Alibaba Group (BABA) L C

Home , Alibaba Group, AutoNavi, Cainiao, Daniel Zhang, Daraz

3 October 2018 | 7:04AM HKT

y Investing for future growth: Evolving ecommerce and digitizing retail u

B industry; reiterate Buy (on CL)

BABA $247.00 $160.23 54.2% Piyush Mubayi 12m Price Target: Price: Upside: +852-2978-1677 | [email protected] Goldman Sachs (Asia) L.L.C. What has changed Ronald Keung, CFA +852-2978-0856 | [email protected] Goldman Sachs (Asia) L.L.C. Alibaba’s 3rd Annual Investor Day reinforced our bullish stance on Bill Liu, CFA the company’s value proposition in a digital era. We remain +852-2978-0820 | [email protected] Goldman Sachs (Asia) L.L.C. impressed with Alibaba’s overall leverage to China consumption Wendy Chen +852-2978-2672 | [email protected] growth given its strategy, positioning, ability to build new Goldman Sachs (Asia) L.L.C. businesses (such as new retail) and its execution. We note the Key Data ______company’s unique corporate structure and culture and highlight its Market cap: $419.6bn deep bench of management expertise. We expect Alibaba to Enterprise value: $411.2bn 3m ADTV: $3.7bn continue to invest for future growth on multiple fronts, including China Asia Internet retailing, digital advertising, local services and entertainment, for M&A Rank: 3 Asia ex. Japan Conviction List what we believe will be a TAM (total addressable market) of GS Forecast ______~RMB80 trillion by 2020E. 3/18 3/19E 3/20E 3/21E Revenue (Rmb mn) New 250,266.0 398,389.8 578,365.2 796,295.2 In this note, we provide a summary and outlook for each major Revenue (Rmb mn) Old 250,266.0 400,927.6 575,336.8 788,643.6 EBITDA (Rmb mn) 105,792.0 126,007.3 170,127.9 240,808.0 division. We raise our 12m SOTP-based TP by 2% to US$247 on EPS (Rmb) New 33.00 38.20 52.47 74.36 EPS (Rmb) Old 33.00 39.52 56.08 77.21 higher Ant Financial valuation; we reiterate our Buy rating (on P/E (X) 32.6 28.9 21.0 14.8 Conviction List). P/B (X) 7.7 6.3 4.9 3.8 Dividend yield (%) NM NM NM NM CROCI (%) 21.1 25.8 29.7 36.9

Implications 3/18 6/18E 9/18E 12/18E (1) Alibaba is digitalizing the entire retail experience and building EPS (Rmb) 5.73 8.04 8.45 14.25 ______up infrastructure to realize its vision of “Business as a Service GS Factor Proﬁle Growth (BAAS)”. We estimate online retail penetration rising to 29% by Financial Returns 2020E in China’s ~RMB48 trillion retail market. Multiple (2) Core commerce business: Taobao recommendation feeds have Integrated simpliﬁed the user shopping experience and are taking

personalization to the next level. In the process, Taobao should Percentile 20th 40th 60th 80th 100th

create additional ad inventory which we believe will be monetized BABA relative to Asia ex. Japan Coverage over the next few years. BABA relative to Asia Internet

Source: Company data, Goldman Sachs Research estimates. See disclosures for details.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Goldman Sachs Alibaba Group (BABA)

Alibaba Group (BABA) Balance Sheet (Rmb mn) ______3/18 3/19E 3/20E 3/21E Buy CL Rating since May 8, 2015 Cash & cash equivalents 199,309.0 237,740.5 296,868.9 411,675.1 Accounts receivable 0.0 0.0 0.0 0.0 Inventory ------Ratios & Valuation ______Other current assets 57,546.0 94,189.0 130,280.1 169,969.1 3/18 3/19E 3/20E 3/21E Total current assets 256,855.0 331,929.5 427,149.0 581,644.2 P/E (X) 32.6 28.9 21.0 14.8 Net PP&E 66,489.0 75,083.8 91,714.5 115,345.5 P/B (X) 7.7 6.3 4.9 3.8 Net intangibles 198,991.0 202,363.6 205,079.0 211,192.3 FCF yield (%) 3.2 4.0 4.9 6.6 Total investments 177,892.0 245,069.5 322,323.6 399,577.8 EV/EBITDA (X) 27.2 22.5 16.2 10.6 Other long-term assets 16,897.0 34,563.4 55,035.7 80,387.7 CROCI (%) 21.1 25.8 29.7 36.9 Total assets 717,124.0 889,009.9 1,101,301.8 1,388,147.5 ROE (%) 25.9 23.3 26.0 28.8 Accounts payable 97,907.0 167,491.8 240,400.1 323,409.4 Net debt/equity (%) (37.6) (38.5) (40.3) (47.7) Short-term debt 6,028.0 5,537.6 5,155.9 7,225.7 Interest cover (X) 28.0 22.9 32.3 50.3 Other current liabilities 31,875.0 46,251.6 64,526.6 85,630.5 Days inventory outst, sales ------Total current liabilities 135,810.0 219,281.1 310,082.6 416,265.6 Receivable days ------Long-term debt 34,153.0 31,374.5 29,211.8 3,096.7 Days payable outstanding 276.0 233.8 245.2 245.8 Other long-term liabilities 107,722.0 100,776.7 95,370.6 115,251.3 DuPont ROE (%) 19.0 18.0 20.6 23.2 Total long-term liabilities 141,875.0 132,151.3 124,582.4 118,348.0 Turnover (X) 0.3 0.4 0.5 0.6 Total liabilities 277,685.0 351,432.4 434,665.0 534,613.6 Leverage (X) 1.6 1.7 1.7 1.6 Preferred shares 3,001.0 3,001.0 3,001.0 3,001.0 Total common equity 365,822.0 463,960.6 593,019.8 779,916.9 Growth & Margins (%) ______Minority interest 70,616.0 70,616.0 70,616.0 70,616.0 3/18 3/19E 3/20E 3/21E Total liabilities & equity 717,124.0 889,009.9 1,101,301.8 1,388,147.5 Total revenue growth 58.1 59.2 45.2 37.7 Gross cash invested (ex cash) 414,508.0 466,515.6 533,150.0 608,087.5 EBITDA growth 42.1 19.1 35.0 41.5 Net debt, adjusted (162,213.0) (203,913.4) (265,586.2) (404,437.8) EPS growth 40.8 15.7 37.4 41.7 Average capital employed 248,801.5 308,530.1 370,442.4 428,158.4 DPS growth NM NM NM NM BVPS (Rmb) 140.16 176.08 222.84 290.16 EBIT margin 35.7 26.6 25.1 26.2 EBITDA margin 42.3 31.6 29.4 30.2 Cash Flow (Rmb mn) ______Net income margin 33.4 24.3 23.8 24.8 3/18 3/19E 3/20E 3/21E Net income 64,468.7 56,363.0 77,006.4 123,193.4 Price Performance ______D&A add-back 22,020.0 20,181.2 25,126.3 32,363.2 BABA ($) S&P 500 Minority interest add-back (2,681.0) (3,960.0) (2,000.0) (2,000.0) Net (inc)/dec working capital 22,082.0 29,652.0 34,619.8 39,072.3 240 3,000 Other operating cash flow 13,214.3 45,735.6 54,052.9 65,703.6 220 2,900 Cash flow from operations 119,104.0 147,971.8 188,805.4 258,332.5

200 2,800 Capital expenditures (29,836.0) (32,148.6) (44,472.3) (62,107.6) 180 2,700 Acquisitions (53,742.0) (67,177.5) (77,254.1) (77,254.1) Divestitures 6,185.0 ------160 2,600 Others (6,497.0) ------140 2,500 Cash flow from investing (83,890.0) (99,326.1) (121,726.4) (139,361.7)

Oc t-17 J a n-18 Apr-18 J ul-18 Oc t-18 Dividends paid (common & pref) 1,124.0 ------3m 6m 12m Inc/(dec) in debt (3,590.0) (10,214.1) (7,950.6) (4,164.6) Absolute (14.0)% (9.8)% (7.7)% Other financing cash flows 22,825.0 0.0 0.0 0.0 Rel. to the S&P 500 (19.8)% (20.3)% (20.2)% Cash flow from financing 20,359.0 (10,214.1) (7,950.6) (4,164.6) Total cash flow 55,573.0 38,431.5 59,128.3 114,806.3 Source: FactSet. Price as of 2 Oct 2018 close. Free cash flow 89,268.0 115,823.2 144,333.1 196,225.0

Income Statement (Rmb mn) ______Source: Company data, Goldman Sachs Research estimates. 3/18 3/19E 3/20E 3/21E Total revenue 250,266.0 398,389.8 578,365.2 796,295.2 Cost of goods sold (101,539.0) (207,207.8) (303,558.0) (418,659.0) SG&A (35,326.0) (52,774.7) (81,902.5) (107,323.2) R&D (16,398.0) (24,135.1) (37,593.7) (49,171.2) Other operating inc./(exp.) (7,614.0) (8,446.1) (10,309.4) (12,697.0) EBITDA 105,792.0 126,007.3 170,127.9 240,808.0 Depreciation & amortization (16,403.0) (20,181.2) (25,126.3) (32,363.2) EBIT 89,389.0 105,826.2 145,001.6 208,444.8 Net interest inc./(exp.) 27,304.7 5,655.4 6,649.0 10,558.7 Income/(loss) from associates ------Pre-tax profit 99,107.7 112,072.8 161,711.8 233,223.3 Provision for taxes (18,199.0) (19,241.1) (26,079.2) (37,365.2) Minority interest 2,681.0 3,960.0 2,000.0 2,000.0 Preferred dividends ------Net inc. (pre-exceptionals) 83,589.7 96,791.7 137,632.6 197,858.0 Post-tax exceptionals (19,121.0) (40,428.7) (60,626.2) (74,664.6) Net inc. (post-exceptionals) 64,468.7 56,363.0 77,006.4 123,193.4 EPS (basic, pre-except) (Rmb) 32.74 37.39 52.64 74.92 EPS (diluted, pre-except) (Rmb) 32.03 36.73 51.72 73.61 EPS (basic, post-except) (Rmb) 25.25 21.77 29.45 46.65 EPS (diluted, post-except) (Rmb) 24.70 21.39 28.94 45.83 DPS (Rmb) ------Div. payout ratio (%) 0.0 0.0 0.0 0.0

3 October 2018 2 Goldman Sachs Alibaba Group (BABA) Table of Contents

Key takeaways from 2018 Alibaba Investor Day 6

Alibaba Digital Economy 6

Taobao: Personalization 4.0 9

Tmall: Transforming All 14

Ele.me: High-frequency category expansion 15

Hema: Pioneering new retail 20

Cainiao: Alibaba’s logistics infrastructure 22

Cloud: Empowering Digital Transformation 24

Ant Financial: Destination for 2bn+ Consumers 26

Youku: Where the fun starts 28

Lingshoutong: Digital solutions for small retailers 29

Amap: More than just a map 30

Strong core fueling future investments 31

M&A: The importance of synergies 35

Financials & valuation 35

Insight into Alibaba’s future 36

Disclosure Appendix 38

3 October 2018 3 Goldman Sachs Alibaba Group (BABA)

(3) Ele.me offers local services, a high-frequency category which we expect will have 2020E TAM of ~Rmb29tn. Ele.me is expanding the range of BABA’s service offerings, and has rapidly been integrated into the ecosystem of consumers, logistics infrastructure and merchants, whilst also expanding BABA’s last mile logistics solutions.

