Alibaba Group Holding Ltd. OUTPERFORM 12-18 Mo

EQUITY RESEARCH COMPANY UPDATE

July 6, 2016 INTERNET Stock Rating: Alibaba Group Holding Ltd. OUTPERFORM 12-18 mo. Price Target $110.00 Increase PT to $110 on Business Outlook and SOTP BABA - NYSE $78.64 SUMMARY We have become more constructive on BABA, walking away from its Investor 3-5 Yr. EPS Gr. Rate 30% Day. In addition to high-level takeaways in our First Look, this note focuses on 52-Wk Range $86.42-$57.20 addressing major misunderstandings around the company that overhang the stock's Shares Outstanding 2,562.0M valuation. These include: non-core investments, accounting quality and counterfeiting Float 1,090.0M controversy. We also believe the AliCloud flywheel will trigger a revaluation of BABA Market Capitalization $196,228.6M similar to AMZN in 2015, while the Street seems to be massively underestimating Avg. Daily Trading Volume 15,058,767 AliCloud's growth potential. Increasing FY17/18E revenue by 5%/7% on higher Dividend/Div Yield NA/NM take-rate/AliCloud estimates, but reducing non-GAAP net income by 3%/4%, on Book Value $13.10 currency and YOKU/LAZADA consolidation. Our sum-of-the-parts analysis suggests Fiscal Year Ends Mar a $282B fair value for BABA, including $238B for marketplace/AliCloud and $44B for investments. Increasing PT to $110 from $100. Reiterate Outperform. 2017E ROE 12.3 % LT Debt $8,292.0M KEY POINTS Preferred NA ■ Investors are "ignoring" the value of Ant Financial (AFG). BABA (ex. AFG) Common Equity $38,700M is trading at 17x 2-yr P/E vs. 30%+ CAGR. Investors remain uncertain about Convertible Available Yes AFG's value and whether they can benefit from owning BABA. However, we think EPS Non- the 2014 Share and Asset Purchase Agreement (SAPA) is highly aligned with Q1 Q2 Q3 Q4 Year Mult. GAAP investors’ interests, and BABA’s share is the best proxy to participate in China’s 2015A 0.49 0.45 0.81 0.48 2.25 35.0x Internet finance industry. 2016A 0.59 0.57 0.99 0.47 2.63 29.9x ■ Investors don't like Cainiao, as its business model is widely misunderstood. 2017E 0.61 0.69 1.18 0.60 3.08 25.5x We highlight Cainiao's asset-light nature and believe the company is leveraging an Prior (E) 0.62 0.67 1.17 0.72 3.18 NM efficient model to address a massive, fragmented, but underdeveloped industry. 2018E ------4.27 18.4x Prior (E) ------4.44 NM Our analysis suggests substantial growth opportunities, while margin pressure will Revenue be alleviated as Cainiao scales on 3P business. Q1 Q2 Q3 Q4 Year Mult. ($/mil) ■ AliCloud massively underestimated, in our view. China's Cloud industry is on 2015A 2.5B 2.7B 4.2B 2.8B 12.3B 15.7x the brink of massive growth, with AliCloud best positioned. In addition to AliCloud's 2016A 3.3B 3.5B 5.3B 3.8B 15.9B 12.1x leadership in infrastructure, middleware/security/pricing are differentiators that 2017E 4.5B 5.1B 7.6B 5.4B 22.6B 8.5x should drive share gains globally. We expect Cloud revenue to grow 112% Prior (E) 4.3B 4.8B 7.2B 5.1B 21.4B NM annually vs. Street's 82%, reaching 18% of FY20E revenue vs. FY16's 3%. 2018E ------30.5B 6.3x Prior (E) ------28.5B NM ■ Our SOTP valuation suggests a $282B fair value for BABA, or $110 per share. This includes 1) $232B pretax value for the core marketplace, 2) $43B pretax value for AliCloud, 3) $21B for the stake in AFG, 4) $3.7B for Cainiao ownership, 5) $18.7B for long-term investments and 6) ($44.9B) corporate tax. This valuation implies 16x/26x our FY18E non-GAAP EBITDA/EPS. ■ Estimate revisions. Increasing FY17/18 revenue estimates by 5%/7% to reflect the evolving ecosystem that drives take-rate. However, we are maintaining FY17E gross profit. Raising FY18E by 4% on GM pressure from YOKU/LAZADA consolidation. Lowering FY17E non-GAAP EBIT by 4%, modeling higher capex/ D&A for AliCloud. GMV estimates are unchanged.

Stock Price Performance Company Description Alibaba is the largest online and mobile commerce company in the world, as measured by GMV. It also provides cloud computing services and partners with third-party service providers to offer Jason Helfstein Jed Kelly, CFA payment and escrow, financing and 212-667-6433 212-667-8196 logistics services. [email protected] [email protected] Bo Pang Kevin Gallagher 212 667-7935 212 667-7598 For analyst certification and important disclosures, see the Disclosure Appendix. [email protected] [email protected]

Oppenheimer & Co Inc. 85 Broad Street, New York, NY 10004 Tel: 800-221-5588 Fax: 212-667-8229 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

5-YEAR PRICE PERFORMANCE INVESTMENT THESIS

140 Alibaba is the largest online and mobile commerce company in the world as measured by gross merchandise volume, or 120 GMV. Alibaba has also been building up one of the most 100 comprehensive business ecosystems in the world, covering

80 a wide range of business offerings, which altogether create compelling network effects. Our positive thesis is based on the 60 company's unrivaled dominant position in its core business, its BABA 40 pioneer ecosystem that creates a long-standing barrier to entry, Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 and numerous drivers, including enhancing monetization and Source: Bloomberg solid GMV growth outlook, as well as new growth opportunities including cross-border e-commerce.

BASE CASE ASSUMPTION CATALYSTS ■ GMV CAGR of 17% FY16-20E ■ GMV growth acceleration in CY16 ■ Revenue CAGR of 35% FY16-20E ■ Evidence of macro turnaround ■ Blended take-rate increases from 2.59% in FY16 to 3.69% in FY20E ■ Faster than expected monetization improvement ■ Non-GAAP EBITDA margin declines from 51.7% in FY16 to 47.9% ■ Evidence of successful integration of investees, reflecting as higher in FY20E ARPU ■ Non-GAAP EPADS CAGR of 30% FY16-20E ■ Exponential growth of Cloud revenue ■ Higher governance transparency and incremental disclosure regarding core businesses and major investees. ■ Ant Financial's IPO ahead of schedule (YE2016), with higher than expected valuation. ■ Negative results from SEC inquiry

UPSIDE SCENARIO DOWNSIDE SCENARIO ■ Evolving business environment and advanced big data technology ■ Macro slowdown further pressures GMV growth and drives could provide SMEs a higher ROI advertising solution, which significant devaluation of local currency translates into improving monetization capabilities. ■ BABA continues to lose market share to competitors due to ■ Further gain share in B2C, leveraging capacities of its investees. disadvantages in services and product authenticity ■ Penetration in lower tier cities could underpin BABA's LT GMV growth ■ Negative results from SEC inquiry ■ Faster than expected adoption of AliYun might become BABA's LT ■ Less transparency on corporate governance and lower accounting revenue driver quality ■ Increasing valuation of major investees, primarily Ant Financial and ■ Insufficient disclosure on key operating metrics and major investees Cainiao Network

PRICE TARGET CALCULATION Our $110 price target (was $100) suggests 40% upside from the current levels. This is based on our five-bracket SOTP valuation. In detail, the $282B fair value includes 1) $232B pretax value for core marketplace business, 2) $43B pretax value for AliCloud, 3) $21B for stake in AFG, 4) $3.7B for Cainiao ownership, 5) $18.7B for long-term investment and 6) ($44.9B) corporate tax. This valuation implies 16x/26x our FY18E non-GAAP EBITDA/EPS.

KEY RISKS ■ Fierce competition among various rivals may hurt growth trajectory; ■ Aggressive investments and acquisitions pose uncertainties; ■ Risk associated with the partnership corporate structure—interests of the partnership may not align with those of Alibaba’s public shareholders; ■ Reliance on third-party merchants leads to challenges in quality and efficiency of services; ■ Potential taxation on C2C e-commerce may hurt Taobao’s business; ■ Insufficient disclosure on key operating metrics and major investees; ■ Negative results from SEC inquiry; ■ Further economic slowdown and consumption weakness.

Jason Helfstein: 212-667-6433 2 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Table of Contents

Discussing Investors’ Major Concerns ...... 4 Concern 1 – Ant Financial Group ...... 4 Company Profile ...... 4 Ownership Structure...... 4 Agreement with BABA ...... 5 Takeaways from the Investor Day ...... 5 Financials and Valuation ...... 6 Concern 2 – Cainiao Network ...... 8 Company Profile ...... 8 Revenue Model ...... 9 Evidence of Asset-light Business Model ...... 9 Business Opportunities ...... 10 Takeaways from Suzhou Tmall Supermarket Warehouse Tour ...... 10 Conflict of Interest, a Potential Threat ...... 11 Related-party Transactions ...... 12 Valuation ...... 12 Concern 3 – AliCloud ...... 13 Company Profile ...... 13 China’s Cloud Industry Is Taking Off ...... 13 AliCloud’s Competitive Advantages ...... 14 “Go Global” Is Now More Realistic than Ever ...... 16 We Value AliCloud at $43B (before tax) ...... 16 Concern 4 – Capital Allocation ...... 18 Concern 5 – Counterfeiting ...... 19 Concern 6 – Consolidation Policy ...... 20 Concern 7 – Inflated GMV and Orders ...... 21 Increasing Price Target to $110 on Sum-of-the-Parts Valuation ...... 22 Five Components of SOTP valuation ...... 22 A Fair Value of $282B ...... 22 Estimate Revisions ...... 24

3 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

Discussing Investors’ Major Concerns

Concern 1 – Ant Financial Group Investors are ignoring the value of Ant Financial, because Jack Ma transferred AliPay out of BABA in 2011 without Softbank and YHOO’s permission. This damaged management’s credibility. In addition, the Chinese government prohibited foreign investors from owning more than 30% of domestic financial institutions. Excluding Ant Financial, BABA is trading at 17x its two-year P/E, nearly a 50% discount to its 30% earnings growth.

