Ant IPO: The Internet 2.0. Subscribe.

ED 290 August 5th, 2020

Paul Schulte, MA, MALD Phuang Jing Yi Dean Sun Chu Desai [email protected] [email protected] [email protected] [email protected] www.schulte-research.com (+852) 9705 0777 Andrew Ho Roman Shemakov

SchulteResearch [email protected] [email protected] 0 Table of Contents

Page Description 2 - 5 Part I – IPO Valuation Estimates 6 - 16 Part II – Alibaba’s Relationship with Ant Financial 17 - 43 Part III – Ant Financial Operations 19 - 23 1. 24 - 31 2. Financial Technology 32 - 35 3. Zhima Credit 36 - 39 4. Ant Fortune 40 - 43 5. MYbank 44 - 55 Part IV – Alibaba Financials 56 - 61 Part V – Future 62 - 77 Part VI – AntChain: Ant Group Blockchain 78 - 79 Part VII – Investors in Ant are a ‘who’s who’ of 80 - 83 Part VIII – China’s Global Mark on Fintech 84 - 88 Part IX – Investment Concerns 89 - 93 Part X – Alibaba’s Financials Compared to its Competitors 94 - 98 Part XI – Appendix: Ownership

SchulteResearch 1 Part I – IPO Valuation Estimates

SchulteResearch 2 Key Ratios

Alibaba Ant Group Amazon Apple Facebook Google

Market Cap 664 200 1578 1842 723 1012 654 (USD BN)

Current Ratio 1.91 N/A 1.08 1.50 4.60 3.66 1.11

Debt/Equity 0.72 0.14 0.36 1.14 0.09 0.08 0.42 Ratio P/B Ratio 6.3 5.9 23.2 23.5 6.9 5.0 10.1

P/E Ratio 31.4 43.0 144.9 32.2 31.0 32.7 49.3

ROE 14.6% 6.8% 21.5% 67.8% 23.5% 15.8% 18.8%

ROC 6.3% 6.5% 7.9% 18.6% 27.6% 19.5% 11.5%

EV/EBITDA 22.1 37.0 41.7 22.4 20.2 17.7 39.3

SchulteResearch 3 Potential IPO Outlook for Ant $200 Bn Valuation

15% public float after IPO

Ant Group Pre-IPO Post-IPO

Stake Value (Bn) Stake Value (Bn)

Alibaba 33% $49.5 28.1% $56.1

Junhan 28.5% $42.7 24.2% $48.5

Junao 21.5% $32.3 18.3% $36.5

Others 17% $25.5 14.4% $28.9

Public - - 15.0% $30.0

Total 100% $150 100% $200

Jack Ma owns 100% of the general partner of both Junhan and Junao. Effectively owning 50% of Ant.

SchulteResearch 4 Growing Chinese Fintech Unicorns

Table: Top 10 fintech unicorns, ranked by valuation Valuation Ranking Company Business Area Valued As of Headquarters Founded ($Bn)

1 Ant Financial Mobile payment and others 150 2018 , China 2004

2 JD Finance Online financial services 98 2020 Beijing, China 1998

3 Lufax P2P lending 40 2019 Shanghai, China 2011

4 Online payment processor 36 2020 San Francisco, US 2010

One97 5 Online payment solutions 16 2019 New Delhi, 2000 Communications

6 Ripple Payment and exchange services 10 2019 San Francisco, US 2012

7 NuBank Online financial services 10 2019 Sao Paulo, Brazil 2013

8 Robinhood Electronic trading platform 8 2020 Menlo Park, US 2013

9 Online financial services 5.5 2019 Stockholm, Sweden 2005

10 SoFi P2P student loan re-financing 5 2020 San Francisco, US 2011

SchulteResearch 5 Part II – Alibaba’s Relationship with Ant Financial

SchulteResearch 6 Alibaba Structure

Alibaba Group Holding Limited (Cayman Islands)

100% 100%

100% Alibaba Investment Limited Holding Ltd. (British Virgin Islands) (Cayman Islands) Alibaba.com Investment Holding Ltd. 100% (British Virgin Islands)

Taobao China Holding Ltd. (HK) Outside Mainland China 100% 100% 100%

Inside Mainland China Hangzhou Supply Beijing 100% 100% Chain Management Computing Technology Co. Ltd.