(4) Hema has revolutionized the Rmb5tn fresh grocery market by creating a new business model that drives low-cost trafﬁc, upgrades the consumer experience and enhances efﬁciency.

(5) Alibaba’s Cloud empowers enterprises in their digital transformation via its state-of-the-art technology. Its market share has risen to 46% in 2017 from 30% in 2015, and it aims to further solidify its leading position in a market with a TAM of Rmb165bn by 2020E.

(6) Cainiao Logistics Network has been digitalizing the logistics industry and enhancing user experience, while providing supply chain solutions to new retail customers. With six global logistics hubs, Cainiao is expanding globally, creating a network of shipping, supply chain management, and last mile delivery.

(7) Ant Financial, the world’s largest techﬁn asset, is building the technology infrastructure for ﬁnancial institutions leveraging Blockchain, AI and IoT. Its CreditTech, InsurTech, AMTech and its risk engine, AlphaRisk, helps its partners better service customers. Ant has 640mn customers using at least 2 categories of its services, and 190mn using at least 5 categories.

Valuation We raise our 12m SOTP-based TP by 2% to US$247 on a higher valuation for Ant Financial. We ﬁne-tune our FY2019E-20E estimates to reﬂect higher investment and lower margins outlook, and update our RMB/US$ rate assumption from 6.8 to 6.9. Even though the Alibaba group is becoming more complicated, we believe its holding company discount shouldn’t be higher given all the moving parts are closely related to each other.

Exhibit 1: Alibaba P/E band: Three months of weakness has left the Exhibit 2: China Internet P/E band stock below its 12-month forward average P/E (the band at the middle)

Source: Bloomberg Source: Bloomberg

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Key Risks 1) Slower growth driven by macroeconomic slowdown across major business lines, in particular China Commerce and Cloud Computing.

2) Lower monetization on account of the change in personalisation, and higher spending due to more intense competition (in China commerce, Cloud, entertainment) that could drag down cash ﬂow.

3) Sustained losses caused by high subsidy and low monetization from new initiatives, including local services (Ele.me), globalization (Lazada), new retail (Hema) and logistics (Cainiao).

4) User targeting capability is improved at a slower than expected rate, resulting in lower CPC (cost per click) growth and thus slower revenue growth.

The authors would like to thank Chuqi Qiu and Yunfan Bao for their contribution to this report.

3 October 2018 5 Goldman Sachs Alibaba Group (BABA) Key takeaways from 2018 Alibaba Investor Day

Alibaba hosted its third Investor Day on September 17-19 at its headquarters in Hangzhou, China. Speakers included Jack Ma (Founder and Executive Chairman), Joe Tsai (Executive Vice Chairman), Daniel Zhang (CEO), Maggie Wu (CFO) and other members of the senior management team.

All statements in the company sections below are from company management unless otherwise stated.

Alibaba Digital Economy

Daniel Zhang, Chief Executive Ofﬁcer

With a clear mission “to make it easy to do business anywhere in the digital era”, Alibaba is striving to upgrade the consumer experience from “shopping @ Alibaba” to “living @ Alibaba”, and enable enterprises from “meeting @ Alibaba” to “working @ Alibaba”. The foundation of Alibaba’s three major business lines (i.e., commerce, services and entertainment) is its logistics, data technology/systems, marketing services & data management and payment & ﬁnancial services. These infrastructure layers provide strong support for daily operations and fuel its continuous expansion.

The CEO also reiterated the company’s goal to achieve GMV of US$1tn in FY20E from US$768bn in FY2018, a CAGR of 14% — we forecast GMV of US$1.1tn in 2020E, or almost 2X that growth rate. By 2036, the company aims to serve 2bn customers around the world, enable 10mn proﬁtable SMEs, and create 100mn job opportunities.

Exhibit 3: Alibaba’s Digital Economy: Commerce+Services+Entertainment, underpinned by strong infrastructure

Commerce Services Entertainment

Online integration Content community

Offline digitalization Suning JV

Data technology for Logistics infrastructure Data Data digital media and entertainment technology technology

Marketing services &data management platform

Infrastructure

Payment & financial services infrastructure

Technology & systems infrastructure

Source: Company data

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Exhibit 4: BABA range of businesses have a TAM of ~Rmb80 trillion by 2020E

Local Games Advertising Retail Travel Video Music Literature services

ADS

TAM 2020E Rmb bn 325 1,033 48,291 3,420 28,842 68 105 59 2020E Online 100% 75% 29% 56% 21% 100% 100% 23% Penetration Online size 2020E Rmb bn 325 771 13,950 1,912 5,946 68 105 13

CAGR 11% 19% 18% 15% 19% 30% 34% 31%

Online size 2017 217 388 7,176 1,085 2,935 24 33 5 RMB bn 2017 Online 100% 60% 20% 45% 14% 100% 96% 11% Penetration

Alibaba’s Market * (1) 59% (2) *38% (3) 26% (4) ** Share 2017 30%

Note: *Market share less than the top 2 players (determined by average mobile DAU) (1) In terms of advertising revenues ((calendar year unless otherwise stated) (2) In terms of total GMV of Taobao and Tmall (3) In terms of total number of orders of food delivery (4) In terms of estimated subscription revenues

Source: Company data, iResearch, Goldman Sachs Global Investment Research

Integrated consumption platform to serve over 600mn users in China Alibaba has been digitalizing the whole retail process and enabling the digital transformation of brands’ physical stores, consumer electronics retailers, fashion and department stores, supermarkets, less developed areas in lower tier cities, and neighborhood stores.

Customer growth and category expansion are still the two main drivers of growth. The TTM (trailing 12 month) annual active customers (AAC) for the China retail marketplace increased from 454mn (as of March 31, 2017) to 552mn (as of March 31, 2018), representing a 22% yoy increase, reaccelerating from 7% yoy for the previous year. Among the new consumers, 70% came from less developed areas.

Meanwhile, the international footprint of Alibaba was further strengthened from the accumulation of over 100mn AAC on Lazada and AliExpress for the twelve months ended June 2018. In addition, expansion of categories from physical goods to broader local lifestyle services creates more value for consumers, especially loyal consumers who spend more time online and tend to explore more lifestyle categories.

From B2C to C2B is the long-term vision. The company believes that ultimately “C2B” (demand-driven smart supply) will be the new norm. Products and services design, production and distribution will be tailor-made according to consumer insights.

Digitalizing the entire fulﬁllment and delivery process Alibaba’s current logistics network includes: (1) Point-to-Point delivery, mainly for seasonal and long-tail products; (2) Hub & Spoke, mainly for standardized products; and (3) On-demand delivery, mainly for on-demand, in-store products. The company expects

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that in the longer term all goods and services can be delivered with such integrated logistics resources. Alibaba will leverage its strategic partners to build up logistics networks and further digitalize the whole fulﬁllment and delivery process to tap into over 10mn merchants and 600mn active consumers currently in the China retail marketplace.

Exhibit 5: From digitizing products and packages to digitizing the entire fulﬁllment and delivery process and further building a hybrid logistics network in the long term Alibaba fulﬁllment and delivery process

Products & Delivery Delivery Merchants Storage packages solutions personnel Consumers

- Address Database INTERCITY - Dynamic Forecasting of - Multiple Last-mile - Delivery Experience 10 mn* - Tracked & Digitized 576mn*** Goods Inventories Solutions Rating (Over 50km) Inventories

- Address Database Local INTRACITY - Optimized Route - Multiple Last-mile - Delivery Experience 3.5mn** - Tracked & Digitized ~168mn**** (Less than 3km) Planning Solutions Rating services Inventories

Notes: * Numbers of merchants on China retail marketplace as of March 31, 2018 ** Registered restaurants and service providers on Ele.me and Koubei as of June 30, 2018. *** Annual active consumers on our China retail marketplaces for the twelve months ended June 30, 2018. **** Represents Ele.me’s annual active consumer for the last twelve months ended June 30, 2018.

Source: Company data

AliCloud and IoT (Internet of Things), potentially the fastest growth areas for BABA n Business as a service: AliCloud has been tapping into more industry verticals and providing enterprises with various ‘cloud based’ solutions, i.e., retail cloud, marketing cloud, Alibaba Financial cloud, logistics cloud, industrial cloud, local service cloud, entertainment cloud, health cloud, and enterprise service cloud. ‘Business as a service’ (BAAS) is the company’s longer-term goal, with continuous vertical expansion.

n Alibaba IoT empowers a ‘smart’ future: AliCloud facilitates innovative IoT applications to process and analyze data generated by connected devices without the need for a heavy infrastructure base. The CEO elaborated several scenes of IoT application: (1) smart living (i.e., home, automobiles and away from home); (2) smart business (i.e., manufacturing, ofﬁce and real estate, and construction); (3) smart city (i.e., public utilities, hospital and trafﬁc management and public transportation).

Alibaba’s globalization n Global sell - from “China to the World” to “Local to Local”: When assessing the go-to-places, factors the company would consider include total population, internet/smart phone penetration and the retail landscape (if it is similar to that of China). Currently AliExpress, Lazada, Daraz and Trendyol (its export players) have reached countries and regions that Alibaba had identiﬁed as ones with extensive opportunities.

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Exhibit 6: Alibaba Globalization - export players

AliExpress Lazada daraz and trendyol

Total Population: Internet Penetration: Total Population: Internet Penetration: Total Population: Internet Penetration: 859mn 74% 571mn 41% 546mn 25%

Countries USA BrazilRussiaFrance UK Spain IndonesiaPhilippinesVietnamThailandMalaysiaSingaporePakistan Bangladesh TurkeyMyanmarSri LankaNepal

Population as of 2017 (mm) 326 209 145 67 66 47 264 105 96 69 32 6 197 165 81 53 21 29

Individuals using the 76% 61% 73% 86% 95% 81% 25% 56% 47% 48% 79% 81% 16% 18% 58% 25% 32% 20% Internet (% of population)

Source: Company data

n Global buy - “World to China“: Top countries for imported goods sold on Tmall Global include Japan, USA, Australia, South Korea and Germany. Alibaba also has joint procurement platforms (i.e., Tmall Global + Hema + Sun Art + Lingshoutong) to facilitate imports from global destinations and better address the demands of China’s customers.

n Global delivery: At present cross-border e-commerce parcel delivery is still fragmented. Alibaba is working to build a more efﬁcient cross-border logistics network to make global delivery possible.

n Global pay: Key partners within Alibaba’s global digital ﬁnancial platform include Ant Financial, Paytm (India), Ascend (Thailand), Dana (Indonesia), Kakaopay (Korea), GCash (Philippines) and Touch N’ Go (Malaysia).

n Global fun: With the robust growth of China’s outbound travel, Fliggy (Alibaba’s travel platform) offers global travel design and other services for consumers.