Exhibit 1. BABA Historical Two-Year Forward P/E Trend

25 23x

20 19x 17x 15 14x 10

9/19/14 1/07/15 2/20/15 3/13/15 4/27/15 6/09/15 6/30/15 7/22/15 8/12/15 9/24/15 1/12/16 2/25/16 4/08/16 4/29/16 5/20/16 6/13/16 1/29/15 4/06/15 5/18/15 9/02/15 2/03/16 3/17/16 7/05/16

10/10/14 10/31/14 11/21/14 11/05/15 11/27/15 12/18/15 12/15/14 10/15/15 BABA 2-Yr P/E BABA 2-Yr P/E (Ex. AFG)

Source: FactSet, Oppenheimer & Co. Inc. Estimates

Opco’s view — We like the asset and believe investors owning BABA are well positioned to benefit from the growing value of Ant Financial Group (AFG). Although “stealing AliPay” seemed to be the easiest way to avoid regulation, we recognize that materially restructuring the company’s key assets without major shareholders’ agreement was a severe breach of principal-agent relationship.

Company Profile

Founded in October 2014, Ant Financial (formally AliPay) has leveraged BABA’s massive transaction volume and user base to become the fastest growing Internet finance company in the world. In addition to AliPay (its payment unit), Ant Financial is also generating revenue primarily from two other business lines, SME/consumer loans and financial product distribution.

Ownership Structure

BABA does not have direct equity interests in AFG, but BABA’s management. does. According to the latest disclosure, Junhan (controlled by Jack Ma) owns 42.28% of AFG; Junao (controlled by BABA Partnership members) owns 34.15%; and other shareholders, primarily SOEs and sovereign institutions, own 23.57%.

Jack Ma, the executive chairman of BABA and largest shareholder of AFG, pledged to reduce his equity interests in AFG over time, below his 7.8%

4 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

ownership in BABA. The reduced ownership will come through share-based compensation or dilution from capital-raising activities.

Agreement with BABA

Although BABA does not nominally own equity interests in AFG, the company is entitled to share 37.5% of AFG’s pre-tax earnings, booked as equity income, per the 2014 Share and Asset Purchase Agreement (SAPA).

Should AFG’s IPO exceed $25B equity value and $2B capital raised, BABA may choose to own up to 33% of AFG shares, through a new issuance or accept a one-time payment equal to 37.5% of AFG’s equity value, based on the IPO price.

Exhibit 2. Details of the 2014 Share and Asset Purchase Agreement (SAPA)

The 2014 SAPA

Receives 37.5% of the consolidated pre-tax income of Ant Financial Group Profit sharing

Upon a qualified IPO (exceed $25B equity value and $2B capital raised) of Ant Financial, Alibaba may elect either to receive a liquidity event payment or, subject to regulatory approvals , to continue to receive the profit share payments in perpetuity

Upon a qualified IPO of Ant Financial (same as above), Alibaba is entitled to elect to receive a payment equal to 37.5% of the Liquidity Event Payment equity value of Ant Financial unless Alibaba acquires a full 33% equity interest through a new issance of Ant Financial

Entitled to acquire up to a 33% equity interest in Ant Financial Group, if AFG applies for and receives the applicable PRC regulatory approvals, which is now in-process Potential equity interest

In the event Alibaba acquires the full 33% equity interest, rights of profit sharing and a liquidity event payment will automatically terminate; or in the event of any equity interest less than 33%, such rights will reduce proportionately

Source: prospectus, Oppenheimer & Co. Inc.

According to the SAPA structure, BABA economically owns AFG with a synthetic call to fully capture AFG’s valuation upside. On the F4Q16 earnings call, BABA’s vice executive chairman, Joe Tsai, expressed the company’s strong willingness to convert the call and take 33% ownership of AFG. AFG is expected to list in Hong Kong or domestic stock exchanges around YE16 or 1H17.

Highly aligned with investors’ interests, BABA’s shares should be the best proxy to index Ant Financial Group and participate in the tremendous growth opportunity of China’s Internet finance industry, we believe.

Takeaways from the Investor Day

o Active users of AFG reached 451M in 2015, a 39% CAGR from 2013 to 2015. In particular, cumulative borrowers of SME loans reached 3M, a 90% CAGR during the same period.

5 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

o Starting as a payment tool on BABA’s retail platform, AFG has developed more than ten user cases, including: transportation, financial services, medical services, gaming and public welfare. This comprehensive ecosystem led to greater user engagement. The percentage of users with more than four active scenarios increased from 17% in 2013, to 40% in 2015.

o With 451M active users domestically and 122M active users on Paytm (25% owned by AFG), AFG set the long-term target of serving 2 billion users globally. To reach the goal, rural strategy will play a critical role, opening up an underpenetrated market of 600M users.

o Sesame Credit, a FICO-like credit score, has been integrated into most of the AFG user cases, and has become an underlying benchmark that endorses borrowers’ line of credit on a real-time basis. This never previously existed in China’s financial system, and should help close the massive gap for capital allocation.

Exhibit 3. Operating Metrics of AFG’s Key Business Lines

Business Line Operation metrics Comparables Mkt Cap ($B) Operation metrics 2.2B accounts Visa $184.4 260M daily transactions 1.8B accounts 451M annual active users MasterCard $104.5 AliPay 180M daily transactions 153M daily average transactions 180M annual active users Paypal $52.0 16M daily average transactions

152M annual active users Charles Schwab $37.9 9.9M active users Wealth Management AUM Rmb 760B Lufax $18.5 3.6M active users Ping An $85.8 110M cumulative users Insurance 380M cumulative users China Life $80.8 400M cumulative users Sesame Credit 130M cumulative users FICO NA 250M users

Source: Company Materials, Oppenheimer & Co. Inc. Estimates

Financials and Valuation

AFG was recently valued at $60B, in a May 2016 financing, raising $4.5B.

We expect AFG to generate revenue close to $6B in 2016E, more than tripling the $1.6B in FY14, primarily from three business lines: 1) AliPay transaction fees, 2) interest revenue from SME loans and 3) commissions from monetary funds and wealth management products.

Transaction fees to AliPay and interests from SME loans account for roughly 80% of AFG’s revenue. As a result of sales & marketing synergies with BABA’s eCommerce platforms, AFG has been very profitable. Its FY14 adj. net margin was disclosed at 26%. Assuming a stable margin, the $60B valuation implies 30x our $2.3B earnings estimate in FY17E.

6 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Exhibit 4. Opco Estimates: Ant Financial Group Summarized P&L

RMB in millions FY 12E FY 13E FY 14E FY15E FY16E FY17E Transaction fee to Alipay 2,178 3,658 6,929 12,429 18,571 25,070 Y/Y % Change NA 68% 89% 79% 49% 35%

SME Loan Interest 108 540 1,748 5,244 12,291 20,648 Y/Y % Change NA 400% 224% 200% 134% 68%

Yu'EBao commission NA 504 3,150 3,906 4,788 5,670 Y/Y % Change NA NA 525% 24% 23% 18%

Financial products dist. fee 23 94 414 1,295 3,208 6,681 Y/Y % Change NA NA 340% 213% 148% 108%

Total Ant Financial Rev 2,309 4,796 12,241 22,874 38,858 58,069 Y/Y % Change NA 108% 155% 87% 70% 49% Adj. Net Margin 25% 26% 26% 26% 26% 26% Adj. Net Income 577 1,247 3,183 5,947 10,103 15,098 Net Profit (US$ M) 93 201 513 944 1,531 2,288 Y/Y % Change NA 116% 155% 84% 62% 49%

Category Breakdown FY 12 FY 13 FY 14 FY15 FY16E FY17E Transaction fee to Alipay 94% 76% 57% 54% 48% 43% SME Loan Interests 5% 11% 14% 23% 32% 36% Monetary Funds&Wealth Mgmt 1% 12% 29% 23% 21% 21%

USD $M 1-Yr Forw ard P/E 30 Discounted MV 60,120 BABA's 33% 19,840

Value per BABA share $7.67

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

7 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

Concern 2 – Cainiao Network

Investors worry that BABA’s dedication to the Cainiao Network is reflecting the company’s intent to build a nationwide logistics network internally to compete with JD.com and traditional couriers.

Opco’s view — Cainiao Network (Cainiao) is not a traditional logistics company, but an asset-light data service provider that aims to improve operating efficiency of its customers and partners.

Company Profile

Cainiao was founded in 2013, as a logistics JV for BABA, leading retailers and logistics firms. BABA initially owned 48% of Cainiao, Intime owned 32%, Fuchu Group owned 10% and Fosun International owned 10%. The five major private couriers (SF Express, YTO Express, ZTO Express, STO Express, and YUNDA Express) each owned 1%.