Zhejiang Zhejiang 100% 33% Taobao Alibaba Network Network (Beijing) Ant Group Software

SchulteResearch 7 Alibaba’s Revenue Component 2020

Alibaba

Section Core Commerce Cloud Computing Digital Media and Innovation initiatives Entertainment Revenue: 85.5% 7.85% 5.28% 1.3%

SchulteResearch 8 Ant Group’s Revenue Component 2020

Ant Group

Blockchain IoT AI Database Yu’e Bao Section Tech Service Payments Financial Service Revenue: 65% 29% 6%

SchulteResearch 9 Ant Group’s Revenue Component

SchulteResearch 10 Alibaba and Ant Financial’s Main Products

33%

Alibaba Ant Financial 100%

0% 100% 100% 100% 100% 100% Share 30% 100% technology and products

Ant Cloud

Alibaba Cloud and Ant Cloud are not the same. They are separate departments in Alibaba and Ant. However, they share some core products and technologies.

SchulteResearch 11 Cross investments

Alibaba Ant Group

Stake Investment Stake Stake Stake Alibaba Majority 3 Bn RMB 35% Minority 35% Ant Preferred shares 3 Bn RMB 0.5% 30% Minority

SchulteResearch *koubei and Ele.me merged in 2018. 12 Other Companies’ Equivalent Products

Ant Financial

Yu‘e Bao

Chinese Equivalents

Jinshan Cloud Tenpay JD Finance Tencent Finance WeBank Foreign Equivalents

PIMCO

SchulteResearch 13 Entities related to Alibaba and Ant are similar to…

SchulteResearch 14 Revenue share

% Alibaba 5% 5% 1% 1% <1% Revenue % Ant - - - ~3% <1% Revenue

• Ele.me and koubei combined constitute of 5% of Alibaba’s revenue.

Company Revenue (Mn) Net Income (FY2019) $448 $ (549) Paytm mall (FY2019) $129 $ (241) Ant Group (Calendar 2019) $17,000 $2,400

SchulteResearch 15 Ecommerce is still Alibaba’s main revenue source

SchulteResearch 16 Part III – Ant Financial Operations

SchulteResearch 17 Ant is a technology-driven company

1. Cloud 5. 2. SOFAStack mPaaS 30% 100% 100% OceanBase

Ant 4. 3. 100% 100%

Ant Chain

SchulteResearch 18 1. Alipay

SchulteResearch 19 Alipay

• The world’s leading payment and lifestyle platform.

• Currently serves over 1 billion users with its local e-wallet partners.

• Has evolved from a digital wallet to a lifestyle enabler.

• Hail a taxi, make doctor’s appointments, purchase wealth management products

• In-store payment service covers over 50 markets across the world, and tax reimbursement via Alipay is supported in 35 markets.

SchulteResearch 20 Alipay

SchulteResearch 21 Alipay vs TenPay

Aspect Alipay Tenpay

Market Share 48.44% 33.59% (Amount of Payment) Users Over 1,000,000,000 1,100,000,000

Number of currencies 18 9 supported

Fees 0.1% for withdrawals more than 0.1% for withdrawals more $2897 than $153

Fee for merchants 0.55% 0.6%

Escrow Service Support Does Not Support

SchulteResearch 22 Alipay is thriving in China

• Payments service not as an end in itself, but as a gateway to a vast digital ecosystem of products and services.

• Alipay is available in:

>1 million >40,000 >1 million taxis >300 hospitals restaurants supermarkets & convenience stores

• Alipay links users’ wallets to in-app retail platforms, financial services, investment, insurance products, e-commerce services, and bill payment

SchulteResearch 23 2. Financial Technology

SchulteResearch 24 Ant Cloud – Fintech of Ant

• For the life cycle of applications, financial technology will focus on the following key technologies: • financial intelligence • financial security • financial distributed architecture • mobile development • blockchain • financial distributed database

• Ant Cloud is 100% owned by Ant Financial. • Ali Cloud is 100% owned by Alibaba. • However, they keep close relationship. Many Ant Cloud products can be found in Ali Cloud.

SchulteResearch 25 Ant Cloud – Fintech of Ant

• At the same time, fintech provides greater and more professional industry solutions in the areas of:

Digital Digital Digital Digital Banking insurance securities supervision

to improve data security, ensure business stability, and optimize data analysis to achieve precision marketing.

SchulteResearch 26 Why Ant Cloud?

• Safe and compliant Completely independent of public cloud

• Multi-center disaster tolerance Multiple financial zones in Hangzhou, Shenzhen and Qingdao

• High-level safety protection

• Secure and flexible network access Dedicated line or IPSecVPN access to meet the requirements of communication between financial services in multiple institutions

• Quickly tap the value of financial-level data solutions help massive financial data turn into data advantages

SchulteResearch 27 Ant Cloud For Digital Banking

• Digital transformation of retail banking has created Customer: of Nanjing online banking. • The "Xinyun+" Internet financial platform • Transform bank channels, customers, products, and risk control into online, intelligent, and ecological is a core financial transaction platform built methods. entirely based on Internet technology. • It can be said that at the strategic level, the • Build an architecture model of "large and medium desks and small front desks" to achieve rapid business establishment of "Xinyun+" has innovation. transformed the Internet financial business of Bank of Nanjing from an S2C model to a new S2B2C model.