Taobao: Personalization 4.0

Fan Jiang, President of Taobao

Taobao mobile app has seen rapid growth of new users and development of the potential user pool: most new users are from low tier cities, especially from tier 4 cities and below, and more users are aged above 50 or between 18 to 25. For the “Every day special price” channel (i.e., value for money goods), the number of orders in July 2018 more than tripled compared with last year.

Personalization 4.0 - The recommendation feeds initiatives In our BABA 1QFY19 Review, we discussed our thoughts on the new change of Mobile Taobao, the “Jin Dian“ or “Entering Store” link next to the merchant’s name in search results, which became available earlier this year. We believe that: (1) in the short term, the growth of paid clicks are reduced since some users skip ads down the results page and make purchases from the merchant’s store directly; but (2) in the long term, this kind of link creates diversity along the user’s curation process, and creates incremental monetization options.

During the investor day presentation, Taobao president Mr. Jiang introduced the redesign of the Mobile Taobao homepage with “recommendation feeds” replacing “modules” starting from the 2nd page. This change generates personalized recommendations right after the home screen and could facilitate more efﬁcient

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information distribution, generating more diversiﬁed content and leading to a better user experience.

Exhibit 7: Personalized recommendation feeds have driven the improvement of purchase conversion rates, according to the company

Personalized Recommendation Feeds Improving Recommendation Personalized Technology Pay-for- performance +30% Purchase Conversion Personalized Rate Improvement Personalized Modules Search Aug 2018 vs. Aug 2017 2010 2013 2016 2018

Source: Company data

What has changed: For the old version, the module (channel) layout was designed for the ﬁrst 7 screens, followed by recommendation feeds. The new version includes recommendation feeds starting from the 2nd screen, which could facilitate a better experience for users who prefer browsing. The recommendation feeds provide personalized content to users based on their historical shopping data, personal interests and other multi-dimensional factors, as a new initiative of “A thousand people a thousand faces (or 千人千面 in Chinese)”.

We believe the new layout allows users to browse personalized content spontaneously without any speciﬁc items in mind to purchase. This new feature helps boost the time users spend on the platform, which could ultimately trigger purchasing activities and translate into incremental advertising and other monetization options in addition to the existing keyword search model, such as new brand launch customization, live streaming, video, etc.

Taobao will become more recommendation feed based, to simplify the layout and bring a better user experience, according to the company. Compared with the current search model which is product focused, we believe the recommendation feed model will be more customer-oriented. Furthermore, the recommendation feed feature does not necessarily cannibalize the existing search function, because: (1) the search bar is always at the top of the screen, (2) the more users search/browse, the more accurate their proﬁle will be, which in turn drives more targeted recommendations. According to the CFO, recommendations already contributed more than half of the mobile Taobao daily product page views as of Aug 2018.

In our view, the value proposition of feed to merchant is different from that of key word search. Feeds should become a new monetization property and incentivize merchants to deliver good quality product content.

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According to management, in the near term, the company will focus more on user experience, with monetization improvement in the longer term.

Content drives user growth and develops user community Content has become the driving force for user growth and has helped transform Taobao into a community not only for shopping but for other fun activities. There is 1.9bn short video viewership per day, and Taobao live streaming MAU growth of April - June 2018 was more than 100% yoy. On average, Taobao’s active users spend more than 20min per day watching live streaming. Live streaming’s contribution to GMV has increased 350% yoy. On product details page, viewership of short-form video has increased from 15% of product page views to 42%, implying more users are now watching short video to browse the product. Currently 94% of product listings have short-form videos, and these have helped boosted a 58% increase in the transaction conversion rate.

New market opportunities Taobao community addresses new demands and new markets - “Xian Yu”, the secondhand goods selling platform, accumulated 15mn annual active sellers as of August 2018, of which 53% are male users. It has seen fast growth in smartphone, ACG (Anime, Cartoon, Game) and male apparel categories.

Loyalty membership program 88VIP shows strong momentum and drives engagement and loyalty across the entire ecosystem with a comprehensive services offering. Based on the company’s estimates, every 100 members of 88VIP could bring in 38/32/36 new users to Youku, Ele.me and Taopiaopiao (Taobao movie ticket) respectively.

Implications the recommendation feed change has on revenue growth We note Alibaba’s press releases of the past six quarters show that cost per click (CPC) has made meaningful contribution to customer management revenue (i.e., ads revenue) since 2QFY18, and overtook click volume as the most important driver of customer management revenue in 3QFY18. We highlight that ads revenue was primarily driven by CPC since 1QFY19.

Exhibit 8: Customer management revenue growth breakdown Our estimated growth of volume of clicks vs. CPC - growth driver shift from click volume to CPC

Rmb mn 1Q FY17 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 3Q FY18 4Q FY18 1Q FY19 2Q FY19E 3Q FY19E 4Q FY19E Customer management revenue (CM) 15,882 16,645 27,909 17,094 26,220 26,272 38,800 22,993 33,053 34,154 52,768 31,730 % yoy 54% 47% 47% 45% 65% 58% 39% 35% 26% 30% 36% 38% Cost per click % yoy 0% 5% 5% 5% 5% 17% 21% 22% 21% 20% 21% 20% Volume of Clicks % yoy 54% 47% 43% 37% 52% 35% 15% 11% 4% 9% 13% 15%

Ratio of change (CPC/total) 0% 11% 11% 11% 8% 30% 53% 63% 81% 65% 57% 53% Driver Primary Click vol Click vol Click vol Click vol CPC CPC CPC CPC CPC CPC Secondary CPC Click vol Click vol Click vol Click vol Click vol

Source: Company data, Goldman Sachs Global Investment Research

The change of recommendation feeds on Taobao took place on Aug 31, 2018. As we mentioned earlier, in the new version, recommendation feeds start from page 2 instead of page 7. As of now, the new feature has been rolled out to less than 20% of the user base, who are relatively new to the Alibaba platform. The company plans to monitor the user behavior closely, and carefully manage the new feature roll out process. Given this, we expect the 20% limit will be maintained in the near term. Whether the user has

3 October 2018 11 Goldman Sachs Alibaba Group (BABA)

chosen to see the new feature depends on their individual proﬁle, but they tend to be relatively “new” to Taobao/Tmall. The company said 70% of the new users are from less developed part of the country (i.e., low tier city/low income users), who generally prefer the browse function to search. Thus the recommendation feed feature should improve the experience to such users.

Ad revenue driver and traffic analysis for search vs. feed 1. We believe most shoppers have a preferred approach to discovering products when they shop, e.g., some prefer searching (for example, male shoppers search for electronics), while others prefer browsing (e.g., female shoppers browse for apparel). In our view, most shoppers do both searching and browsing from time to time, but in most cases they prefer one approach over the other. So a fair assumption would be to assume 50% of Taobao total MAU are “searchers” while the other 50% are “browsers”. 2. Alibaba plans to carefully manage and improve the feed feature, in our view. So we expect the limit of 20% user base or ~130mn users (who are seeing the new feature) to be maintained in FY19E, with the new feature likely to roll out to all users in FY20E. Meanwhile, the company is also exploring the potential for monetization for feeds, which we believe could surface/take place by FY20E. 3. In FY19E, since the feed change is implemented based on individual user profiles with a focus on the 20% user base or ~130mn relatively new users (70% of which are from the less developed areas of the country and prefer browsing), we assume the “browsers” account for 70%, while the remaining 30% are “searchers” within these ~130mn new users. As a result, to arrive at a 50/50 split for overall MAU, we assume the remaining 80% relatively “old” user base or ~550mn MAU (who are still seeing the older version) are 45% “browsers” and 55% “searchers” (see Exhibit 9). 4. More importantly, we expect the absolute number of search users to remain stable (including the 55% of the ~550mn MAUs who are seeing the “Old Version” with feed starts from the 7th screen, and 30% of the ~130mn MAUs who are seeing the “New Version” with feed starts from the 2nd screen). This is because the search bar remains at the top of the screen in both the old and new versions of the Taobao home screen. So the “searchers” can always start a search when they want to - the fact that feeds starts sooner (from the 2nd page instead of the 7th) should not change the preference of “searchers” on how to find interesting products, in our view. Looking beyond FY20E, we expect the total number of “searchers” to continue to grow, but at a rate slightly slower than “browsers”, with the “browser” type of MAU accounting for more than 50% of the user base. 5. For feeds-based ad revenue, we don’t expect any monetization in FY19, since the company mentioned the feeds initiative is still at an early stage and the company wants to ensure better user experience ahead of rollout. 6. For search-based ad revenue, our thoughts on CPC and number of paid clicks are:

o CPC: As the company continues to improve user proﬁle and targeting capability, we believe CPC should continue to increase at ~20% yoy level.

3 October 2018 12 Goldman Sachs Alibaba Group (BABA)

o Number of paid clicks: The number of paid clicks per search user started to decline since 3QFY18, probably as a result of user experience improvement (i.e., shortening the path to the product page, such as reducing landing page numbers and adding a “Jin Dian” button). We expect the yoy declining trend to continue in 2QFY19, and then resume yoy growth from 3QFY19 as the effect annualizes. 7. As a result, we maintain our quarterly customer management revenue forecast in FY19E, with the revenue drivers and trafﬁc analysis detailed in Exhibit 9.