Collectively, Cainiao’s partners employ over 1.7M delivery personnel, operate over 150K distribution hubs/sorting stations across 600+ cities in China and enable same-day/second-day delivery in 13/88 cities. The company’s warehouses are usually rented and operated by third-party logistics companies.

Exhibit 5. Flow Chart Describing the Functionality of Cainiao Network

Sky Net IT System

Logistic management system Connect orders with couriers

ZTO Express Provided by Cainiao Yunda Express Orders

STO Express time

- YTO Express Last-mile delivery

Real BIG BIG DATA Merchants SF Express Customers

Owned by CSN Cooperating with Suning Warehouses and distribution centers in Haier RRS major cities …

Cooperating with partners Pick up orders

Primarily leased by Cainiao partners Ground net PP&E

Source: Oppenheimer & Co. Inc.

Over the longer term, Cainiao’s vision is to enable 100M packages to be delivered within 24 hours vs. ~40M per day in 2015. Based on our conversation with the company, the required investment is expected to be raised by equity and, more importantly, debt capital. Capital supports from BABA will be largely limited to maintaining its ownership level, and transfer of land user rights.

8 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Revenue Model

Cainiao Network generates the bulk of its revenue through two categories– Assisted-delivery services (ADS) and End-to-end logistics solutions (ETE):

1) Assisted-Delivery Service is a brokerage business. Under this model, Cainiao connects merchants’ orders with the available logistics service providers on a real-time basis. Merchants assume the fulfilment responsibility, and transactions occur between merchants and service providers. For Cainiao, no capital-intensive assets are required, and commission revenue is reported on a netbasis. The ADS model now accounts for the majority of packages flowing through Cainiao, with ADS revenue less than 40% of total.

2) End-to-End Logistics Solutions provides fulfilment services using its own or partners’ infrastructures. Special items, such as large items and fresh products, are usually fulfilled this way. Typical examples include: (1) fresh items from Tmall Supermarket, (2) large home appliances fulfilled by Haier RRS JV or the Suning partnership and (3) cross-border logistics solutions. ETE solutions are concentrated in the regions with the highest population density, through 11 fulfillment centers. ETE revenue comprises over 60% of Cainiao revenue, but less than 40% of volume. Merchants pay Cainiao a gross service fee to fulfill their Tmall Supermarket orders. Costs of services are incurred at third-party logistics and last-mile delivery partners. ETE revenue is reported on a grossbasis.

Evidence of Asset-light Business Model

Cainiao’s financial information is selectively disclosed in BABA’s F2016 Form 20- F. Based on the disclosure, we believe that Cainiao Network features tremendous growth and an asset-light business:

1) Revenue grew 229% y/y in 2015. Although total costs also increased 231% y/y, and the net margin declined 46bps y/y, we think the higher loss is largely driven by (1) the front-end loaded D&A (related to the fixed investment in top-tier markets during the early stage) and (2) rapid growth of ETE business which (gross-basis reporting) provides strongest value proposition by addressing fresh/CPG & FMCG/cross-border product categories. However, we expect margins to significantly improve over time, as the company expands and scales on ADS businesses (net-basis reporting).

2) Capital intensity (revenue per Rmb asset required) was reduced by 70% y/y during the same period. While liquid assets may decline on higher loss, fixed assets should be relatively stable.

Exhibit 6. Cainiao Network Summarized Income Statement and Balance Sheet (Rmb millions)

P&L CY2014 CY2015 YoY % B/S Dec-14 Dec-15 YoY % Revenue 941 3,099 229% Total assets 5,951 5,929 (0)% Total costs 1,124 3,716 231% Total liabilities 2,642 1,761 (33)% Net loss (183) (617) NM Total equity 3,309 4,168 26% Net margin (19.4)% (19.9)% -46bps Capital intensity* 6x 2x (70)%

* We use total assets divided by revenue to get to a rough estimate for capital intensity ratio. Source: Company Reports, Oppenheimer & Co. Inc. Estimates

9 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

Business Opportunities

Cainiao Network and its logistics partners enabled delivery of 12.2 billion packages in FY16, with roughly 60% market share in China. Compared to Cainiao’s current revenue size, we are seeing substantial business opportunities:

1) Significant headroom for take-rate: Cainiao generated only Rmb 0.15- 0.25 per package vs. the average package value of ~ Rmb 60 for Tmall Supermarket orders. This implies a take-rate of only 0.3%.

2) Rising scale: Cainiao’s revenue reliance on BABA (60%) should decline over time, following the pattern of AliPay. We expect Cainiao to scale on increasing customer adoption of Cainiao’s services and category expansion.

3) Expansion to B2B: We are seeing substantial headroom in the B2B segment, such as ground/air/ship transportation, which is more fragmented and less efficient than the B2C segment. As a reference, C.H. Robinson Worldwide (CHRW, covered by Oppenheimer’s Scott Schneeberger; see Opco’s initiation report here), a leading freight brokerage company with 30% market share in the US, generated $13.5B/$2.3B gross/net revenue and 7%/41% EBITDA margins on a gross/net basis in 2015. The company is currently trading at $10.2B market cap.

Takeaways from Suzhou Tmall Supermarket Warehouse Tour

The Tmall Supermarket Warehouse in Suzhou commenced operation in June 2014 and is operated by Cainiao’s strategic partner, ALOG (a leading third-party warehousing logistics company).

Exhibit 7. Tmall Supermarket Warehouse

Source: Oppenheimer & Co. Inc. photo.

o This 65K sqm warehouse with 45K SKUs and 1,300 employees is supporting the Tmall Supermarket business in Jiangsu and Anhui provinces. This is a similar size warehouse vs. Amazon’s central warehouse in China and more than triple JD’s warehouse capacity, on average. The vast majority of employees are hired by ALOG.

10 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

o The warehouse can handle 550K packages and 60 full-load trucks per day, on average. At peak capacity, shipments can reach 1M per day. YTD shipments are up more than 100%. Storage space will soon become the bottleneck for business growth.

o Items usually stay less than one hour in the warehouse.

o Although the level of automation is limited to sortation and box making in this specific warehouse, 70% of the items are moved around the best-selling categories, optimized by real-time data. Furthermore, Cainiao and its partners are proactively experimenting with automation across the country. Three highly automated warehouses have begun operations (Guangzhou, Jiaxing and Tianjing (demo)).

o A typical Cainiao warehouse requires around Rmb 100M (roughly US$16M) upfront investment. Rising needs on data storage/computing/analytic capabilities should provide cross-selling opportunities for AliCloud.

Exhibit 8. Flow Chart for Tmall Supermarket Warehouse

B Replenished or bundled C 2nd-tier 3rd-tier

Real-time adjustment A is powered by BABA's big data and AliCloud Best-sellers

10% SKUs account for 80% sales

Sorting Line

Last mile delivery Last mile delivery Last mile

Last mile delivery Last mile

Last mile delivery Last mile Last mile delivery Last mile delivery Last mile

Source: Company Materials, Oppenheimer & Co. Inc. Estimates

Conflict of Interest, a Potential Threat

While we like the idea of Cainiao Network, we are seeing a challenge related to the conflict of interest between Cainiao network and its business partners. Most of Cainiao’s key partners, such as SF-Express and YTO-Express, have historically generated the bulk of their revenue from BABA’s retail platforms. Meanwhile, reliance on Cainiao’s services will inevitably result in a loss of pricing

11 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

power. With only 1% ownership by each leading private courier company, this may not provide enough economic incentive to stay in the partnership.

Related-party Transactions

o Between Cainiao and BABA: BABA paid Cainiao Rmb1.86B for Tmall Supermarket Logistics Solutions in CY15, accounting for 60% of Cainiao’s revenue. This related-party transaction is what BABA paid to Cainiao and booked as BABA’s cost of revenue. It accounted for 6% of BABA’s cost of revenue in CY15 vs. 3-4% in CY14. As a result, the tremendous growth of Tmall Supermarket and Cainiao ETE business is expected to further pressure BABA’s margins in the near term.

o Between Cainiao and AliCloud: Cainiao paid AliCloud Rmb 20M and Rmb 86M (2%-3% of Cainiao revenue) in FY2015 and FY2016, respectively, for database and computing services. We expect the level of such related-party transactions to further increase over time.

Valuation

Cainiao completed its Series A financing at a $7.7B valuation in March 2016. This implies 16x Cainiao’s CY15 revenue and 6.5x CY16E revenue, assuming 150% y/y growth. Major investors include sovereign funds, such as GIC and Temasek. Post-deal, BABA owns 47% of Cainiao Network.

12 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Concern 3 – AliCloud

Our observation suggests that the market is massively underestimating the growth trajectory of AliCloud. Consensus is projecting a 94% three-year CAGR during FY16-FY19.

Opco’s view — We believe the China Cloud industry is at a tipping point where enterprises will start to embrace the age of big data. We believe AliCloud is best positioned to capture a 10x revenue opportunity in the next three years. In comparison, we are modeling a 126% three-year CAGR for AliCloud revenue during FY16-FY19 vs. 164% y/y growth in 4Q:16.