SchulteResearch 28 Ant Cloud For Smart Banking

Introduction: • Intelligent customer service, • marketing, • big data risk control, • product and channel operation, • improve user experience, • Improve operational efficiency, • reduce operating costs.

Advantages:

- Advanced Risk Control - Advanced Marketing - integrates internal and external data, - build an online and flexible marketing management - builds unified financial-level intelligent risk platform, platform for financial institutions, including: - realizing comprehensive risk management such as: - customer insight, - marketing protection, - event management, - account protection, - channel push, - transaction protection, - targeted delivery, - credit protection, - process automation, - channel protection, and - marketing effect analysis, - content protection. - marketing experiment, - event marketing, - creative center and other components.

SchulteResearch 29 Ant Cloud For Insurance

Introduction:

• Puts insurance infrastructure on cloud, and establishes Customer: ZhongAn Insurance distributed architecture of core systems. It took ZhongAn Insurance only 5 months to • Supports data intelligence and implement the disaster recovery deployment technology capabilities for insurance in the next 5-10 years. of the three centers in the two places and support the massive Internet services. It is the first financial institution to build its core system on a cloud computing platform.

SchulteResearch 30 Several Core Products

SOFAStack(Scalable Open Financial Architecture Stack）: • Financial distributed architecture • It provides project management and monitoring. And its distributed structure allows for remote disaster recovery and low-cost rapid expansion.

mPaaS: • Financial-grade mobile development platform mPaaS (Mobile PaaS) provides a cloud-to-end one-stop solution for App development, testing, operation, and maintenance • It is actually an app developing platform, which is specially designed for financial apps to ensure safety and speed.

OceanBase: • OceanBase is a financial-grade distributed relational database independently developed by Ant Financial and Alibaba. • It has online horizontal expansion capabilities and created an industry record of 61 million processing peaks per second.

SchulteResearch 31 3. Zhima Credit

SchulteResearch 32 Zhima Credit

• Independent third-party credit agency under Ant Financial, uses cloud computing, machine learning and other technologies to objectively create credit profiles

• Used in:

Credit Card Consumer Financial Hotel Renting Finance Leasing

Travel Marriage Classification

• Information, student services, and public utilities services, provide credit services for users and merchants.

SchulteResearch 33 What can Zhima Credit do?

A loyalty scheme for an entire country, sponsored by certain companies:

• 600+ points – take out a Just Spend loan of up to 5,000 yuan (around £565) to use to shop on an Alibaba site

• 650+ points – rent a car without leaving a deposit. Faster check-in at hotels, use of VIP check-in at Beijing Capital International Airport

• 666+ points – get a cash loan of up to 50,000 yuan (£5,700 from Ant Financial Services

• 700+ points – apply for Singapore travel without supporting documents such as an employee letter

• 750+ points – get a fast-tracked application to a coveted pan-European Schengen visa

SchulteResearch 34 What can Zhima Credit do?

SchulteResearch 35 4. Ant Fortune

SchulteResearch 36 One click. The Amazon moment for asset managers in China is here.

• Fortune is a comprehensive wealth management app that allows users to manage their finances in one place.

• Ant Fortune is 100% owned by Ant Financial.

• Access wealth management Yu’e Bao and funds on the platform.

SchulteResearch 37 Ant Fortune – Pioneer of Fintech

1. More than 100 blockchain patents, ranking first in the world.

2. Fully-configured IVR, interactive robots, voice recognition, etc.

3. 95% of customer service is cloud.

4. Average customer service capacity has increased by 70%.

Hope that there will be a real "more financial" AI landing

SchulteResearch 38 Future of Ant fortune

• Investment research, trading, and risk control.

• They have two main directions: A. To explore blockchain in the fund field B. Intelligent security risk control.

Hope that there will be a real "more financial" AI landing

SchulteResearch 39 5. MYbank

SchulteResearch 40 MYbank: China‘s first commercial bank with a core system based on cloud computing architecture.

• Initiated by Ant Financial, which is also the major shareholder.

• Ant Financial owns 30% of MYbank. FOSUN owns 25%, Wanxiang group owns 18%. Others were owned by brokers and other companies.

• As one of the first five private approved by CBRC, it officially opened in June 2015.

SchulteResearch 41 MYbank - leading a revolution in the way China lends to small businesses

• Using real-time payments data and a risk-management system that analyzes more than 3,000 variables.

• Ma’s four-year-old MYbank has lent 2 trillion yuan ($290 billion) to nearly 16 million small companies.