Exhibit 9: Ad revenue driver and trafﬁc analysis with the new recommendation feeds feature

Customer Management Revenue Analysis (Rmb mn) 1Q FY18 2Q FY18 3Q FY18 4Q FY18 1Q FY19 2Q FY19E 3Q FY19E 4Q FY19E MAU for Old Version of Taobao (module) Mix 529 549 580 617 634 605 548 549 Searcher 55% 333 301 302 Browser 45% 272 246 247

MAU for New Version (feed) Mix 46 128 137 Searcher 30% 14 39 41 Browser 70% Launched Aug 31, 2018 -> 32 90 96 New version target users as % of total MAU 7% 19% 20%

Total MAU Mix 529 549 580 617 634 651 676 686 Searcher 50% 265 275 290 309 317 347 340 343 Brower 50% 265 275 290 309 317 304 336 343

CPC 0.76 0.82 0.87 0.90 0.92 0.98 1.05 1.08

Search Paid Clicks (mn) 34,500 32,039 44,598 25,548 35,927 34,851 50,255 29,380 Revenue 26,220 26,272 38,800 22,993 33,053 34,154 52,768 31,730

Feed Paid Clicks (mn) ------Revenue ------

Total customer management revenue (Rmb mn) 26,220 26,272 38,800 22,993 33,053 34,154 52,768 31,730

*Note: To simplify calculation, assuming targeted users of feeds and users of the old version are exclusive

Source: Company data, Goldman Sachs Global Investment Research

Long-term revenue potential from feed Given the early stage and continuous evolvement of the recommendation feeds, we do not bake in any revenue upside from the feeds at this time. However, we acknowledge the feed change could bring in revenue upside in two ways:

1. Ad revenue: In the long term, the feeds should bring in incremental ad revenue, because feeds users prefer browsing over searching, and thus don’t create much keyword-based search revenue at the moment. So we expect feeds revenue to be incremental to search revenue, rather than to cannibalize it.

o Moreover, feed revenue doesn’t have a systematic disadvantage per se with monetization vs. search revenue, although it takes time for the feeds to improve targeting and monetize as effectively as keyword search.

o In particular, we believe the CPC of feed should be eventually on par with the CPC of keyword search, because merchants generally do not discriminate between sources of GMV - suggesting they are willing to pay the same take rate for search GMV and feed GMV.

o Some advertisers may allocate ad budgets based on pre-determined annual plans, so it may take time for advertisers to increase their budgets to account

3 October 2018 13 Goldman Sachs Alibaba Group (BABA)

for the feed change, assuming the feed ads ROI matches keyword search ad ROI. This could be the reason that Alibaba is choosing to limit the user base for the new version in the short term. 2. Commission revenue: In the even longer term, the feed change could systematically prioritize Tmall products, leading to a higher mix of Tmall GMV, creating incremental commission revenue. This potential change probably can’t happen in the near term, because the relatively new users who are seeing feeds are mostly from less developed areas, so their affordability is likely still lower compared to other users - but their income will likely rise over time.

With the magnitude contingent on the assumptions used for feed CPC and number of paid clicks for feed, we see scope for further upside in ad revenue.

Exhibit 10: Long-term upside potential of ad revenue from feeds

Customer Management Revenue Analysis (Rmb mn) FY19E FY20E FY21E FY22E

Search Target users 337 347 354 357 Paid Clicks/user 447 461 470 475 Paid Clicks (mn) 150,413 159,784 166,240 169,581 CPC 1.01 1.16 1.28 1.35 Revenue (Rmb mn) 151,311 185,353 212,730 228,537

Feeds Target users 349 381 394 410 Paid Clicks/user - 115 235 356 Feeds paid clicks/ user as % of search 25% 50% 75% Paid Clicks (mn) 43,867 92,725 145,853

CPC - 0.29 0.64 1.01 Feeds CPC as % of search 25% 50% 75% Revenue (Rmb mn) 12,722 59,328 147,420

Total users (mn) 686 727 748 767 Total customer management revenue (Rmb mn) 151,311 198,075 272,058 375,957 % of revenue incremental to current 0% -1% 6% 18%

Source: Goldman Sachs Global Investment Research

Tmall: Transforming All

Jet Jing, President of Tmall

Tmall physical goods GMV achieved 45% yoy growth and contributed 55% of ecommerce-related revenue growth in FY2018, with major product categories including apparel/ consumer goods/FMCG/Home goods GMV increased by 45%/46%/51%/41% yoy respectively (vs. national retail sales growth of the same categories of 8%/10%/10%/12% yoy).

We believe that new demand (1,500 subcategories identiﬁed and import products procured through 6 global centers), new market (200 countries & regions) and new experience will drive the structural upgrade of consumer consumption, and amid this trend Tmall has the capability to hatch new brands and drive new category penetration going forward.

3 October 2018 14 Goldman Sachs Alibaba Group (BABA)

Brands reach out to Tmall not just for today’s sales, but also sales of tomorrow as Tmall brings brands and consumers together. We expect more international high-end brands to partner with Tmall and more product categories to be listed.

Currently more than 50% of China’s listed consumer and retail companies have presence on Tmall. Management believes that Tmall empowers these brands by leveraging the whole Alibaba ecosystem to provide transformative digital solutions to brands in the following areas:

n Product innovation: Tmall innovation center helps brand owners launch new products through the entire process, starting from assisting merchants with conducting market surveys and analyzing customer demands, to collaborating with brands to hatch new products, conduct targeted sampling and host new launches on the platform.

n Brand Building: Tmall provides new product launch, brand campaign and consumer management services to merchants. During shopping festivals, Tmall helps brands reach a broad consumer base.

n Channel management: Brands can utilize a whole pack of channels, including Tmall, Taobao, Lingshoutong, iStore and Cainiao, to operate more efficiently online and offline. For example, an offline store sales person can use DingTalk to interact with any customer who has a Taobao account — this could help merchants convert what would otherwise be a sunk cost from sales people (i.e., who will be in the store even when there is no customer) into a customer management service. In addition, merchants using Cainiao logistics can benefit from better inventory management and reduced costs.

n Consumer asset management: Tmall enables dialogue between brands and consumers, and through the uni-marketing approach, it brings customers onboard and triggers purchasing, which ultimately could help build customer brand loyalty.

Ele.me: High-frequency category expansion

Lei Wang, Chief Executive Ofﬁcer of Ele.me

We recap our forecast for the China O2O revenue pool and online penetration of different verticals (more details available in 1QFY19 Preview: Robust topline growth amid margin drag).

3 October 2018 15 Goldman Sachs Alibaba Group (BABA)

Exhibit 11: We see the potential for China’s O2O revenue pool to reach c.Rmb.1.1 tn by 2023E, with food delivery reaching Rmb255bn China 2023E O2O vertical revenue pool on a Rmb8.4tn addressable market (GSe)

25% Industry take rate China O2O Revenue Pool, 2023E (2023E) (in Rmb bn) Laundry and Beauty services Local 130 22 house keeping 20% 111 transportation Wedding 41 Parent & child services 16 services On-demand food Non-restaurant food 255 389 retail delivery 15% Karaoke 3 clubs

42 19 10% Hotel booking In-store dining Movie 6 ticketing

5% Travel-related services 84 Consumption Frequency (monthly) 0% -4 0 4 8 12 16 20 24 28 32

Source: Goldman Sachs Global Investment Research

Exhibit 12: We expect China’s O2O online penetration rate to rise from 2018E to 2023E in almost all verticals

On-demand food delivery (on restaurant only) Laundry and 2018E housekeeping In-store dining 2023E services 23.5% Online non- Movie ticket restaurant food purchase 16.0% retail 12.5% 32.6% 11.0% 94.0% 2.6% 20.4% 2.9% 44.7% 87.0% 35.7% Parent & child 10.2% Hotel booking services 14.2% 10.3% 13.5% 17.2% 13.5% 12.8% 10.8% 19.4% 16.2% Travel-related Wedding services 20.5% 16.1% services

Karaoke clubs Local transportation

Beauty services

Note: Food delivery penetration rate is based on restaurant retail transaction volume.

Source: iResearch, Goldman Sachs Global Investment Research

3 October 2018 16 Goldman Sachs Alibaba Group (BABA)

When assessing service categories to expand, the company looks closely at whether or not the category: (1) is from consumers’ inelastic demand; (2) has high consumption frequency; (3) has weak network effect, and (4) currently has low level of digitalization. In our view, on-demand food delivery business, which produces a large amount of commercial data of consumers and merchants given its high-frequency nature, has brought signiﬁcant supplemental value to Alibaba.

Value to consumers, merchants and the group n Value proposition to consumers: (1) convenient access to enlarged geographic search; (2) easy order placement for food delivery and other categories; (3) personalized recommendations; (4) real-time order tracking.

n Value proposition to merchants: Ele.me enables restaurants to unlock new channels to approach customers and increase profitability without incurring additional fixed costs. It addresses several ‘pain points’ of restaurants such as intense competition under a fragmented market, low profitability and low capacity utilization, lack of brand recognition and reliance of online channels to acquire customers.

n Value proposition to the Alibaba ecosystem: Not only a signiﬁcant addition to the current service offerings, Ele.me’s large-scale on-demand delivery network, Fengniao Delivery provides nationwide last-mile logistics solutions to other business units within the Alibaba ecosystem, including beverage delivery (Starbucks), fresh delivery (Hema), grocery delivery (RT-Mart), merchant business (Koubei and LingShouTong), etc.

Unparalleled scale with high growth n Key operating metrics for Ele.me as of June 30, 2018: 167mn AAC for the last twelve months, 19.8X number of orders per AAC; 3.5mn merchant (F&B merchants only, deduped between Ele.me and Koubei); 666K monthly active riders (deduped between Ele.me and Baidu Waimai).

n Nationwide coverage: 676 out of 701 cities covered as of April 30, 2018, according to Ministry of Civil Affairs of the People’s Republic of China.

Competitive advantages amid ﬁerce competition We expect the competition to intensify for the near to mid term, and market share gain to be the key focus for Ele.me to scale up and achieve proﬁtability. The competitive advantages of Ele.me, in our view, are:

n Organic trafﬁc and resources from the Alibaba ecosystem: With 576mn TTM AAC from Taobao (as of June 30, 2018), 870mn TTM AAU from Alipay (as of FY2018) and 167mn MAU from Koubei (as of May 31, 2018), Ele.me can reach a large base of users within the Alibaba ecosystem. In addition, user engagement across commerce, digital commerce, digital entertainment and other segments enables easy cross-selling practice and promotions. Therefore, Ele.me can acquire a large number of customers for low costs.

3 October 2018 17 Goldman Sachs Alibaba Group (BABA)

n Expansion into lower tier cities: We expect Ele.me to build up a delivery network in lower tier cities leveraging the infrastructure and technology invested by Alibaba throughout its strategic expansion into less developed and rural areas.

n A close-loop ecosystem connecting consumers and restaurants: Alibaba expects the pending merger of Ele.me and Koubei to allow it to provide restaurants with a broader range of services. We note that as current digitalization of in-store dining is still low, Koubei’s services including online table booking, menu digitalization, payment and restaurant ﬁnancing could be of great value to restaurants.

n Operating efficiency with full integration into the Alibaba ecosystem: Ele.me on-demand delivery network FengNiao can provide nationwide last-mile logistics solutions to the Alibaba Ecosystem. It collaborates with new retail stores to deliver more products such as FMCG and grocery, so riders should witness reduction of downtime. As a result, we believe both the platform and merchants could benefit from reduced rider costs per order and improved operating efficiency.

We think that key areas to further improve competence in the food delivery market will be:

n Investing in AI technology and big data analytics to enhance route optimization, order fulﬁllment and restaurant digital operations.

n Expanding merchant network and upgrading services. Bringing onboard more merchants, especially those that specialize in different cuisines will be important to Ele.me in order to serve more consumers with different appetites and preferences across China.

n Exploring more consumption scenarios and increasing consumption frequency. Currently the number of orders per AAC of Ele.me is around 20, which we think can further increase driven by the exploration of more consumption scenarios (e.g., hospitals, group business lunch, etc.).