Company Profile

Incorporated in 2009, AliCloud was envisioned to empower BABA’s growth in the data age. Today, AliCloud is leading the China Cloud industry, providing Cloud computing solutions for 2.3M businesses, with 500K paying customers as of March 2016 vs. AWS’ 3M. Key customers include:

o Tech companies such as Weibo, BGI (Huada Genetics), DJI and Cainiao. Over 50% of China Unicorns are AliCloud’s users. o Government authorities such as Sinopec, Ministry of Public Security, Beijing Bureau of Tax and China Customs. o MNCs such as Accenture, SAP and Philips.

In FY16, AliCloud revenue grew 131% to $474M, accelerating from 64.5%/16.0% in FY15/FY14. AliCloud has become the third largest Cloud vendor in the world (after AWS and Microsoft Azure) and the largest in China with 62% market share.

Exhibit 9. AliCloud Revenue ($ in Millions) and Revenue Growth

500 131.1% 140% 450 120% 400 350 100%

300 80% 64.5% 250 200 60% 150 29.9% 40% 100 16.0% 20% 50 - 0% FY 13 FY 14 FY 15 FY 16

Cloud Computing & Internet Infra Y/Y Change (%)

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

China’s Cloud Industry Is Taking Off

We believe that China’s cloud industry is still in its infancy but on the brink of massive expansion. Three catalysts will fuel this growth: 1) the mobile age is leading to exponential growth of data that pushes local servers to embrace the cloud; 2) security-sensitive entities such as government agencies and large enterprises have begun to adopt Cloud solutions; and 3) the economic slowdown is forcing businesses to pursue more powerful IT architectures under a flexible cost structure.

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At the AliCloud conference in Xiamen, the president of AliCloud forecasted a 135% 3-year CAGR for the China IaaS market, reaching $7.8B by CY2018. As the clear leader, AliCloud should be the main beneficiary of the market’s growth. As a result, we expect AliCloud to grow at 134% 3-year CAGR and reach $4.7B revenue in CY2018. This estimate is roughly in line with management’s estimation of a 3-to-4-year behind AWS.

Exhibit 10. IT and Cloud Industry Breakdown (Calendar Year)

US$ in billions 2014 2015 2016E 2017E 2018E CAGR Global IT spending, net 3,816 3,823 3,856 3,898 3,975 1% YoY Change 3.7% 0.2% 0.9% 1.1% 2.0% Global IT spending ex.Comm. 2,169 2,236 2,284 2,319 2,346 2% YoY Change 4.5% 3.1% 2.2% 1.5% 1.2% Global cloud market 154 175 203 237 274 16% YoY Change 18% 14% 16% 17% 16% Penetration ex. Comm. 7.1% 7.8% 8.9% 10.2% 11.7% Penetration of IT Spending 4.0% 4.6% 5.3% 6.1% 6.9% Amazon Web Services 4.6 7.9 12.0 16.8 22.2 41% YoY Change 49% 70% 52% 40% 32% Global mkt share 3.0% 4.5% 5.9% 7.1% 8.1% Microsoft Azure 0.8 1.7 3.4 5.4 7.9 66% YoY Change 199% 112% 94% 62% 45% Global mkt share 0.5% 1.0% 1.7% 2.3% 2.9% China IT spending, net 343 342 346 370 385 4% YoY Change 4% (0)% 1% 7% 4% Global mkt share 9.0% 9.0% 9.0% 9.5% 9.7% China IT spending ex.Comm. 157 164 161 171 177 3% YoY Change NA 5% (2)% 6% 4% Global mkt share 7.2% 7.3% 7.0% 7.4% 7.6% China Cloud market (mainly IaaS) NA 0.6 1.5 3.5 7.8 135% YoY Change NA NA 150% 133% 123% Penetration ex. Comm. NA 0.4% 0.9% 2.1% 4.4% Penetration of IT Spending NA 0.2% 0.4% 0.9% 2.0% Global mkt share NA 0.3% 0.7% 1.5% 2.8% Alibaba Cloud 0.2 0.4 0.9 2.1 4.7 134% YoY Change 48% 109% 141% 135% 125% China mkt share NA 62% 59% 60% 60% Global mkt share 0.1% 0.2% 0.4% 0.9% 1.7% Source: Alibaba Cloud, Gartner, Oppenheimer & Co. Inc. Estimates

AliCloud’s Competitive Advantages

Leading position on infrastructures has been proven. During 2015 Singles' Day, an annual stress test for AliCloud, the company hosted 300M concurrent consumers online, processing 140K transactions per second, 86K payments per second and 200PB of data that day. In the same year, AliCloud set a new world record in the Sort Benchmark competition, ~70% faster than the 2014 record setters (Apache Spark, Samsung, Baidu and UCSD).

Middleware (PaaS) is the differentiator. AliCloud is not only accumulating and computing data, but also powering data processing, analytics and applications. AliCloud is now compatible with 70% of databases and all mainstream operating systems in the market. It is open to strategic partners to develop and provide a wide range of mission-critical solutions for customers in the eCommerce, city service, finance, healthcare, IoT, energy and entertainment industries. Its rich product pipeline also includes large-scale computing (TB/PB distributed

14 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

computing) and advanced business analytics (data mining/deep learning/business intelligence).

Exhibit 11. AliCloud’s Solutions for Various Industries AliCloud customers User cases and achievements o Spent only 90 days to build Sinopec's eCommerce/supply-chain platform on AliCloud; o Rmb10bn transactions within the past 1.5 years; Sinopec o Procurement, office supplies, supply chain, financing, CRM and logistics, all in one cloud solution; o Sinopec spent Rmb200bn per year on procurement, which could be all handled by this eCommerce platform over Cloud; o Storage cost is getting higher than genetic test, which pushed Huada toward Cloud; BGI (Huada Genetics) o Cloud played a critical role to reduce test time by 80%; o Develop a cross-platform entertainment system for New Year Gala to engage with audience within MangoTV 40 days o Provided elastic computing power during the peak time; Beijing Bureau of Tax o Developed module solutions for 11 operation units; o The system can be seamlessly replicated to other provinces. Source: Alibaba Cloud Summit, Oppenheimer & Co. Inc.

Security is another key feature. AliCloud has been certified by multiple global authorities, including ISO27001 (information security), ISO20000 (IT services), ISO22301 (business continuity) and CSA (Cloud Security Alliance). AliCloud is providing 17 security solutions for different industries. Every day, AliCloud is protecting 1M+ websites globally from over 200M brute forces, 20M web application attacks and 1,000 DDoS attacks. Thanks to its high security standard, AliCloud has been widely adopted by government agencies such as CFDA, CCTV, Ministry of Railways, China Customs, Ministry of Public Security and Beijing Bureau of Tax.

Competitive pricing and limited competition drive share gain. AliCloud has reduced prices 17-20 times per year, which kept its pricing flexible and competitive vs. AWS and Microsoft Azure.

Exhibit 12. Pricing Comparison

General Purpose On Demand AliCloud Instance Name CPUs Memory (GB) OS Region $ per Hr $ vs. AWS $ vs. MSFT n1 1 0.5 Linux US East $0.0068 4.9% -65.9% n2 4 16 Linux US East $0.2235 -6.5% -37.9% n2 8 32 Linux US East $0.4470 -16.0% -54.2%

AWS Instance Name CPUs Memory (GB) OS Region $ per Hr $ vs. MSFT $ vs. GooG t2.nano 1 0.5 Linux US East $0.0065 -67.5% -9.7% m4.xlarge 4 16 Linux US East $0.2390 -33.6% 32.8% m3.2xlarge 8 30 Linux US East $0.5320 -45.4% 47.8%

Microsoft Instance Name CPUs Memory (GB) OS Region $ per Hr Price vs. Google A0 1 0.75 Linux East US $0.0200 177.8% A3 4 7 Linux East US $0.2400 33.3% A4 8 14 Linux East US $0.4800 166.7% A8 8 56 Linux East US $0.9750 170.8% Note: pricing of AWS in Asia (Japan) is roughly 50% higher than US East. Source: Company Websites, Oppenheimer & Co. Inc. Estimates.

15 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

In addition, the intensity of competition is lower in China. On one hand, global vendors’ customers are largely limited to multinational companies, because of security issues and regulations. On the other hand, domestic competitors generally:

a) Are niche players that develop solutions for verticals such as gaming, social and online video; b) Have a much smaller customer base to upsell, compared to BABA; c) Are consumer-facing (such as Baidu, Tencent and Sina).

“Go Global” Is Now More Realistic than Ever

BABA reiterated its “going global” ambition at the Investor Day. This includes: 1) serving 2 billion users inside and outside of China by 2036; and 2) generating material revenue from outside China, which comprises only 8% of revenue today.

Compared to BABA’s retail business, which is restricted by cultural differences, AliCloud could be a game changer. We believe technology exportation is significantly easier than brand/culture exportation, especially considering that BABA was consistently haunted by counterfeiting issues.

In particular, we expect security, ecosystem and strategic partnership to be three key differentiators to AliCloud’s global competition:

o AliCloud recently obtained two overseas security certifications: Payment Card Industry Data Security Standard (PCI-DSS) and Singapore Multi-Tier Cloud Security (MTCS) Standard Level 3. We think security is the right entry point for AliCloud’s global expansion, breaking into government agencies of Asian and other developing countries.

o A more comprehensive competition. We think AliCloud is well positioned to leverage BABA’s big data in eCommerce, digital entertainment, logistics and financials to curate personalized demands.

o Softbank-AliCloud Joint Venture (Softbank Cloud Corp.) is a smart move. According to the management of both companies, AliCloud owns 40% of the JV, providing its back-end technology and support, while Softbank owns 60%, sharing its front-end client relationships in Japan. We believe AliCloud will be better off leveraging local know-how and focusing on technology advancement. We consider such partnerships a good strategy to break the ice in developed markets. AliCloud is also partnering with SK Group in Korea.