• The whole borrowing process takes three minutes and involves zero human bankers. The default rate so far: about 1%.

SchulteResearch 42 MYbank - leading a revolution in the way China lends to small businesses

• After obtaining authorization from borrowers, MYbank analyzes real-time transactions to gain insights into creditworthiness.

• Loan approval rate at MYbank that’s four times higher than at traditional lenders, which typically reject 80% of small-business loan requests and take at least 30 days to process applications.

• The CEO of MYbank said the Hangzhou-based firm’s operating cost per loan is about 3 yuan, versus 2,000 yuan at traditional rivals.

SchulteResearch 43 Part IV – Alibaba Financials

SchulteResearch 44 Balance Sheet – Assets

(CNY MM) 71% YoY increase in Total Current Assets

74% YoY increase in Cash & Equivalents

Steady YoY increase in Total Assets

45% YoY increase in Long Term Investments

SchulteResearch 45 Balance Sheet – Liabilities & Shareholder’s Equity

(CNY MM)

Alibaba Retained Earnings (MM USD) 70,000 57,734 60,000

50,000 57% 40,000 49% 36,800 30,000 57% 24,692 20,000 15,682

10,000

0 2017 2018 2019 2020

Strong YoY increase in Retained Earnings

SchulteResearch 46 Gross Profit & Gross Profit Margin

Alibaba FY Gross Profit (USD MM) & Gross Profit Margin 35,000 100%

90% 30,000 Steady YoY increase in Gross profit, but decrease in Gross profit margin 80% 25,000 70% 63% 58% 60% 20,000

46% 45% 50%

15,000 40%

30% 10,000 45% YoY 20% YoY 33% YoY 20% 5,000 10%

13,951 20,163 24,186 32,200 0 0% 2017 2018 2019 2020

Gross Profit Gross Profit Margin

SchulteResearch 47 Revenue Breakdown

Alibaba Revenue Breakdown Alibaba Core Commerce Breakdown (CNY MM) 930 1307 3773 (USD MM) 1% 2% 5% 5602 3562 China Retail (Customer Management) 8% 1343 6% 2% 3113 China Retail (Commission) Core Commerce 5% China Retail (Other) 3405 Cloud Computing 24555 6% China Wholesale 1740 40% 3% Digital Media and Entertainment International Retail

International Wholesale Innovation Initiatives and Others Cainiao Logistics Services 12078 20% Local Consumer Services 61055 86% 9952 Others 16%

SchulteResearch 48 Revenue Breakdown

YoY Growth in Revenue Breakdown 70%

62%

60% Innovation Initiatives and Others’ increase in revenue was primarily driven by online gaming 50%

42%

40% 35%

30%

20%

12%

10%

0% Cloud Computing Innovation Initiatives and Others Core Commerce Digital Media and Entertainment

SchulteResearch 49 History of Cloud Computing Revenue

Cloud Computing FY Revenue & Adjusted EBITA (USD MM) 7,000 0

6,000 5,746 While Alibaba’s cloud computing arm is still losing money, -50 5,000 analysts believe it will soon be a key profit driver, similar to Amazon Web Services -112 -100 4,000 3,682

3,000 -162 -150

2,024 2,000 -198 -200 1,000

0 -250 2018 2019 2020

Revenue Adjusted EBITA

SchulteResearch 50 Revenue Forecast

Alibaba Revenue Forecast (USD BN) 130

120 On average, analysts forecast 110 $94.6BN USD and $118.9BN USD in revenue for FY 2021 and 2022 respectively

100

90

80

70 2020 2021 2022

Average Estimate Low Estimate High Estimate

SchulteResearch 51 Operating Income

FY Total Revenue & Total Operating Expenses FY Operating Income (USD MM) Analyst (USD MM) 20,000 Estimate 17,308 18,000 100,000 16,000 14,000 12,800 90,000 12,000 9,459 10,000 7,992 80,000 8,000 6,430 Operating Income 6,000 4,000 70,000 2,000 0 60,000 2017 2018 2019 2020 2021

50,000 FY Operating Profit Margin 40,000 35% 29% Analyst 30% 27% 30,000 Estimate 25% 19% 20,000 20% 18% 15% 15% 10,000 10%

0 5% 2017 2018 2019 2020 2021 0% Total Revenue Total Operating Expenses 2017 2018 2019 2020 2021