3 October 2018 18 Goldman Sachs Alibaba Group (BABA)

Exhibit 13: Ele.me’s performance in major cities in China, June 2018

Jun-18 Orders per % of Total Populati Monthly Rank City capita per orders (top on (mn) orders month 21 cities) 1Hangzhou 1.5 9.5 14 8% 2 Shanghai 1.4 24.2 35 20% 3Nanjing 1.2 8.3 10 6% 4Fuzhou 1.1 7.7 9 5% 5Shenzhen 0.9 12.5 11 7% 6Beijing 0.8 21.7 18 10% 7Changsha 0.8 7.9 6 4% 8Shenyang 0.7 8.3 6 4% 9Suzhou 0.7 10.7 8 5% 10 Guangzhou 0.7 14.5 10 6% 11 Ningbo 0.6 8.0 5 3% 12 Nanchang 0.6 5.5 3 2% 13 Dalian 0.6 7.0 4 2% 14 Changzhou 0.6 4.7 3 2% 15 Hefei 0.6 8.0 4 3% 16 Chengdu 0.4 16.0 7 4% 17 Tianjin 0.4 15.6 6 4% 18 Qingdao 0.4 9.3 4 2% 19 Dongguan 0.3 8.3 2 1% 20 Chongqing 0.2 30.8 5 3% 21 Foshan 0.2 7.7 1 1% All top 21 0.7 246 171 100%

Source: CanYin O2O, CEIC

Exhibit 14: Our Ele.me estimates

Fiscal year FY2017E FY2018E FY2019E FY2020E FY2021E 4QFY18E 1QFY19E 2QFY19E 3QFY19E 4QFY19E Food delivery only Ele.me market share by GTV 35.6% 36.5% 38.2% 39.6% 40.0% 36.0% 36.1% 37.4% 40.6% 39.5% Delta, yoy 0.9% 1.8% 1.4% 0.4% 3.5%

GTV (Rmb bn) 60.9 127.6 201 283.6 375.8 33.4 41.5 47.1 59.0 53.8 yoy% 110% 58% 41% 32% 61%

ASP (Rmb) 40.7 43.6 45.4 46.3 46.5 44.9 41.8 42.4 50.2 46.5 yoy% 7% 4% 2% 0% 3%

Total orders (mn) 1,498 2,925 4,438 6,127 8,081 744 993 1,111 1,175 1,159 Daily orders, average (mn) 4.1 8.0 12.2 16.8 22.1 8.3 10.9 12.1 12.8 12.9 yoy% 95% 52% 38% 32% 56%

Blended take rate 8.3% 9.4% 9.7% 11.5% 12.8% 9.3% 9.4% 9.5% 9.7% 10.3% Delta, yoy 1.1% 0.4% 1.7% 1.3% 1.0%

Revenue (mn) 5,062 11,959 19,637 32,510 48,106 3,108 3,901 4,475 5,717 5,544 yoy% 136% 64% 66% 48% 78%

Gross profit (664) (1,380) (1,479) 2,731 7,716 (485) (753) (725) 207 (208) Gross margin% -13.1% -11.5% -7.5% 8.4% 16.0% -15.6% -19.3% -16.2% 3.6% -3.8%

Non-GAAP operating profit (4,338) (6,348) (10,828) (5,928) 128 (1,413) (2,086) (2,778) (3,183) (2,781) Non-GAAP operating margin% -85.7% -53.1% -55.1% -18.2% 0.3% -45.5% -53.5% -62.1% -55.7% -50.2%

Implied operating loss per order (2.9) (2.2) (2.4) (1.0) 0.0 (1.9) (2.1) (2.5) (2.7) (2.4)

Source: Goldman Sachs Global Investment Research

3 October 2018 19 Goldman Sachs Alibaba Group (BABA) Hema: Pioneering new retail

Hou Yi, CEO of Hema

Hema’s scorecard at a glance n As of July 31, 2018, there were 64 Hema stores covering 14 cities and serving over 10mn customers.

n As of July 31, 2018, daily average sales per mature store (deﬁned as a Hema store operated >1.5 years; 7 such stores as of July 31, 2018) reached over Rmb800k, and annualized average sales per sqm of mature stores reached over Rmb50k. Online sales contributed to over 60% of total sales for mature stores and growth has been faster than that of ofﬂine sales since July 2017.

n Now, the average consumer basket size is Rmb113 for offline orders and Rmb75 for online orders and spending per month of core users (shopping both online and offline) is over Rmb500. For buying frequency, online buyers make 4 purchases per month while offline buyers make 2.

Digital operation and accurate customer portrait Hema’s digitalization of store operations touches upon key areas including merchandise & inventory management, pricing, marketing solutions, payment, day-to-day operations, membership management, etc., which are supported by infrastructure and facility built-up including:

n Retail cloud: Front end (app, cloud POS, Chatbot, etc.); Middle end (Corporate Resource management, payment, fulﬁllment, etc.); Back end (ERP, store operation system, algorithm, etc.).

n Smart hardware: AI-POS, Electronic Shelf Label (ESL), IoT-based conveyor belt, automatic guided vehicle (AGV), unmanned vehicle, etc.

Leveraging its strong ditigal capability, Hema also identiﬁes speciﬁc characteristics and consumption behaviors of different groups of customers to generate comprehensive consumer portraits. For example, each age group is tagged by a unique description and matched with corresponding product categories.

Hema’s modular solutions including logistics infrastructure, business model, technology (smart hardware+retail cloud), supply chain & merchandise, algo & data analytics and operations know-how are of great value to other retailers within the ecosystem. After Alibaba’s strategic investment in Sun Art (36.2% stake in November 2017) which operates under the Auchan and RT-Mart banners, Hema’s business model set up example and helped RT-Mart through the digital upgrade by leveraging Hema’s own technology capability. RT-Mart Taoxianda stores average daily online orders per store reached over 1,200, average monthly sales per store increased by over 10%, and average number of newly added young customers per store (deﬁned by those who are aged under 35) exceeded 20k (data as of July 2018 and includes RT-Mart Taoxianda New Retail stores operated more than three months).

3 October 2018 20 Goldman Sachs Alibaba Group (BABA)

Exhibit 15: New Retail: Hema’s advanced solutions model

New Retail: Grocery Retail Traditional Gorcery Retail Create New + Transform Old Business Model Primary Self-operated stores Self-operated (Create New) + Enable Third-party (Tranform Old) Monetization Model Direct Sales Direct Sales +Commission + Technology Service Fee + … # of Stores Closing Opening Annual Revenue per sqm (Rmb) ~10k 50k+ Profitability $ $$

Source: Company data

Still huge market opportunities ahead According to the company, sales from super/hypermarkets only contributed to 22% of China’s fresh grocery sales in 2016, while a large bulk (73%) were still brought by traditional “wet markets.” In the US, however, sales from super/hypermarkets accounted for 90% of total fresh grocery sales last year, according to the company. We note that currently, the penetration rate of major fresh grocery store mobile apps remains in the low single digits, and we see further market opportunities for increased penetration ahead backed by both demand and technological upgrades/advancements to the consumer’s experience.

Exhibit 16: Fresh grocery store app users as % of total mobile users is still at the low-single-digit level Major fresh grocery store app users and penetration rate

40.0 37.9 6.0% 35.7 35.0 32.1 5.0% 30.0 4.0% 25.0 23.5 3.4% 3.1% 3.2% 19.0 20.0 3.0% 2.4% 2.1% 15.0 2.0% 10.0 1.0% 5.0

0.0 0.0% Jul-17 Oct-17 Jan-18 Apr-18 Jul-18

Fresh store app users (mn) Penetration rate (%)*

The penetration rate here is deﬁned by active devices installed with major fresh store apps divided by total number of active devices.

Source: Jiguang

Exhibit 17: Our Hema estimates remain unchanged

FY18E FY19E FY20E FY21E 1Q FY18 2Q FY18 3Q FY18 4Q FY18 1Q FY19 2Q FY19E 3Q FY19E 4Q FY19E Hema 5,240 18,235 35,231 50,396 335 993 1,861 2,052 2,655 3,684 5,315 6,581 yoy% 248% 93% 43% 693% 271% 186% 221% as % of China retail revenue 3.0% 7.0% 9.5% 10.1% 0.9% 2.5% 3.1% 5.1% 4.9% 6.5% 6.1% 10.6% No. of stores 37 113 163 213 10 20 25 37 45 70 98 113 yoy% 205% 44% 31% 400% 429% 350% 250% 292% 205% Rev/store 19 20.3 21.3 22.3 13.1 22.1 27.6 22.1 21.6 21.4 21.1 20.8 Sq meters/store 8,000 8,000 8,000 5,000 8,000 8,000 8,000 7,600 7,300 7,000 6,700 Rev per sq meter 30,392 31,912 33,508 7,879 8,272 10,341 8,272 8,521 8,776 9,040 9,311 Annualized revenue per square meter 31,514 33,090 41,362 33,090 34,083 35,105 36,158 37,243

Source: Goldman Sachs Global Investment Research

3 October 2018 21 Goldman Sachs Alibaba Group (BABA) Cainiao: Alibaba’s logistics infrastructure

Lin Wan, President of Cainiao Network

Market dynamics: Still about scale, growth and efﬁciency but delivery model is evolving Scale and growth: We note that in China there were 110mn average daily packages delivered in CY2017 (a CAGR of 42% in 2014-2017), more than 2x the US (51mn in CY2017), among which 69mn packages were processed by Cainiao Network, according to the company. Alibaba platforms contributed to over 40mn packages processed underpinned by its strong e-commerce scale (GMV of US$768bn as of FY2018 to date).

Higher efficiency of China’s logistics network: Cainiao network processed 812mn logistics orders during the Singles Day shopping festival in CY2017, compared with 152mn orders on the same day in CY2013 with the time to fulfill the first 100mn orders reduced to 2.8 days from 9 days. Mr. Wan highlighted that along with continuous scale expansion, major express courier players have also managed to enhance operating efficiency in his view. Specifically, he noted that one of Cainiao Network’s express courier partners (name undisclosed), reduced costs by 16.7% CAGR in 2013-2017.

Upgraded demands from consumers, merchants and logistics partners: Under the spotlight of new retail, consumers are increasingly asking for differentiated delivery options (e.g. point to point 2-3 day delivery, same-day delivery, on-demand delivery, etc.). Given this, merchants are finding themselves in need of an integrated online and offline supply-chain solution and logistics partners likely facing efficiency bottlenecks with fierce competition on delivery capacity. Cainiao’s digital strategy for the logistics network reflects this evolving delivery model (from brick and mortar expansion and smart warehousing) in our view.

(please refer to the ‘How? Logistics: Redeﬁned by New/Borderless Retail, instant delivery‘ section of our Shopping & Delivery Re-Imagined (II) report for more details of China’s logistics market dynamics)

3 October 2018 22 Goldman Sachs Alibaba Group (BABA)

Exhibit 18: China’s average daily package volume is more than 2x of the US in 2017, and witnessed strong contribution from Cainiao Logistic network Average daily package volume in 2014 vs. in 2017

160 Average daily package volume (mn)

140 46.4% 42.1% 7.5% CAGR CAGR CAGR 120 110

100

80 69

60 51 38 41 40 22 20

0 Cainiao China US 2014 2017

Source: Company data

Cainiao’s strategy: Digitized logistics infrastructure Digitization upgrade across the entire logistics chain: Incorporating a large amount of data, Cainiao Network helps to digitalize the entire logistics chain via: 1) a high penetration of e-shipping labels (currently over 80% compared with low single digit % three years ago) and address database, 2) smart routing and dynamic forecasting (aggregating over a 2mn-man delivery staff network), 3) over 10mn sqm of digitally connected warehouses and 4) with a courier service rating system covering 6 major express players in China as of June 30, 2018.