Notwithstanding, we expect the data safety issue to be the primary stumbling block down the road. It may require BABA to build up infrastructures/data centers in those jurisdictions (outside mainland China) where it is pursuing Cloud, so local laws around data protection and national security can be met. In addition, the usage of data may also be limited, which could negatively impact the value proposition of AliCloud’s services.

We Value AliCloud at $43B (before tax)

We apply a discounted cash flow valuation to AliCloud, assuming:

16 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

1) 105% five-year revenue CAGR with $13B revenue in 2020E. This implies 4% share of global cloud market; 2) 53% terminal EBITDA margin vs. AWS’ 59%; 3) 12x terminal EV/EBITDA vs. AWS’ 10x, given the faster growth; 4) 14% discount rate.

As a result, we estimate that the value of AliCloud (before corporate tax) reaches $43B or 21% of our $201B target value for AWS. This implies 25x terminal EBIT and 36x terminal P/E, respectively, compared to AWS’ 14x and 20x.

Exhibit 13. DCF Valuation for Alibaba Cloud (US$ in billions)

2014 2015 2016E 2017E 2018E 2019E 2020E CAGR Alibaba Cloud 0.2 0.4 0.9 2.1 4.7 8.5 13.3 105% Incremental revenue 0.1 0.2 0.5 1.2 2.6 3.8 4.8 YoY Change 48% 109% 141% 135% 125% 80% 56% Operating Income (0.1) (0.1) (0.0) 0.1 0.6 1.8 3.3 Operating margin (50)% (20)% (3)% 5% 13% 21% 25% Incremental EBIT margins NA 8% 9% 11% 19% 31% 32% Depreciation 0.1 0.1 0.4 0.9 1.8 2.6 3.7 ______% of revenue ______35% ______40% ______43% ______43% ______39% ______31% ______28% AliCloud EBITDA (0.0) 0.1 0.4 1.0 2.4 4.4 7.0 149% EBITDA Margin (15)% 20% 40% 48% 52% 52% 53% Y/Y NA NA 376% 184% 142% 82% 60% Incremental EBIT margins NA 52.2% 53.3% 53.9% 54.5% 52.6% 54.8%

AliCloud Capital Expenditures (0.8) (0.8) (1.5) (2.7) (3.8) (5.6) (6.5) % of revenue (428)% (223)% (170)% (130)% (80)% (66)% (49)% Depr % of Capex 8% 18% 25% 33% 48% 47% 57% Capex yield NA 23% 34% 44% 69% 67% 74% Useful life of the D&A NA 10.0 5.7 4.4 3.3 3.4 3.2 ______Unlevered Free Cash Flows (0.8) (0.8) (1.2) (1.7) (1.4) (1.2) 0.5

AliCloud Valuation Summary Terminal Value $84 Terminal EV/EBITDA 12x Terminal EV/EBIT 25x Terminal PE @ 30% rate 36x Discount Rate 14%

PV of Terminal Value $47 NPV of FCF ($4) Equity Value $43

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

17 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

Concern 4 – Capital Allocation

Investors have criticized BABA’s significant capital allocations outside its core business, as they consider BABA’s asset injection for major subsidiaries and massive M&A suspect, inappropriate and detrimental to shareholders’ interests.

Opco’s view — We partially agree.

At the Investor Day, BABA’s vice chairman, Joe Tsai, ranked strategic M&A the top priority for capital usage, followed by share buybacks.

We agree that in the highly competitive China Internet space, investing into next- generation business drivers is strategically necessary for BABA. In particular, these investments have either focused on the natural extension of BABA’s core retail business such as Internet finance and logistics, or value-added services to enrich its ecosystem such as digital entertainment and social networking.

As a result, it is fair to treat this capital spending as recurring, and subtract it from the free cash flow (FCF) defined by the company. In such a case, the adjusted FCF would appear to be less supportive and resilient for share repurchase programs (Exhibit 14).

Exhibit 14. Opco Analysis of BABA Free Cash Flow

FY-ending March 31, (RMB in millions, except per share) FY 13 FY 14 FY 15 FY 16 FY 17 E FY 18 E FY 19 E FY 20 E Net cash from operating activities 14,476 26,379 50,574 56,836 63,901 90,812 122,143 162,137 YoY Change 56.1% 82.2% 234.4% 12.4% 12.4% 42.1% 34.5% 32.7% Investing Activities: Restricted cash 334 199 1,139 746 - - - - Payment for land use rights (1,457) (1,491) (2,935) (5,407) (9,192) (13,328) (17,327) (22,525) Purchase of PPE (745) (3,285) (4,770) (5,438) (10,000) (18,000) (25,000) (25,000) Short-Term Investments 2,589 (8,304) (1,113) 4,619 - - - - * Investment Securities (46) (2,747) (10,878) (13,177) (15,000) (18,000) (20,000) (20,000) Loans to employees (344) (212) (40) 35 - - - - ** Capital contribution for equity method investments (285) (16,379) (23,331) (27,604) (30,000) (30,000) (30,000) (30,000) Cash collected from disposal of subsidiary 551 (46) (1,271) 4,890 - - - - Net cash from business acquisition (52) (732) (10,255) (1,495) - - - - Net Cash from Investing 545 (32,997) (49,042) (42,831) (64,192) (79,328) (92,327) (97,525)

Reported Free Cash Flow 13,731 23,094 45,804 51,398 53,901 72,812 97,143 137,137 YoY Change 61% 68% 98% 12% 5% 35% 33% 41% Recurring items for investing activities (1,982) (23,948) (43,185) (46,736) (64,192) (79,328) (92,327) (97,525) Adj. FCF available for buyback 12,494 2,431 7,389 10,100 (291) 11,484 29,816 64,612 Cash for share buyback (40,111) (157) (270) (19,795) Adj. FCF after buyback (27,617) 2,274 7,119 (9,695)

* Primarily refers to investment in listed (public) companies. ** Primarily refers to investment in major subsidiaries, such as Ant Financial and Cainiao Network. Source: Company Reports, Oppenheimer & Co. Inc. Estimates

Another capex item that should be more closely monitored and further elaborated on is the acquisition of land use rights. This item is indicative of the expansion velocity for AliCloud and Cainiao Network.

For example, BABA entered into an agreement with Cainiao in FY14 to dispose two wholly owned subsidiaries for Rmb 524M cash (US$84.5M), with a gain of 74M (US$11.9M). In FY16, BABA disposed another wholly owned subsidiary to Cainiao Network for Rmb 204M cash (US$32.0M), with a gain of Rmb 3M (US$0.5M). Note that the major assets of these disposed subsidiaries are land use rights, and these assets were primarily used to build out warehouses in certain regions that required Cainiao to take the lead.

18 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Concern 5 – Counterfeiting

Investors generally believe that BABA’s profit-chasing nature has fertilized the fake product industry.

Opco’s view — Counterfeiting is a legacy issue of China’s growth-driven and “OEM type” of economy. BABA actually has zero tolerance on counterfeiting and proactively applies its big data technology to crack down on fake products. It is becoming the main force of IP protection.

While the dispute with IACC members is ongoing, Jack Ma made a controversial comment during the Investor Day that caused a commotion in the crowd: “Fake products made today are of better quality and price than authentic ones.”

However, the chief platform governor highlighted that by “fake products” Jack meant OEM products, which are defined as goods made by the original equipment manufacturer but unauthorized to use the brand. Thereby, the intellectual properties remain protected.

Exhibit 15. IP Protection Is Different from Simply Wiping Out Fake Products

Source: Company Presentation, Oppenheimer & Co. Inc.

In response to criticism of selling fake goods in June 2015, BABA decided to remove problematic listings from its platform once a seller had been identified as selling counterfeit goods. BABA has developed more than 600 detection models to identify suspicious products. The detection mechanism is powered by big data and covers the entire shopping process, including listings, consumer behaviors, payments and logistics.

As a result, BABA has removed 120M problematic listings and closed 200K stores to date. The company also collaborated with local law enforcement to successfully arrest 300 people, overturn 46 unlawful factories and confiscate $125M worth of products in 2015.

In addition, the company enforced a seven-day unconditional money-back guarantee, and fast money-back guarantee for customer protection. In 2015, BABA spent more than $15M to buy back suspicious goods, froze $72M in accounts and refunded $12M to customers who bought fake goods.

19 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

Concern 6 – Consolidation Policy

There is confusion regarding BABA’s consolidation policy, particularly as it applies to Cainiao Network. Investors think BABA should consolidate Cainiao to better capture its financial performance. The current equity method is not prudent and questionable for hiding losses, by investors. This is one of the key topics that the SEC inquired, earlier this year.

Opco’s view — BABA disclosed its principles of consolidated reporting which are subject to the following conditions:

o The company directly or indirectly controls more than 50% of the voting power;

o Or the company has the power to 1) appoint or remove the majority of the members of the board of directors or 2) to cast a majority of votes at the meeting of the board of directors or 3) to govern the financial and operating policies of the investee;

o Or in special situations where the company is the primary beneficiary of a VIE structured investee, entitled to direct its operating activities and obligated to absorb losses/profits.