SchulteResearch 52 Adjusted EBITA and Adjusted EBITDA

(USD MM) Year ended March 31, Adjusted EBIT Breakdown by Segment Adjusted EBITA and Adjusted EBITDA 2019 2020 FY2020 Adjusted FY2020 Adjusted Segment Income from operations 7992 12912 EBITA (USD MM) EBITA Margin (%) Add: Share-based compensation 5249 4483 Core Commerce 23415 38% expense Cloud Computing (199) (4%) Add: Amortization and impairment of Digital Media & 1502 1891 (1570) (41%) intangible assets Entertainment Innovation Initiatives & Add: Impairment of goodwill - 81 (1245) (133%) Others Add: Settlement of U.S. federal class 235 - Unallocated (1034) - action lawsuit Consolidated 19367 27% Adjusted EBITA 14977 19367

Add: Depreciation and amortization Current & Forecasted EV/EBITDA of property and equipment, and 2095 2899 operating leases cost relating to land FY2020 FY2021 FY2022 use rights

Adjusted EBITDA 17072 22266 EV/EBITDA 22.1 22.3 16.5

SchulteResearch 30% YoY increase in Adjusted EBITDA 53 Non-GAAP Net Income

USD MM Year ended March 31, Non-GAAP net income 2019 2020 76% YoY increase in Net income 11233 19821 Net income Add: Share-based compensation expense 5249 4483

Add: Amortization and impairment of intangible assets 1502 1891 Current & Forecasted Net Income Add: Impairment of goodwill and investments 1590 3623 (USD MM) Net Income Less: Gain on deemed disposals/disposals/revaluation (6654) (673) of investments and others FY2020 19821 Add: Settlement of U.S. federal class action lawsuit 235 - Less: Gain in relation to the receipt of the 33% equity - (10106) FY2021 17697 interest in Ant Financial Add: Amortization of excess value receivables arising FY2022 23710 from the restructuring of commercial arrangements 37 14 with Ant Financial Adjusted for tax effects on non-GAAP adjustments (115) (343) 43% YoY increase in Non-GAAP net income 13077 18710 Non-GAAP net income

SchulteResearch 54 Non-GAAP Free Cash Flow

(USD MM) Year ended March 31,

Non-GAAP Free cash flow 2019 2020 21% YoY increase in Net cash provided Current & Forecasted Net cash provided by operating activities 21137 25507 by operating Free Cash Flow activities Free Cash Less: Purchase of property and equipment (USD MM) Flow (excluding land use rights and construction (4527) (3483) A decrease in both in progress relating to office campuses) Purchase of property FY2020 18489 Less: Acquisition of licensed copyrights and and equipment & (1983) (1813) other intangible assets Acquisition of licensed FY2021 24382 copyrights and other Less: Changes in the consumer protection intangible assets 0 (1722) FY2022 47420 fund deposits 26% YoY increase in Non-GAAP Free cash flow 14627 18489 Non-GAAP Free cash flow

SchulteResearch 55 Part V – Ant Group Future

SchulteResearch 56 Alipay Three Year Plan

• Open up its platform to support the digital transformation of 40 million service providers across China.

• Strengthen its position in China by evolving from a payment platform to a gateway for lifestyle services.

• Work with 50,000 Independent Software Vendors (ISVs) to help 40 million service providers digitalize their operations. Simon Hu, CEO of Ant Financial, unveils the three-year plan at the Alipay Partner Conference in Hangzhou, China

SchulteResearch 57 Alipay will focus on China & Transformation

• Transformation from a financial services provider to a Mini-programs Portable charger rental gateway for lifestyle services. Car rental Recently Used • Allow service providers to tap into the giant Alipay user base.

• Service was 60% of GDP growth in China in 2019. Social security helper • COVID-19 incentive program allowed: Bike rental 1. 1,200 developers to create 181 mini-programs on Alipay in one week. Alipay mini-programs for convenience 2. A grocery delivery program attracted 800,000 users. 3. A medical consultation program received 700,000 ADU. Recommended • Searches on Alipay for lifestyle services increased 300% YoY in 2019.

SchulteResearch 58 Ant Group focuses on payments and Ecommerce internationally

Industry Company Country Industry Company Country

UK SE Asia

Bangladesh Bangladesh

India India Payments $$$ Ecommerce Philippines Philippines

Thailand Thailand

Indonesia Indonesia

Alibaba is building a payment + ecommerce ecosystem around the world, just like it did in China.

Ant is much more heavily focused on payments, whereas Alibaba’s concentration is on ecommerce.

SchulteResearch 59 A separate showdown in SE Asia?

• With the US and China fighting over the South China Sea, could digital financial services in Southeast Asia become another key battleground? YES!

vs. *

vs.

• Everyone wants a slice of the SE Asia fintech pie.

* gojek is funded by a consortium of American companies and Tencent. All competing with Alibaba.

SchulteResearch 60 A separate showdown in SE Asia?