New retail supply chain infrastructure: As of June 30, 2018, Cainiao had over 10mn sqm of multi-tiered warehouses covering urban and rural areas; a hub-and-spoke network covering over 1,000 routes that enable merchants to place inventories closer to consumers; an on-demand delivery network covering over 200 cities driven by the rising demand of product category expansion and demand for instant delivery.

n Fulﬁllment network: Cainiao’s supply chain solutions has gained notable traction. The yoy order growth doubled from FY2017 to FY2018, with a daily peak processing capacity of 50mn items (compared with 30mn in 2016). The same-day and next-day deliveries covered over 1,500 counties and districts as of June 30, 2018.

n Important economic value to the merchants: Mr. Wan cited two examples to address the value created by the new retail supply chain solutions: (1) Cainiao offered a consolidated inventory management solution to an international FMCG brand (name undisclosed), which reported seeing cross-region shipment reduce by 60%, inventory turnover improve by 30%, online in-stock rate over 95%, and sales increase by 10% after adopting Cainiao’s services (as of June, 2018). (2) Cainiao noted transforming a health and beauty retailer (name undisclosed) into a store-based warehouse network equipped with inventory sharing, system integration and on-demand delivery capabilities, whose order volume grew to 10 times in just two months as a result of the supply chain solution (vs. order volume before it adopted Cainiao’s services).

3 October 2018 23 Goldman Sachs Alibaba Group (BABA)

n Last-mile network upgrade: Cainiao currently handles 10mn+ parcels per day and each delivery personnel in the network now handles 120 packages per day (compared with just 50 packages/person two years ago), indicating decent efﬁciency improvement. In addition, with multiple choices of delivery methods and products offered to consumers, e.g. self-pickup, pick-up lockers, door-to-door delivery, as well as AI-empowered Cainiao smart voice assistant which enhances communications with consumers and reduces daily call time by 160k hours. Cainiao services have upgraded the consumer experience of last-mile delivery services and improved operating efﬁciency.

Cainiao’s global logistics network n Imports: With operation coverage of c.1mn sqm bonded warehouses worldwide as of June 2018, Cainiao’s global smart logistics network accomplished 3x yoy growth in import orders over the same period.

n Exports: Over a million export orders were processed on a daily basis as of June 2018, and the average delivery time has reduced to within 10 days for France, Spain and other countries. Cainiao’s global logistics network collaborates with multiple e-commerce intercontinental charter ﬂights to enhance its cross-border delivery capabilities.

n Efficiency: With AI-empowered technology, personnel efficiency has improved from 5 mins to 5 secs, and customs clearance efficiency has improved from over 2 days to 10 secs in some cases.

n Infrastructure: Cainiao has launched 6 e-hubs in Hong Kong, Moscow, Dubai, Belgium, Kula Lumpur and Hangzhou to build up logistics infrastructure for an inclusive global platform.

Exhibit 19: Our Cainiao estimates remain unchanged Numbers in blue are company reported

Cainiao, Rmb mn FY2017E FY2018E FY2019E FY2020E FY2021E 1QFY18E 2QFY18E 3QFY18E 4QFY18E 1QFY19E 2QFY19E 3QFY19E 4QFY19E International retail 10,284 14,201 18,854 24,225 29,747 4,000 3,200 3,907 2,852 3,327 4,248 5,187 6,092 % yoy 121% 38% 33% 28% 23% - - - - -17% 33% 33% 114%

% of GMV 0.27% 0.29% 0.31% 0.33% 0.34% 0.37% 0.29% 0.26% 0.25% 0.24% 0.30% 0.27% 0.42% % of China retail revenue 9.0% 8.0% 7.3% 6.5% 6.0% 10.9% 8.1% 6.5% 7.1% 6.2% 7.5% 5.9% 9.8% Net profits, GAAP (2,247) (2,237) (2,417) (2,643) (2,468) (521) (581) (625) (509) (563) (628) (676) (551) % net margin -22% -16% -13% -11% -8% -13% -18% -16% -18% -17% -15% -13% -9%

*Note: GSe except 3QFY18 - 1QFY19 revenue

Source: Company data, Goldman Sachs Global Investment Research

Cloud: Empowering Digital Transformation

Simon Hu, President of Alibaba Cloud

China’s cloud computing market represented ~26% of the global market in terms of server shipments in 2017 and continues to grow (Exhibit 20). According to the company, currently 40% of the top 500 companies and 49% of the listed companies in China are using Alibaba Cloud; 80% of the Chinese technology companies are on Alibaba Cloud. According to the company, Alibaba Cloud accounted for 46% of China’s total IaaS provider revenue in 2017, up from 30% in 2015 and equaling the sum of the next 8

3 October 2018 24 Goldman Sachs Alibaba Group (BABA)

vendors (Exhibit 22). ARPU has doubled from last year and revenue generated per server has increased by 70% vs. 2014.

Exhibit 20: Worldwide vs. China Annual Server Shipments (‘000 Exhibit 21: Revenue Generated per Server on Alibaba Cloud units)

Greater China Global China shipment as % of Global

16,000 80%

14,000 70%

12,000 60%

10,000 50% 12,333 11,451 8,000 11,091 11,104 40% 26% 27% 6,000 22% 24% 30%

4,000 20%

2,000 10% 2,484 2,682 2,998 3,344

- 0% CY2015 CY2016 CY2017 CY2018E CY2015 CY2016 CY2017 CY2018E CY2019E

Source: Company data Source: Company data

Exhibit 22: Alibaba Cloud accounted for 46% of China total IaaS provider revenue in CY2017

5.4% 5.6% 6.5% 5.7% 5.1% 6.8% 7.5% 7.6% 7.3% 29.8% 41.4% 45.5% 8.7% 10.3% 12.7%

30.8% 37.7% 24.7%

CY2015 CY2016 CY2017

Alibaba Cloud Others Provider 1 Provider 2 Provider 3 Provider 4

*Note: Company does not disclose provider identities

Source: Company data

Exhibit 23: Alibaba Cloud has been growing rapidly... Exhibit 24: ...although operating proﬁt margin remains negative as the company is in the investment phase; set to gain additional market share

800 Alibaba Cloud revenue (US$mn) 200% 32% 32% 32% 32% 32% 40% 29% 30% 31% 31% 31% 25% 28% Alibaba Cloud yoy growth (RHS) 180% 21% 700 17%

160% 20% 175% 600

140% 156% 0%

500 120% 130% -4% -4% -5% -5% -8% -5% -8% 400 115% 100% -20% -13% -10% 104% 103% -16% 103% 80% 96% 99% 93% 300 -40%

60% 200 -41% 40% -60% -59% 100 20% -80% AliCould revenue as % of AWS - 0% -76% AWS non-GAAP OP Margin (%) AliCloud Adj. EBITA Margin (%) -100% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18

Source: Company data Source: Company data

3 October 2018 25 Goldman Sachs Alibaba Group (BABA)

Alibaba Cloud empowers enterprises (new retail, ﬁnancials, media, gaming & video and healthcare) along the way of rapid deployment of AI and digitalization and addresses challenges they encounter including business transformation, operation optimization, employee empowerment and user experience improvement. Meanwhile, Alibaba Cloud also ensures platform and data security, having protected 40% of internet companies as of 1QFY18, ﬁxed 6.5mn bugs and defended 50% DDoS attacks, on par with the leading cloud computing company in US, in our view.

Alibaba Cloud plans to increase focus on Public Cloud, while also planning to allow partners to provide private cloud services in the future to address the demands of SOEs (State-Owned-Entity). The company also expects its cloud business to take up 20% of the IT budget in China (vs. 5% now) to continue to drive rapid growth and enable more enterprises through the digital transformation progress.

In our view, the continuous investment in cloud technology demonstrates Alibaba’s determination to solidify its leading position in the industry and take up more market share in the future.

Ant Financial: Destination for 2bn+ Consumers

Eric Jing, Executive Chairman and CEO of Ant Financial

Ant Financial is focused on developing industry leading, financial-grade technologies in blockchain, artificial intelligence (AI), security, Internet of Things (IoT) and computing (BASIC). Ant’s AI-driven credit assessment technologies have allowed financial institutions to instantly approve and transfer proceeds to approximately 11 million small businesses (+80% yoy) while controlling the NPL (non-performing loan) rate at a low level of ~1.1-1.2%.

Ant Financial’s insurance technology covers 40mn small business owners and since its launch in November 2017, the company says that it takes just two hours for these small businesses to receive reimbursements. Thanks to AlphaRisk, Ant Financial’s AI-powered risk engine, payment fraud loss rate is currently less than 5/10mn (i.e., less than 5 fraud payments per 10mn transactions) as of March 2018.

According to the group, Ant Financial has achieved breakthroughs in blockchain technology, being able to process 25k transactions with high security and privacy per second. In June 2018, Alipay HK of Ant Financial Services Group and GCash announced the launch of the ﬁrst blockchain-based cross-border remittance service globally to offer a secure and low-cost way to wire money.

During the past year, Ant Financial has seen strong momentum among consumers and small businesses and continues to strive to increase its service per customer rate by introducing consumers to its multiple services. In the past 12 months, Ant Financial added 200mn real name users in China and active domestic ofﬂine merchants have grown 3x, demonstrating its strong capability to capture ofﬂine spending - a segment where Ant believes the opportunity could be up to three transactions per day for more

3 October 2018 26 Goldman Sachs Alibaba Group (BABA)

than a billion people. Users using 2 or more categories of services provided by Ant Financial (i.e. payment, wealth management, ﬁnancing, insurance and credit system) increased by around 210mn and consumers using all 5 categories increased by 130mn since Investor Day 2017.

Exhibit 25: Ant Financial has deepened engagement with small businesses

Cash Insurance Unsecured Lending Management ~11MM ~21MM ~40MM Small Business Small Business Small Business Small Business Served Served Owners Covered

↑ ~1.8x YoY ↑ ~8x YoY since Nov 2017

Source: Company data

Alipay has further strengthened its presence across the globe, with tourists using Alipay outside of mainland China increasing 130% yoy and population coverage by local payment partner encompassing 3.6bn people in 2017 (combined population covered by TrueMoney, bKash, easypaisa, Paytm, Alipay, Apilay HK, kaokaopay, GCash, Touch’n Go, DANA).

Mr. Jing reiterated that Ant Financial’s focus remains on customers and services rather than competition, and its mission to service more than 2bn consumers worldwide. For current revenue composition, 35~40% revenue comes from technology services, less than 10% from ﬁnancial services, and the remaining from payment.