We think the policy is economically reasonable, and it is clear that Cainiao Network, 47% owned by BABA, is not subject to any of the above conditions. Therefore, we believe consolidation reporting is not required.

Even if BABA were to consolidate Cainiao, we would see no material impact to BABA’s operating performance, as shown in the analysis below. This could suggest the current reason for the de-consolidation of Cainiao is that BABA shares operating and economic control with its partners.

Exhibit 16. BABA CY15 Summarized Metrics With vs. Without Cainiao

CY2015 BABA Key Metrics without Cainiao consolidate Cainiao Delta Revenue 94,384 97,483 3.3% Gross margin 67.2% More likely improved NM Operating margin 45.3% Unknown NM Equity income (1,412) (1,116) 296 Adj. Pre-tax income 31,139 31,435 1.0%

Pretax Margin 33.0% 32.2% -75bps

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

20 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Concern 7 – Inflated GMV and Orders

Investors doubt figures describing gross merchandise value and order volume on BABA’s platform. This questions the strength of BABA’s operating performance and real value. This is another key topic that the SEC inquired.

Opco’s view — It is possible that 20-30% of transactions on BABA's retail platform could be sellers "buying their own product" to inflate their product rank. While this would have no impact on revenue, it would mean the effective take-rate is closer to 4% vs. last year's 2.6% (but still well below AMZN at ~13%).

In fact, BABA includes a clear definition of its "GMV" figures in Form 20-F:

o GMV refers to the value of confirmed orders of products and services on BABA’s China retail marketplaces, regardless of how or whether the buyer and seller settle the transaction. This means there is a chance that the transaction is not eventually settled. Disclosure of delivered orders is more appropriate.

o GMV includes shipping charges paid by buyers to sellers. Most investors believe these shipping charges should not be counted as GMV, by nature.

o With regard to potentially fraudulent transactions, BABA excludes certain product categories and transactions in certain product categories over a certain amount per day. However, such disclosure remains very limited.

In conclusion, we think the GMV definition is BABA’s best effort to present its real business activities. Note that AMZN does not provide a GMV figure for this reason. Further, BABA is closely monitoring fake transactions and will penalize sellers through downgrading creditworthiness or even closing the stores, once misbehaviors are identified. However, we think it would be prudent to disclose GMV based on the value of delivered orders, excluding shipping charges. More details regarding the product categories and transactions being excluded for fraudulency would be also appreciated.

21 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

Increasing Price Target to $110 on Sum-of-the- Parts Valuation

During the financial session of the company’s Investor Day, management announced plans to re-categorize BABA’s revenue brackets to better convey the company’s value proposition, and lay a foundation for a sum-of-the-parts valuation.

Exhibit 17. BABA Revenue Breakdown Re-categorization

Mobile China eCommerce Int'l eCommerce Cloud computing New acquisitions

Current

Future

Mobile media and Other initiatives Marketplace Cloud computing entertainment (OS/Dingtalk/AutoNavi)

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

Five Components of SOTP valuation

We include five components in our SOTP valuation: 1) marketplace (advertising and eCommerce) platforms, 2) Alibaba Cloud, 3) interest in Ant Financial Group, 4) interest in Cainiao Logistics and 5) strategic investments that are booked as long-term investments.

Businesses outside of these five brackets are essentially value-added applications to enrich the overall ecosystem. For example, although the acquisition of YOKU will be 6-7% accretive to BABA’s FY17E revenue, more importantly, it allows merchants to better target customers through cross-channel advertising and thus drive the overall take-rate. Therefore, as a crucial part of BABA’s Unified ID initiative (cross-platform user profiling), YOKU should not be separately valued. This also applies to investment in Suning, Haier, Ele.me and Weibo.

A Fair Value of $282B

As a result, our DCF model suggests a $232B equity value (before corporate tax) for BABA’s marketplace, assuming 1) a 20% nine-year revenue CAGR, 2) a 50.0% terminal EBITDA margin vs. FY16’s 52.7%, 3) a 10x terminal EBITDA multiple and 4) a 14% discount rate. This valuation implies 18x and 21x FY18E non- GAAP EBITDA and non-GAAP net income, respectively, roughly in line with their long-term intrinsic growth.

On top of the marketplace, we think the other four components are worth $87B:

1) The $43B pretax value for AliCloud; 2) The $21B value for 33% potential equity interest in Ant Financial Group ($65B valuation post its Series B financing);

22 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

3) The $3.7B value for 47% ownership of Cainiao Network (valued at $7.8B post its Series A financing); 4) Long-term investment of $18.7B, as of 3/31/2016.

After corporate tax, our sum-of-the-parts valuation suggests a fair value of $282B for BABA, or $110 per share. This implies 26x our FY18E non-GAAP EPS.

Exhibit 18. Discounted Cash Flow Model for Core Marketplace Business and Sum-of-the-Parts Valuation

Core BABA Ex. Cloud FY 16 FY 17 E FY 18 E FY 19 E FY 20 E FY 21 E FY 22 E FY 23 E FY 24 E FY 25 E CAGR Marketplace revenue $15,403 $21,428 $28,019 $34,926 $42,574 $50,237 $57,772 $65,283 $72,464 $79,710 20% YoY NA 39% 31% 25% 22% 18% 15% 13% 11% 10% Non-GAAP EBIT $7,259 $8,823 $11,792 $15,172 $19,385 $23,024 $26,651 $30,312 $33,864 $37,489 20% Margin 47.1% 41.2% 42.1% 43.4% 45.5% 45.8% 46.1% 46.4% 46.7% 47.0% YoY 22% 34% 29% 28% 19% 16% 14% 12% 11% Non-GAAP EBITDA $8,121 $9,962 $13,175 $16,321 $20,749 $24,610 $28,446 $32,307 $36,042 $39,845 19% Margin 52.7% 46.5% 47.0% 46.7% 48.7% 49.0% 49.2% 49.5% 49.7% 50.0% YoY NA 23% 32% 24% 27% 19% 16% 14% 12% 11% D&A % of revenue 5.6% 5.3% 4.9% 3.3% 3.2% 3.2% 3.1% 3.1% 3.0% 3.0%

Less: Core related Capex ($879) ($1,393) ($2,019) ($2,625) ($3,195) ($3,696) ($4,124) ($4,492) ($4,825) ($5,135) YoY NA 59% 45% 30% 22% 16% 12% 9% 7% 6% % of total Capex 52% 48% 43% 41% 36% 36% 35% 36% 35% 36% Add: Change in WC $462 $643 $785 $908 $1,064 $1,206 $1,329 $1,436 $1,522 $1,594 % of revenue 3% 3% 3% 3% 3% 2% 2% 2% 2% 2% Unlevered Free Cash Flows $7,705 $9,212 $11,940 $14,604 $18,618 $22,119 $25,651 $29,251 $32,739 $36,304 19%

Assumptions for BABA marketplace Terminal Value $414,391 Terminal EV/EBITDA 10x Terminal EV/EBIT 11x Terminal PE @ 30% rate 16x Discount Rate 14% PV of Terminal Value $136,056 NPV of FCF $95,654 Core BABA Value $231,710

Implied multiples: FY18 P/E 21x FY18 EBITDA 18x

Sum-of-the-Parts valuation 1. Alibaba Marketplace Value $231,710 2. AliCloud Value @ 100% $43,055 Corporate tax @ 16% non-GAAP ($44,942) Total BABA Enterprise Value $229,823 3. Long-term investment $18,743 4. Ant Financial Value @ 33% $21,285 5. Cainiao Network @ 47% $3,689 Net Cash $8,648 Target Value $282,188 Diluted shares outstanding 2,568 Fair value per share $110

Implied multiples: FY18 P/E 26x FY18 EBITDA 16x

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

23 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

Estimate Revisions

We are increasing our FY17 and FY18 revenue estimates by 5% and 7%, respectively, to reflect 1) the power of Unified ID and the evolving ecosystem that drive take-rate improvement, 2) confidence in AliCloud and 3) (3%) drag from currency depreciation. Our GMV estimates are unchanged.

For FY17, we are maintaining our gross profit estimate despite the higher revenue, as we expect that the consolidations of YOKU and LAZADA will weigh on full-year gross margin by 7.6%. In addition, we are lowering our non-GAAP operating income estimate by 4% but maintaining EBITDA, as we expect capex/D&A to step up at AliCloud.

For FY18, we are raising gross profit by 4% due to a 7.4% negative impact from consolidating YOKU and LAZADA. Similarly, we are increasing our EBITDA estimate by 8%, despite non-GAAP operating income remaining unchanged, but expect higher capex/D&A for AliCloud. Last, we are reducing non-GAAP net income by 4%, upon higher losses picked up from equity method investees.