Source: https://www.bloomberg.com/news/articles/2020-06-12/indonesia-s-ovo-is-said-close-to-merger-with-dana-to-fight-gojek

SchulteResearch 61 Part VI – AntChain: Ant Group Blockchain

"Blockchain is not a bubble, but Bitcoin might be. Bitcoin is only a tiny application of blockchain,"

Jack Ma 2018 World Intelligence Congress.

SchulteResearch 62 China is Doubling Down on Blockchain

In 2019, China declared Blockchain National Infrastructure

This April, China Launched the Blockchain Service Network

- an immense digital infrastructure initiative which already encom- passes around 100 city-nodes across the country, and is expected to serve as the backbone for massive interconnectivity both in China and abroad.

“[China will] take the leading position [in Blockchain] ... occupy the commanding heights of innovation, and gain new industrial advantages,” . October 2019

SchulteResearch http://www.chinabankingnews.com/2020/06/15/chinas-blockchain-services-network-the-biggest-event-in-computing-since-the-cloud-rich-turrin/ 63 Blockchain Service Network(BSN): The Network for Networks

- BSN is ChinaChain. It serves as the infrastructure upon which all the other public blockchains can coexist.

- It is currently integrated with - Tezos, NEO, Nervos, EOS, IRISnet and Ethereum.

- Developers on these blockchains can build applications using BSN’s cloud data center. - The Problem? - It is not yet user friendly enough for mass public appeal.

SchulteResearch http://www.chinabankingnews.com/2020/06/15/chinas-blockchain-services-network-the-biggest-event-in-computing-since-the-cloud-rich-turrin/ 64 AntChain: Ant Group Blockchain

“There are still 1.7 billion people in the world who have no bank accounts, but most of them have mobile phones. The impact of blockchain on the future of humans may be far beyond our imagination.” – Jack Ma

1. Biggest player in the world’s blockchain community, and is essentially tied at the hip to ChinaChain.

2. #1 patent holder in blockchain with 212 patents.

3. Agreements with Dell, HP, Lenovo. Making IT leasing services more accessible to SMEs.

4. Runs on the AliCloud, integrated into Alibaba’s ecosystem. SMEs in the Alibaba ecosystem is the prize.

THIS IS THE FOUNDATION OF THE NEXT FIVE YEAR PLAN.

SchulteResearch 65 AntChain announced on July 23rd

• AntChain announced on July 23, just one day after the PBOC released technical, performance, and security standards for blockchains. Possible cooperation?

• >50 uses of AntChain, including:

IT Leasing Shipping Insurance Claim Cross-Border Donations Geared towards Processing Remittances SMEs

• Close ties between Ant and the Chinese government, with Ant securing contracts to provide blockchain services to Xiong’an, Hebei and other cities.

While AntChain does not have a direct link with the PBOC Coin, it will definitely be tapping into ChinaChain, also known as the “internet of blockchains.”

SchulteResearch 66 ChinaChain: The blockchain of blockchains

• ChinaChain is a “licensed consortium blockchain” running on Hyperledger Fabric, Ethereum, EOS, WeBank’s FISCO BCOS, Baidu’s Xuperchain, and ChainSQL. Basically a blockchain of blockchains.

• It will connect 128 cities within China with 7 places outside: Paris, Sydney, Sao Paulo, Singapore, Tokyo, Johannesburg, San Francisco.

• AntChain will work with ChinaChain to weave together different blockchains and bring SME’s into the blockchain world.

Blockchain Service Network. Source: Decrypt

SchulteResearch 67 ChinaChain is the internet 2.0

- Computing originally functioned in terms of servers, you would own and compute on them.

- The big transition came with the cloud - you no longer own the servers, they are rented from Amazon, Ping An or Alibaba. The computing is done on a platform.

- The current breakthrough is coming through transactions - everything regarding contracts, authentication, and security will operate as a public utility.

SchulteResearch 68 Creating Unified National Standards

- On July 22nd 2020, The People’s (nicknamed “央妈” which means “central mama,”) issued national standards for all blockchain technology in the country.

- If you have a blockchain application in any sector, and you want to host it on the BSN, it must adhere to “technical, performance and security” standards - data privacy, encryption protocols, etc.

SchulteResearch http://www.chinabankingnews.com/2020/06/15/chinas-blockchain-services-network-the-biggest-event-in-computing-since-the-cloud-rich-turrin/ 69 Ant is China’s Blockchain Sweetheart

• July 23rd 2020 (one day after Central Mama published their standards), AntGroup Launches “AntChain” designed to function on top of the BSN

• It is designed for SME to build solutions in supply chains, banking, proptech, contract verification, and personal storage.

• Ant will connect government in Zhuhai, i.e. banks, and end-users to share data such as title deeds, credit history, and mortgage applications.

SchulteResearch 70 Ant Is Leading BlockChain Development Globally

Up to 2020, Ant Financial’s 1,005 blockchain patents worldwide ranked the company first globally for three consecutive years from 2017 to 2019.