We believe Ant Financial will continue to be the “enabler” of Alibaba’s New Retail strategy and help the company navigate the globalization road map. With strong service and technology capabilities, we expect Ant Financial to support the evolving needs and enhance the competitiveness of the whole Alibaba ecosystem.

We update our estimates for Ant Financial for FY19E~FY21E as below.

3 October 2018 27 Goldman Sachs Alibaba Group (BABA)

Exhibit 26: ANT business by segment: Our P&L forecast (update) Numbers in red are GSe, numbers in blue are from the company

1 Payment (Rmb mn) CY2013E CY2014E CY2015E CY2016E CY2017E CY2018E CY2019E CY2020E Consumption related (incl. e-com, bills, offline) TPV (Rmb bn) 2,296 4,749 7,274 8,224 17,124 21,958 29,618 38,503 % GMV as % of ecommerce payment vol 73% 51% 43% 46% 28% 28% 25% 23% % of total TPV 80% 68% 58% 40% 35% 30% 28% 28% % Alipay technology fee 0.37% 0.31% 0.28% 0.26% 0.25% 0.25% 0.25% Revenue 17,573 22,878 22,762 45,023 54,845 73,978 96,171 % yoy change -1% 98% 22% 35% 30% Net profit 252 296 675 (548) 1,110 9,617 Net margin (%) 1.10% 1.3% 1.5% -1.0% 1.5% 10.0%

2 Consumer lending (Rmb mn) CY2015E CY2016E CY2017E CY2018E CY2019E CY2020E Loan balance 7,500 67,500 522,000 704,700 902,016 1,127,520 % yoy 800% 673% 35% 28% 25% On-BS 36,000 36,000 36,000 36,000 % Effective take rate 5.0% 5.0% 5.0% 5.0% 5.0% Off-BS 486,000 668,700 866,016 1,091,520 % Effective take rate 2.5% 2.5% 2.5% 2.5% Services fee revenue 3,375 13,950 18,518 23,450 29,088 Credit cost 360 360 360 360 Other op cost 5,220 7,037 8,442 9,599 CIR 50% 40% 38% 36% 33.00% PBT 1,688 8,370 11,121 14,648 19,129 Tax rate 15% 15% 15% 15% 15% Net profit 1,434 7,115 9,453 12,451 16,260 % margin 43% 51% 51% 53% 56%

3 SME Lending (MYbank, 30% owned by Ant) (Rmb mn) CY2015E CY2016E CY2017E CY2018E CY2019E CY2020E Earning asset 29,896 60,566 77,310 81,176 83,270 85,464 Funding liabilities 26,000 55,952 66,020 LLR (127) (967) (1,134) NPL 13 332 389

Loan balance 7,413 33,858 32,771 34,409 36,130 37,936 % yoy 356.7% -3.2% 5.0% 5.0% 5.0% as % of AliPay GMV 0.2% 0.9% 0.7% 0.6% 0.5% 0.4% as % of earning asset 24.8% 55.9% 42.4% 42.4% 43.4% 44.4%

Net interest income 199.6 2,405 3,703 4,360 4,473 4,591 Interest income 365.7 3,689 5,613 Interest expense (166.1) (1,285) (1,910) Non interest income 53 232 572 858 1,288 1,320

Operating revenue 253 2,637 4,275 5,219 5,760 5,910 Operating expense (incl. fees to ANT/BABA) (218) (1,267) (3,342) (3,720) (3,728) (3,604) fees to ANT/BABA (130) (593) (573) (602) (632) (664) other opex (88) (675) (2,768) (3,118) (3,096) (2,940) PPOP 35 1,370 934 1,498 2,032 2,306 Provision (127) (967) (423) (479) (539) (604) Other income 1.5 2.1 Tax 23 (89) (108) (153) (224) (255) Net profit (69) 316 404 867 1,269 1,447 % net margin -27% 12% 9% 17% 22% 24%

4 Wealth Management (Rmb mn) CY2016E CY2017E CY2018E CY2019E CY2020E Revenue 2,916 6,593 9,224 11,317 15,047 % yoy 126% 40% 23% 33% Cost ratio 40% 40% 35% 30% 30% PBT 1,749 3,956 5,996 7,922 10,533 Tax rate 15% 15% 15% 15% 15% 51% of NPAT of Tian Hong 782 1,803 2,066 2,066 2,479 Net profit 2,269 5,166 7,162 8,799 11,431 % net margin 78% 78% 78% 78% 76%

Source: Company data, Goldman Sachs Global Investment Research

Youku: Where the fun starts

Weidong Yang, President of Youku

3 October 2018 28 Goldman Sachs Alibaba Group (BABA)

Growth strategy = original content + user base + data technologies Original content strategy: We believe Youku will continue to focus on developing its original content portfolio. There are various ways to commercialize original content, showtime schedule is typically more ﬂexible, and the IPs become an asset of the ﬁrm. Most importantly, ROI of original content tends to be higher than that of licensed content. Over the years, Youku has made substantial progress on the commercialization of its high-quality original content, with the number of commercialized content doubling and revenue from commercialized content growing 84x from FY2017 to FY2018 . Within the top 30 rated drama and variety shows on Douban.com, 13 and 11 are from Youku respectively (rating from Jan 2017 to July 2018).

Youku has been actively investing in original content production, with the number of self-operated studios increasing by more than 100% yoy and number of investees +129% yoy in FY2018. We expect the increase of original content to attract more subscribing users. That said, heavy content spending (especially in original content) is likely to continue to drag the group’s proﬁt in the foreseeable future.

Youku leverages its proprietary technology to appraise and produce high quality IPs, provide personalized recommendations to efficiently distribute this content to target users, and thus enhance the user’s watching experience through this technology innovation. For example, the system identified “Day and Night”, a popular drama based on a novel published 3 years ago. The drama attracted billions of viewers on the platform and was later purchased by Netflix.

Driven by the diversiﬁed content offerings on hand and strong technology presence, Youku’s average daily paying subscribers grew at 280% CAGR in FY2016-2018 and user engagement improved with effective video viewership per user increasing by 16% yoy and account login rate increasing by 46% yoy as of June 2018.

Outlook for future collaboration: Youku expects more cooperation with others platforms within Alibaba’s ecosystem, for example producing “11.11 Gala” and variety show based on popular products of Alibaba, distributing popular content on Taobao (e.g. 30mn queries of “Day and Night” on Taobao), and driving 88VIP membership penetration.

Lingshoutong: Digital solutions for small retailers

Kevin Lin, President of Lingshoutong (LST)

Traditional channels: According to the National Bureau of Statistics, total retail sales reached Rmb36.6tn (US$5.3tn) in CY2017, with ofﬂine retail sales accounting for Rmb29.5tn (US$4.3tn) and traditional channels still playing a major role. For the FMCG category in particular, over 50% of the sales are still contributed by traditional ofﬂine channels, i.e. mom-and-pop stores. Lingshoutong believes the challenges faced by these traditional channels — multiple layers of distributors, redundant infrastructure, low productivity, isolated information, and the need for service upgrades remain to be addressed.

3 October 2018 29 Goldman Sachs Alibaba Group (BABA)

Uberizing distribution and digitalizing mom-and-pop stores: Lingshoutong bridges suppliers and mom-and-pop stores through a joint distribution network. Each brand suppplier can distribute products more effectively and obtain real-time sales data. Each mom-and-pop store can enjoy more attractive price and quality assurance thanks to the system’s AI technology. As of June 2018, Lingshoutong overed over 1mn mom-and-pop stores, and signed strategic cooperation agreements with 42 brands.

Key services provided by Lingshoutong digital strategies: (1) POS cashier system (digitalized sales data); (2) product selection optimization; (3) Un-manned selling systems that create incremental revenues for physical stores (even when the store is closed); (4) on-demand delivery in collaboration with Alibaba’s logistics partners; (5) Similar procurement pricing comparable to other chains (e.g. supermarkets).

Amap: More than just a map

Zhenfei Liu, President of Amap (formerly AutoNavi)

Data, data, data Amap is the largest location-based data intelligence platform in China in terms of MAU and DAU (Nov 2017 to July 2018) according to QuestMobile. It incorporates various kinds of data such as:

n Location-based big data: POI (Point of Interest) collection in 300+ cities covering 3,600 tourist attractions; Amap also provides POI data for Apple Maps.

n Trafﬁc big data: covers all cities in China except Sansha, Taiwan and Macau and achieves over 90% accuracy in real-time trafﬁc monitoring.

n User big data with over 400mn MAU and c.70mn DAU (compared with 50mn for Baidu Map) as of July 2018 according to QuestMobile.

n Application big data: provides location services to 300k apps such as Taobao, Weibo and Toutiao.

n Empowering new retail and smart logistics with accurate positioning, POI and road condition data, Amap plays an important role in store operations, distribution planning, targeted marketing and location recommendation services. In place of manual route planning which relies on personal experience, the mobility real-time data helps to generate optimal routes, avoid trafﬁc jams and save time and costs.

Strategy: Mobile and automobile ecosystems Amap plans to upgrade services for various consumer platforms, as well as dive into the automobile market (where massive data is available and smart navigation services are needed). Amap expects to achieve over 80% share in the pre-installment market (i.e. automobile manufacturers pre-install Amap before sending the car) and over 90% in the post-installment market (i.e. users download and use Amap by themselves after purchasing the car).

3 October 2018 30 Goldman Sachs Alibaba Group (BABA) Strong core fueling future investments

Maggie Wu, CFO

Strong growth in the core business In FY18 (Apr 2017 to Mar 2018), Alibaba delivered 58% yoy revenue growth (or 54% excluding the consolidation of Cainiao Network since Oct 2017), higher than its own guidance of 45-49% during the investor day last year. Annual active customers increased by 98mn in last 4 quarters. Its core business has developed a more diversiﬁed consumer base with rising penetration into less developed areas. For the 110mn new customers added in the past 12 month ending June 2018, 70% of them are from less developed areas.

User engagement across its core business has been improving, as users are staying longer and spending more on the platform—average spending per annual active consumer in the China retail market place increased to Rmb8.7K in FY2018, and the retention rate for consumers who spent over Rmb10K on the platform was high at 98%.

For the ecommerce business, our cohort analysis below models users placing more orders and spending more on the platform over time, based on company data (Yr 1 & Yr 5, in blue).