Exhibit 19. Estimate Revisions

F1Q:17E F2Q:17E F3Q:17E F4Q:17E US$ Million Old New Delta Old New Delta Old New Delta Old New Delta Total GMV (in Rmb Billion) $820 $820 0% $871 $871 0% $1,172 $1,172 0% $896 $896 0% y/y Grow th 22% 22% 22% 22% 22% 22% 21% 21% Rmb per USD $6.50 $6.64 (2)% $6.50 $6.69 (3)% $6.50 $6.69 (3)% $6.50 $6.69 (3)% y/y Grow th -5% -7% -2% -5% 0% -3% -1% -4% Net Revenue $4,334 $4,450 3% $4,766 $5,082 7% $7,228 $7,624 5% $5,075 $5,406 7% y/y Grow th 33% 36% 37% 46% 36% 43% 35% 44% Gross Profit $2,687 $2,626 -2% $2,955 $3,049 3% $4,553 $4,612 1% $3,045 $2,892 -5% Margin 62% 59% -300bps 62% 60% -200bps 63% 61% -250bps 60% 54% -650bps Non-GAAP EBITDA $2,085 $2,019 -3% $2,213 $2,326 5% $3,547 $3,646 3% $2,419 $2,303 -5% Margin 48% 45% -274bps 46% 46% -69bps 49% 48% -125bps 48% 43% -508bps Non-GAAP Operating Income $1,813 $1,695 (6)% $1,924 $1,949 1% $3,239 $3,218 (1)% $2,116 $1,848 (13)% Margin 42% 38% -373bps 40% 38% -201bps 45% 42% -260bps 42% 34% -751bps Non-GAAP Net Income $1,601 $1,555 (3)% $1,715 $1,773 3% $3,018 $3,033 1% $1,865 $1,554 (17)% Margin 37% 35% -199bps 36% 35% -109bps 42% 40% -197bps 37% 29% -799bps Non-GAAP Earnings/ADS $0.62 $0.61 (3)% $0.67 $0.69 4% $1.17 $1.18 1% $0.72 $0.60 (16)% y/y Grow th 5% 2% 17% 21% 18% 19% 55% 30% Diluted ADS outstanding 2,569 2,564 (0)% 2,577 2,567 (0)% 2,584 2,569 (1)% 2,592 2,572 (1)% Tax rate 16% 15% -61bps 16% 15% -61bps 16% 15% -61bps 16% 15% -61bps

F2017E F2018E US$ Million Old New Delta Old New Delta Total GMV (in RMB million) $3,760 $3,760 0% ¥ 4,507 $4,507 0% y/y Grow th 22% 22% 20% 20% Rmb per USD $6.50 $6.68 (3)% $6.50 $6.69 (3)% y/y Grow th -2% -5% 0% 0% Net Revenue $21,403 $22,570 5% $28,456 $30,537 7% y/y Grow th 35% 42% 33% 35% Gross Profit $13,240 $13,184 0% $17,073 $17,712 4% Margin 62% 58% -345bps 60% 58% -200bps Non-GAAP EBITDA $10,265 $10,296 0% $13,120 $14,208 8% Margin 48% 45.6% -234bps 46% 47% 42bps Non-GAAP Operating Income $9,091 $8,714 (4)% $11,834 $11,791 (0)% Margin 42% 39% -387bps 42% 39% -297bps Non-GAAP Net Income $8,198 $7,919 (3)% $11,559 $11,022 (5)% Margin 38% 35% -322bps 41% 36% -453bps Non-GAAP Earnings/ADS $3.18 $3.08 (3)% $4.44 $4.27 (4)% y/y Grow th 21% 16% 40% 38% Diluted ADS outstanding 2,580 2,568 (0)% 2,606 2,581 (1)% Tax rate 16% 15% -61bps 15% 15% 0bps Source: Company Reports, Oppenheimer & Co. Inc. Estimates

24 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Exhibit 20. Opco vs. Guidance vs. consensus Opco vs FY1Q17E Opco Consensus Consensus GMV (RMB Bn) ¥ 820 ¥ 824 0% Taobao (RMB Bn) ¥ 493 ¥ 491 0% Tmall (RMB Bn) ¥ 328 ¥ 332 -1% Mobile (RMB Bn) ¥ 599 ¥ 602 -1% Total Revenue $4,450 $4,449 0% Gross Profit $2,626 $2,760 -5% Gross Margin 59% 62% -303bps Non-GAAP EBITDA $2,019 $1,983 2% Margin 45% 45% 80bps Non-GAAP Operating Income $1,695 $1,803 -6% Margin 38% 41% -244bps GAAP EPADS $0.27 $0.35 -23% Non-GAAP EPADS $0.61 $0.62 -2%

Opco vs Opco vs Consensus FY17E Guidance Opco Consensus Consensus Guidance vs Guidance GMV (RMB Bn) ¥3,760 ¥ 3,762 0% NA NA Taobao (RMB Bn) ¥2,159 ¥ 2,161 0% NA NA Tmall (RMB Bn) ¥1,600 ¥ 1,603 0% NA NA Mobile (RMB Bn) ¥2,883 ¥ 2,902 -1% NA NA Total Revenue $22,414 $22,570 $21,863 3% 1% -2% Gross Profit $13,184 $13,532 -3% NA NA Gross Margin 58% 62% -348bps NA NA Non-GAAP EBITDA $10,296 $9,909 4% NA NA Margin 46% 45% 30bps NA NA Non-GAAP Operating Income $8,714 $8,796 -1% NA NA Margin 39% 40% -163bps NA NA GAAP EPADS $1.68 $1.95 (14)% NA NA Non-GAAP EPADS $3.08 $3.16 (2)% NA NA

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

25 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00 Exhibit: Alibaba Group Holding Ltd Income Statement (FY-ending March 31)

BABA Income Statement E E E E F16-'F20E (in $ millions, except per share or stated otherwise) FY 13 FY 14 FY 15 Jun-15 Sep-15 Dec-15 Mar-16 FY 16 Jun-16 Sep-16 Dec-16 Mar-17 FY 17 E FY 18 E FY 19 E FY 20 E CAGR Total GMV $177,908 $270,488 $394,257 $108,548 $112,185 $148,816 $115,074 $485,374 $123,469 $130,240 $175,129 $133,976 $562,934 $673,674 $783,290 $900,184 16.7% Y/Y Change (%) 67.2% 52.0% 45.8% 34.4% 23.8% 17.3% 18.9% 23.1% 13.7% 16.1% 17.7% 16.4% 16.0% 19.7% 16.3% 14.9% 21314 Total Revenues $5,702 $8,463 $12,293 $3,265 $3,488 $5,333 $3,751 $15,877 $4,450 $5,082 $7,624 $5,406 $22,570 $30,537 $40,477 $52,351 34.8% Y/Y Change (%) 77.4% 48.4% 45.2% 28.4% 27.2% 26.4% 33.4% 29.2% 36.3% 45.7% 43.0% 44.1% 42.2% 35.3% 32.5% 29.3% 1. China Commerce (A + B) 4,818 7,275 10,153 2,695 2,881 4,612 3,012 13,236 3,483 3,760 6,084 3,949 17,282 22,418 28,074 34,497 27.1% % of Revenue 84.5% 86.0% 82.6% 82.5% 82.6% 86.5% 80.3% 83.4% 78.3% 74.0% 79.8% 73.1% 76.6% 73.4% 69.4% 65.9% Y/Y Change (%) 92.0% 51.0% 39.6% 25.3% 30.4% 29.3% 34.4% 30.4% 29.2% 30.5% 31.9% 31.1% 30.6% 29.7% 25.2% 22.9% 2. International Commerce Revenues 687 782 1,046 282 289 318 308 1,198 310 321 361 344 1,336 1,547 1,790 2,065 14.6% % of Revenue 12.1% 9.2% 8.5% 8.6% 8.3% 6.0% 8.2% 7.5% 7.0% 6.3% 4.7% 6.4% 5.9% 5.1% 4.4% 3.9% Y/Y Change (%) 13.7% 13.8% 33.8% 18.9% 9.7% 12.0% 16.6% 14.5% 10.1% 11.2% 13.3% 11.8% 11.6% 15.8% 15.7% 15.4% 3. Cloud Computing & Internet Infra. 107 125 205 78 102 126 165 474 193 239 287 359 1,077 2,474 5,442 9,524 111.7% % of Revenue 1.9% 1.5% 1.7% 2.4% 2.9% 2.4% 4.4% 3.0% 4.3% 4.7% 3.8% 6.6% 4.8% 8.1% 13.4% 18.2% Y/Y Change (%) 29.9% 16.0% 64.5% 105.6% 119.9% 116.7% 164.1% 131.1% 146.1% 134.1% 126.9% 116.9% 127.3% 129.6% 120.0% 75.0% 4. Other Income 89 282 889 210 216 276 265 969 464 762 892 754 2,874 4,098 5,170 6,265 59.5% % of Revenue 1.6% 3.3% 7.2% 6.4% 6.2% 5.2% 7.1% 6.1% 10.4% 15.0% 11.7% 14.0% 12.7% 13.4% 12.8% 12.0% Y/Y Change (%) 414.6% 215.9% 215.5% 81.9% -3.1% -10.9% 9.2% 9.0% 120.6% 252.7% 223.6% 184.4% 196.6% 42.6% 26.2% 21.2% Gross Profits $4,096 $6,308 $8,448 $2,183 $2,366 $3,642 $2,268 $10,484 $2,626 $3,049 $4,612 $2,892 $13,184 $17,712 $23,476 $30,364 30.5% Gross Margin 71.8% 74.5% 68.7% 66.9% 67.8% 68.3% 60.5% 66.0% 59.0% 60.0% 60.5% 53.5% 58.4% 58.0% 58.0% 58.0% Y/Y Change (%) 89.4% 54.0% 33.9% 21.1% 29.3% 21.1% 24.5% 24.1% 20.3% 28.9% 26.6% 27.5% 25.8% 34.3% 32.5% 29.3%