SchulteResearch 71 BlockChain-as-a-Service (BaaS)

- Ant has launched blockchain infrastructure for SME to manage private chains that require a high level of trust and security - Commercial Applications: - Cross-border remittances - Supply chain financing - Advertising - Entertainment (Copyright, ticket purchases, etc.) - Insurance

- Security Applications - Money Laundering - Drug Tracing - Tax Avoidance

SchulteResearch 72 This is Ant

This is ChinaChain

SchulteResearch 73 Ant Chain: The ‘everything store’ for the Chinese Internet

- AntChain has the ability to process and support one billion user accounts and one billion transactions every day

- Currently, over 100 million digital assets are uploaded onto AntChain on average every day.

- Ant claims the AntChain has been used in more than 50 cases so far in IT leasing, shipping, insurance claim processing, cross-border remittances and charitable donations, according to a company statement.

https://www.finextra.com/newsarticle/36269/ant-group-creates-new-blockchain-based-technology-unit

SchulteResearch 74 Ant is the Key to Widespread Acceptance of BSN

• The AntChain includes a new workstation, similar in size to a laptop, which will accelerate blockchain applications via built-in software and a dedicated hardware accelerator for SMEs.

• The workstation can be set up in one tenth of the time it normally takes and increases transaction speed by 30% with enhanced security.

https://www.scmp.com/tech/blockchain/article/3094352/alibaba-payments-arm-ant-launches-new-technology-brand-help-speed

SchulteResearch 75 Key International Partnerships

- So far, Ant Group has signed a strategic agreement with Dell, Hewlett-Packard and Lenovo to make IT leasing services more accessible for SMEs through the use of AntChain.

- Earlier in May, Ant Group formed a similar partnership with Intel.

- China’s state-run container line Cosco Shipping Holdings Ltd. is currently working with Ant Group on using blockchain technology to track goods across seaborne supply chains.

https://www.wsj.com/articles/cosco-strikes-blockchain-pact-for-ocean-cargo-with-alibaba-ant-11594144848

SchulteResearch 76 BSN goes Global

• Starting August 10, China will roll out the international version of its blockchain infrastructure (BSN). The network gives developers across the world tools and access to blockchain technology through BSN’s overseas data centers so that they can build applications for businesses and smart cities.

• As the BSN takes hold in worldwide countries, it will become the only global infrastructure network that is innovated by China.

SchulteResearch 77 Part VII – Investors in Ant are a ‘who‘s who’ of China

SchulteResearch 78 Perspective from the Financing Process

Date Round Amount Investors

2018-06-23 Strategic Investing 1.6 billion RMB Pacific Insurance

BlackRock, GIC, Temasek, Canadian Pension, Fund Malaysian Treasury Investment, General Atlantic, 2018-05-27 Pre-IPO 14 billion US dollars ,Carlyle Group, Sequoia Capita, Warburg Pincus, Silver Lake

2018-02-01 Strategic Investing Unknown Alibaba 2017-05-18 Debt investment 3.5 billion US dollars Unknown

China Post Capital A round of strategic investors including Primavera 4.5 billion US dollars Capital 2016-04-26 B round continue to invest Many insurance companies including China Life, CCB Trust, CIC Overseas

2015-09-01 Strategic Investing Unknown Capital National Social Security Fund, Shanghai Gimpo Industrial Fund, Primavera Capital, China Pacific 2015-07-01 A round 12 billion RMB Insurance, China Development Bank, China People's Insurance, China Life ,New China Life

SchulteResearch 79 Part VIII – China’s Global Mark on Fintech

SchulteResearch 80 The Nascent International Push

Ant’s globalization strategy: localc partnerships c

SchulteResearch 81 Sources: CBInsights Ant Asian Holdings

SchulteResearch 82 Ant Global Partnerships

SchulteResearch 83 Part IX – Investment Concerns

SchulteResearch 84 Largest American Funds Backing Ant

Silver Lake Management LLC, Warburg Pincus LLC, and Carlyle Group Inc. were the biggest U.S. backers in Ant’s latest funding round in 2018, investing at least $500 million each in the fintech giant. General Atlantic LLC invested about $350 million in the same round. (When Ant was valued at $150 billion)

At its current valuation of $210 billion, American backers are baking out with a 40% return.

The Winners: American Pension Funds (read firefighters and teachers) who are bankrolling investment in Chinese Tech.

SchulteResearch https://www.bloomberg.com/news/articles/2020-07-29/silver-lake-warburg-carlyle-poised-for-gains-from-ant-s-ipo 85 Largest Backers of American Funds Investing in China?

SchulteResearch https://www.nepc.com/press/nepc-survey-endowments-and-foundations-harbor-concerns-abroad-but-stay-the-course 86 No Interest in Pulling out

SchulteResearch https://www.nepc.com/press/nepc-survey-endowments-and-foundations-harbor-concerns-abroad-but-stay-the-course 87 US-China Tension is Threatening American Investment

SchulteResearch https://www.bloomberg.com/news/articles/2020-02-08/pompeo-tells-governors-china-out-to-exploit-u-s-vulnerabilities 88 Part X – Alibaba’s Financials Compared to its Competitors

SchulteResearch 89 Comparison to Major Competitors: P/B & P/E

P/B Ratio P/E Ratio 25 160.0 23.5 23.2 144.9 140.0 Overvalued

20 120.0 109.9

100.0 15

80.0

10.1 10 60.0 7.6 49.3 6.3 5.4 40.0 32.2 31.4 5 24.9

20.0

0 0.0 Apple Amazon Tencent JD.com Alibaba Walmart Amazon JD.com Tencent Apple Alibaba Walmart

SchulteResearch 90 Comparison to Major Competitors: ROC & ROE

ROC ROE 20.0% 80.0% 18.6%

18.0% 70.0% 67.8%

16.0% Alibaba’s ROC of 6.3% is relatively low compared 60.0% 14.0% to its main competitor, 50.0% 12.0% 11.5% Tencent 11.1%

10.0% 40.0% Alibaba’s ROE of 14.6% is lower than 7.9% 8.0% most major competitors 30.0% 6.3% 6.0% 21.5% 4.5% 20.0% 18.8% 18.3% 4.0% 14.6%

10.0% 8.2% 2.0%

0.0% 0.0% Apple Tencent Walmart Amazon Alibaba JD.com Apple Amazon Tencent Walmart Alibaba JD.com

SchulteResearch 91 Comparison to Major Competitors: EV/EBITDA & Tangible Leverage

EV/EBITDA Tangible Leverage 70.0 4 66.3

Overvalued 3.5 3.39 60.0 3.16 3.13

3 50.0 Low values indicate a Undervalued strong balance sheet 41.7 2.5 39.3 2.27 40.0

2

30.0 1.5 22.4 22.1

20.0 1.05 1 12.8

10.0 0.5 0.34

0.0 0 JD.com Amazon Tencent Apple Alibaba Walmart Apple Walmart Amazon JD.com Alibaba Tencent

SchulteResearch 92 Comparison to Major Competitors: Balance Sheet Totals

Total Assets (USD MM) Total Liabilities (USD MM) 400,000 300,000 250,000

350,000 200,000 150,000 100,000 300,000 50,000 0 250,000 2018 2019 2020

Alibaba Tencent JD.com Amazon Walmart Apple 200,000

150,000 Total Equity (USD MM) 120,000 100,000 100,000 80,000 60,000 50,000 40,000 20,000 0 0 2018 2019 2020 2018 2019 2020

Alibaba Tencent JD.com Amazon Walmart Apple Alibaba Tencent JD.com Amazon Walmart Apple

SchulteResearch 93 Part XI – Appendix: Jack Ma Ownership

SchulteResearch 94 Jack Ma’s holding share of Alibaba

Source: Alibaba Annual Financial Report : https://docoh.com/filing/1577552/0001047469-19-003492/BABA-20F-2019FY

SchulteResearch 95 Jack Ma intends to reduce ownership of Ant

• According to Alibaba’s 20F filing, Jack Ma intends to reduce his ownership of Ant from 50% to 8.8%. No timeline for this dilution is given.

• Jack Ma’s current effective 50% stake in Ant is owned through Junhan and Junao, where he is the general partner.

• Is it expected that Junhan and Junao’s stakes will be diluted in future capital raising events by Ant.

• According to Alibaba’s SEC filings, Jack Ma will reduce his stake in Ant through “a combination of future equity-based incentive awards to employees and dilutive issuances of equity in Ant Group.” • Possibly transferring his Ant shares to limited partners of Junhan and Junao.

SchulteResearch 96 Perspective from the Stock structure Ma Yun, Alibaba and Ant employees Shareholder Percentage Amount (RMB) Alibaba 33.00% 7,763,002,334 Hangzhou Junhan equity investment 28.45% 6,692,240,657 partnership Hangzhou Jun’ao equity investment 21.53% 5,065,806,273 partnership Other invest institutions and investors 17 %

Some members of Alibaba Partnership This means Alibaba controls almost 83% of Ant Financial’s stock

Many Alibaba and Ant employees will benefit from the IPO

SchulteResearch 97 What will happen to Jack Ma’s Ant shares?

Directly from Ant’s 20F filing in July 2020.

SchulteResearch 98