Product development expenses 620 821 1,719 523 507 579 554 2,164 668 651 747 697 2,763 3,542 4,533 5,575 26.7% % of Revenue 10.9% 9.7% 14.0% 16.0% 14.5% 10.9% 14.8% 13.6% 15.0% 12.8% 9.8% 12.9% 12.2% 11.6% 11.2% 10.7% Y/Y Change (%) 33.3% 32.4% 109.4% 66.1% 20.7% 16.5% 12.9% 25.9% 27.7% 28.2% 29.1% 25.9% 27.6% 28.2% 28.0% 23.0% Selling and marketing expenses 597 733 1,373 361 403 562 444 1,775 467 559 762 584 2,373 3,145 4,088 5,130 30.4% % of Revenue 10.5% 8.7% 11.2% 11.1% 11.6% 10.5% 11.8% 11.2% 10.5% 11.0% 10.0% 10.8% 10.5% 10.3% 10.1% 9.8% Y/Y Change (%) 21.6% 22.8% 87.4% 85.0% 41.6% 15.4% 8.7% 29.2% 29.3% 38.6% 35.6% 31.6% 33.7% 32.5% 30.0% 25.5% General and administrative expenses 477 680 1,258 362 335 386 362 1,445 392 407 549 411 1,758 2,229 2,813 3,429 24.1% % of Revenue 8.4% 8.0% 10.2% 11.1% 9.6% 7.2% 9.6% 9.1% 8.8% 8.0% 7.2% 7.6% 7.8% 7.3% 7.0% 6.6% Y/Y Change (%) 34.5% 42.5% 85.1% 137.8% 4.9% -1.0% -9.5% 14.8% 8.2% 21.4% 42.2% 13.6% 21.7% 26.8% 26.2% 21.9% Amortization of intangibles 21 51 337 104 115 126 115 460 127 141 158 144 571 740 963 1,251 % of Revenue 0.4% 0.6% 2.7% 3.2% 3.3% 2.4% 3.1% 2.9% 2.8% 2.8% 2.1% 2.7% 2.5% 2.4% 2.4% 2.4% Operating Income $2,381 $4,024 $3,732 $832 $1,006 $1,919 $793 $4,640 $973 $1,292 $2,396 $1,056 $5,719 $8,054 $11,079 $14,978 34.0% Operating Margin 41.8% 47.5% 30.4% 25.5% 28.8% 36.0% 21.1% 29.2% 21.9% 25.4% 31.4% 19.5% 25.3% 26.4% 27.4% 28.6% Y/Y Change (%) 188.0% 69.0% -7.3% -24.5% 42.1% 27.4% 89.1% 24.3% 16.8% 28.4% 24.8% 33.2% 23.3% 40.8% 37.6% 35.2% Non-GAAP Operating Income $2,589 $4,483 $5,834 $1,477 $1,504 $2,594 $1,499 $7,164 $1,695 $1,949 $3,218 $1,848 $8,714 $11,791 $15,750 $20,817 30.6% Non-GAAP OPM 45.4% 53.0% 47.5% 45.2% 43.1% 48.6% 40.0% 45.1% 38.1% 38.4% 42.2% 34.2% 38.6% 38.6% 38.9% 39.8% Y/Y Change (%) 151.9% 73.1% 30.1% 15.7% 25.5% 17.8% 28.5% 22.8% 14.8% 29.6% 24.1% 23.3% 21.6% 35.3% 33.6% 32.2% Non-GAAP EBITDA $2,743 $4,954 $6,574 $1,707 $1,754 $2,950 $1,783 $8,216 $2,019 $2,326 $3,646 $2,303 $10,296 $14,208 $18,962 $25,090 32.2% Non-GAAP EBITDA margin 48.1% 58.5% 53.5% 52.3% 50.3% 55.3% 47.5% 51.7% 45.4% 45.8% 47.8% 42.6% 45.6% 46.5% 46.8% 47.9% Y/Y change (%) 135.0% 80.6% 32.7% 23.5% 184.6% 21.2% 28.8% 25.0% 18.2% 32.6% 23.6% 29.1% 25.3% 38.0% 33.5% 32.3% Profit Before Tax $1,669 $4,288 $4,958 $5,195 $3,835 $2,472 $1,107 $12,588 $946 $1,250 $2,549 $855 $5,604 $8,312 $11,602 $15,798 Income Tax Expense 241 515 1,035 225 263 549 283 1,326 250 286 506 247 1,290 1,807 2,441 3,246 Effective Tax Rate 14.4% 12.0% 20.9% 4.3% 6.9% 22.2% 25.6% 10.5% 26.5% 22.9% 19.8% 28.9% 23.0% 21.7% 21.0% 20.5% Profit After Tax $1,429 $3,772 $3,923 $4,970 $3,572 $1,923 $824 $11,262 $696 $964 $2,043 $608 $4,314 $6,505 $9,161 $12,553

GAAP Net Income $1,429 $3,772 $3,923 $4,970 $3,572 $1,923 $824 $11,262 $696 $964 $2,043 $608 $4,314 $6,505 $9,161 $12,553 Net Margin 25.1% 44.6% 31.9% 152.2% 102.4% 36.1% 22.0% 70.9% 15.6% 19.0% 26.8% 11.2% 19.1% 21.3% 22.6% 24.0% Y/Y Change (%) 90.8% 164.0% 4.0% 147.9% 623.6% 99.4% 78.1% 187.1% -86.0% -73.0% 6.3% -26.2% -61.7% 50.8% 40.8% 37.0%

Non-GAAP Net Income $2,291 $4,451 $5,643 $1,532 $1,456 $2,525 $1,184 $6,781 $1,555 $1,773 $3,033 $1,554 $7,919 $11,022 $14,834 $19,683 30.5% Non-GAAP Net Margin 40.2% 52.6% 45.9% 46.9% 41.7% 47.4% 31.6% 42.7% 34.9% 34.9% 39.8% 28.8% 35.1% 36.1% 36.6% 37.6% Y/Y Change (%) 121.2% 94.3% 26.8% 29.9% 31.2% 19.5% -5.2% 20.2% 1.5% 21.8% 20.1% 31.3% 16.8% 39.2% 34.6% 32.7% GAAP Diluted EPADS 0.60 1.62 1.57 1.92 1.39 0.75 0.32 4.39 0.27 0.38 0.80 0.24 1.68 2.52 3.53 4.82 Y/Y Change (%) 101.4% 170.5% -2.9% 128.4% 588.1% 102.4% 79.7% 179.5% -85.9% -73.0% 5.5% -26.5% -61.7% 50.0% 40.1% 36.3%

Non-GAAP Diluted EPADS $0.95 $1.90 $2.25 $0.59 $0.57 $0.99 $0.47 $2.65 $0.61 $0.69 $1.18 $0.60 $3.08 $4.27 $5.72 $7.55 29.9% Y/Y Change (%) 148.4% 100.1% 18.5% 20.5% 25.5% 22.0% -4.0% 17.7% 2.2% 21.0% 18.9% 29.9% 16.2% 38.5% 33.9% 32.0%

Weighted Basic Shares Outstanding 2,294 2,175 2,334 2,477 2,461 2,446 2,458 2,461 2,460 2,463 2,465 2,468 2,464 2,476 2,489 2,501 0.4% Weighted Diluted shares outstanding 2,389 2,332 2,499 2,588 2,564 2,550 2,562 2,566 2,564 2,567 2,569 2,572 2,568 2,581 2,594 2,607 0.4% Y/Y Change (%) (5.3)% (2.4)% 7.2% 8.6% 5.2% (1.5)% (0.9)% 2.7% (0.9)% 0.1% 0.8% 0.4% 0.1% 0.5% 0.5% 0.5% RMB/USD $6.05 $6.20 $6.20 $6.20 $6.36 $6.48 $6.45 $6.37 $6.64 $6.69 $6.69 $6.69 $6.68 $6.69 $6.69 $6.69 1.2%

Source: Company Reports and Oppenheimer estimates

26 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Stock prices of other companies mentioned in this report (as of 7/6/16): JD.com, Inc. (JD-NasdaqGS, $20.36, Not Covered) Charles Schwab Corp. (SCHW-NYSE, $24.68, Not Covered) China Life Insurance Co, Ltd. (2628-HKG, HK$16.40, Not Covered) Ping An Insurance (Group) Company of China (2318-HKG, HK$33.35, Not Covered) Intime Retail (Group) Co. Ltd. (1833-HKG, HK$6.02, Not Covered) Fosun International Ltd. (656-HKG, HK$9.92, Not Covered) Softbank Group Corp. (9984-TKS, JPY5,613.00, Not Covered) Accenture Plc (ACN-NYSE, $113.52, Not Covered) SAP SE (SAP-DE, €66.70, Not Covered) Royal Philips NV (PHIA-NL, €21.58, Not Covered) Disclosure Appendix

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27 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

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28 BABA (OUTPERFORM) - $110.00 Alibaba Group Holding Ltd.

Distribution of Ratings/IB Services Firmwide

IB Serv/Past 12 Mos.

Rating Count Percent Count Percent

OUTPERFORM [O] 299 55.89 125 41.81 PERFORM [P] 234 43.74 70 29.91 UNDERPERFORM [U] 2 0.37 0 0.00

Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.

Company Specific Disclosures

Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3 months from BABA and JD.

Oppenheimer & Co. Inc. makes a market in the securities of AMZN, CHRW, JD, MSFT, SCHW and YHOO.

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29 Alibaba Group Holding Ltd. BABA (OUTPERFORM) - $110.00

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