Exhibit 27: Strong core user base

634mn MAUs 870mn AAUs 400mn+ MAUs 400mn+ MAUs 168mn AAC 100mn+ AAC

Source: Company data

Exhibit 28: Our consumer cohort analysis Numbers in blue are from the company, the rest is GS estiamte

Consumer cohort Years on platform >5 yrs Yr 5 Yr 4 Yr 3 Yr 2 Yr 1 FY2018 Total Yr5/Yr1 # of shoppers (AAC) mn 172 83 95 73 31 98 552 -3% % of total 31% 15% 17% 13% 6% 18% GMV Rmb bn 2,180 996 741 460 149 294 4,820 28% % of total 45% 21% 15% 10% 3% 6% Total # of orders # 25,800 10,956 10,260 6,406 2,093 2,646 58,160 % of total 44% 19% 18% 11% 4% 5% Orders per year per AAC # 150 132 108 87.75 67.5 27 105.4 37% % of total 142% 125% 103% 83% 64% 26% Categories # 23 23 21 19 15 6 31% Spending per AAC Rmb 12,676 12,000 7,800 6,300 4,800 3,000 8,732 32% % of total 145% 137% 89% 72% 55% 34% Spending per order Rmb 84.5 90.9 72.2 71.8 71.1 111.1 82.9 % of total 102% 110% 87% 87% 86% 134%

Source: Company data, Goldman Sachs Global Investment Research

3 October 2018 31 Goldman Sachs Alibaba Group (BABA)

Invest for the future The robust growth of Alibaba’s core business generates ample cash ﬂow (US$15.8bn as of FY18), fueling the company’s investments in multiple areas. Alibaba’s strategic investment in Hema, local services, Cainiao Logistics and international e-commerce has shown early results (please see our individual sections for more details).

Exhibit 29: Core commerce earnings support organic investment in other areas in 1QFY19

Rmb International: 37.0bn Lazada Local Services: Ele.me New Retail Logistics: Rmb Cainiao Marketplace- 32.8bn based Core Commerce Digital Media & Core Adjusted Entertainment Commerce Innovation EBITA Cloud Computing Adjusted Initiatives & Rmb EBITA Others and 26.5bn Unallocated Adjusted EBITA

Source: Company data

Exhibit 30: Alibaba non-GAAP operating proﬁt margin by segment (GSe) Numbers in red are GSe

CONSOLIDATED INCOME STATEMENT FY17 FY18 FY19E FY20E FY21E 1Q FY18 2Q FY18 3Q FY18 4Q FY18 1Q FY19 2Q FY19E 3Q FY19E 4Q FY19E SEGMENT OPERATING MARGIN (non-gaap) 1Advertising 69.5% 73.3% 76.3% 76.3% 76.3% 72.6% 74.3% 73.0% 73.3% 75.7% 77.4% 76.1% 76.3% 2Commission 69.5% 71.4% 74.4% 74.4% 74.4% 68.6% 69.3% 73.0% 73.3% 71.7% 72.4% 76.1% 76.3% Advertising+Commission 69.5% 72.7% 75.8% 75.8% 75.7% 71.6% 72.9% 73.0% 73.3% 74.5% 75.9% 76.1% 76.3% 3 Other (new retail) -95.4% -83.8% -56.1% -51.1% -41.1% -96.4% -95.7% -77.0% -79.7% -66.3% -60.0% -55.0% -50.0% China Retail Commerce 65.8% 58.8% 54.3% 48.4% 46.9% 64.2% 59.1% 60.4% 51.1% 55.8% 56.2% 58.0% 46.2% 4Wholesale 24.6% 28.7% 33.1% 33.1% 33.1% 33.6% 34.3% 23.0% 25.3% 37.7% 35.0% 30.0% 30.0% China Core Commerce (Retail + Wholesale) 63.9% 55.6% 47.1% 41.7% 40.3% 62.9% 58.1% 55.7% 46.7% 49.9% 48.2% 51.0% 38.7% 5 Cainaio -22% -12.8% -8.0% -5.0% -26.6% -14.7% -8.3% -9.0% -22.0% -10.0% 6Ele.me -52.8% -18.2% 0.3% -51.1% -62.1% -55.7% -50.2% China Core 63.9% 54.8% 43.2% 40.0% 40.1% 62.9% 58.1% 54.1% 45.8% 47.9% 43.5% 46.7% 34.2% 7 Retail, Int’l 54.4% 23.4% 3.8% 5.0% 8.0% 53.6% 54.3% 3.0% 5.3% 6.7% 3.0% 3.0% 3.0% 8Wholesale, Int’l -7.4% 43.8% 28.1% 25.0% 25.0% 47.5% 7.2% 98.0% 22.9% 37.6% 25.0% 25.0% 25.0% Int’l commerce 26.6% 29.9% 10.2% 8.9% 10.6% 51.3% 37.1% 27.8% 10.5% 15.9% 9.3% 7.4% 10.0% 9Others 14.4% 22.4% 28.0% 28.0% 28.0% 13.6% 24.3% 23.0% 25.3% 41.7% 25.0% 25.0% 25.0% Total Core Commerce (China + Int’l) 59.9% 52.0% 40.2% 37.0% 37.1% 61.3% 55.6% 51.4% 41.6% 45.0% 40.2% 43.1% 32.3% 10Cloud -7.2% -6.1% -8.6% -5.0% -2.0% -4.3% -5.6% -5.1% -8.1% -10.5% -10.0% -8.0% -7.0% 11Entertainment -57.2% -61.3% -58.1% -55.0% -45.0% -70.7% -58.1% -61.3% -57.0% -58.1% -58.1% -58.1% -58.1% 12Innovation -126.2% -97.0% -100.0% -100.0% -100.0% 13 Unallocated (% of total rev) -2.4% -1.3% -1.2% -0.9% -0.7% -1.6% -1.0% -1.2% -1.4% -2% -1.4% -0.9% -1.2% GROUP OPERATING MARGIN (non-gaap) 40.5% 35.7% 26.6% 25.1% 26.2% 42.9% 38.6% 37.5% 25.0% 30.2% 28.3% 32.7% 20.7% yoy -4.8% -9.2% -1.5% 1.1% 4.0% -0.2% -8.4% -10.9% -12.8% -10.3% -4.8% -4.3% GROUP EBITA MARGIN (non-gaap) 43.7% 38.8% 28.7% 26.9% 27.8% 46.9% 41.8% 40.5% 27.1% 32.8% 28.3% 32.7% 20.7% yoy -4.9% -10.1% -1.8% 0.9% 46.9% 41.8% 40.5% 27.1% -14.1% -13.5% -7.9% -6.4%

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 31: We expect marketplace-based core commerce to support organic investments in other areas going forward

non-GAAP Operating Profit (Rmb mn) FY17 FY18 FY19E FY20E FY21E 1Q FY18 2Q FY18 3Q FY18 4Q FY18 1Q FY19 2Q FY19E 3Q FY19E 4Q FY19E

Core (MP only) 82,572 125,869 172,362 229,754 296,809 27,923 28,911 42,616 26,419 37,079 38,257 59,287 37,740 + investments Core commerce (incl. new retail) 80,174 111,209 136,551 181,003 244,910 26,368 25,823 37,665 21,353 31,117 30,190 48,285 26,959 + investments Total Operating Profit, non-gaap 64,050 89,389 105,826 145,002 208,445 21,532 21,270 31,111 15,476 24,398 22,985 39,619 18,825 Total Investments 18,522 36,480 66,536 84,753 88,364 6,391 7,641 11,505 10,943 12,681 15,273 19,668 18,915 % of Marketplace-based core commerce 22% 29% 39% 37% 30% 23% 26% 27% 41% 34% 40% 33% 50% yoy 33% 97% 82% 27% 4% 119% 154% 180% 225% 98% 100% 71% 73%

Source: Company data, Goldman Sachs Global Investment Research

Valuation Framework The company commented that valuation needs to consider its adjusted EBITDA of US$18bn (FY18 ), the future potential (e.g. core commerce upside, cloud computing,

3 October 2018 32 Goldman Sachs Alibaba Group (BABA)

digital media, innovation), together with its strategic investment portfolio which is currently valued at more than US$80bn+ (company estimates).

Why BABA deserves a narrow holding company discount in our view Numerous companies with multiple assets often trade at a discount to their NAV to factor in: 1) management teams being spread too thin - the lack of focus leading to assets under-utilization, 2) private assets may be difﬁcult to value, and 3) potential breakup costs.

We believe that a 10% holding company discount for SOTP valuation is appropriate for Alibaba due to the following reasons:

1. Cohesive interlinked businesses: Alibaba has active buyers/merchants, logistics, as well as a computing infrastructure supporting adjacent verticals. The same strategy is being applied to grow internationally, including ASEAN and South Asia.

2. Synergy across all the business units: In our view, Alibaba’s investment strategy is aimed at leveraging its multiple assets. Though many of its current business units were created with the initial goal of ensuring the long-term success of its core business, we believe we are at a juncture where some of the ‘supporting businesses’ have become large enough to drive the core.

3. Depth in management is centralized in a partnership, which has demonstrated the ability to scale up in a controlled manner (i.e., total amount of losses are not out of control) to cater to the management of its business. This provides depth in the management ranks (i.e., management team of different levels of subsidaries can accumulate experience and grow) and ensures that there is alignment of interests between the owner-manager and shareholders. Also in our view, the pool of partners being brought on board should drive actions and ideas (e.g., capital allocation), which we believe will ultimately drive stable growth of the business and the stock price. Lastly, this structure resolves the challenges younger tech companies have faced with succession planning (i.e., key-man risk).

3 October 2018 33 Goldman Sachs Alibaba Group (BABA)

Exhibit 32: Alibaba’s senior management and partnership structure

Years with Name Joined BABA Position BOD Member BABA Jack Yun MA 1999 Chairman Yes 19 Joseph C. Tsai 1999 Executive Vice-Chairman Yes 19 Daniel Yong ZHANG 2007 CEO Yes 11 Eric Xiandong JING 2007 Chairman, CEO, ANT Yes 11 Jingxian CAI 2000 Senior_Researcher 18 Li CHENG 2005 CTO 13 President, Wholesale Trudy Shan DAI 1999 19 marketplace Chairman, CEO, Alibaba Luyuan FAN 2007 11 Pictures Yongxin FANG 2000 Senior Director, DingTalk 18 Felix Xi HU 2007 Deputy CTO, ANT 11 Simon Xiaoming HU 2005 President, Alicloud 13

Fang JIANG 1999 Deputy Chief Peoples Officer 19

Zhenfei LIU 2006 President, Autonavi 12 NI Xingjun 2003 President, Alipay 15 Lucy Lei PENG 1999 Chairwoman, CEO, Lazada 19 Sabrina Yijie PENG 2000 VP, ANT 18 Xiaofeng SHAO 2005 Secretary General 13 Timothy STEINERT 2007 General Counsel, Secretary 11 Lijun SUN 2002 GM : Social Responsibility 16 Judy Wenhong TONG 2000 CPO 18 Chairman, Technology Jian WANG 2008 10 Steering Committee Lei WANG 2003 CEO Ele.me 15 Shauai WANG 2003 Chairman, Mktg & PR 15 Winnie Jia WEN 2007 VP, Office of the Chairman 11 Sophie Minzhi WU 2000 CCO 18 Maggie Wei WU 2007 CFO 11 Eddie Yongming WU 1999 Chairman, Alibaba Health 19 VP, Tmall Technology Zeming WU 2004 14 Department Sara Siying YU 2005 Deputy General Counsel 13 Head, eWTP Investment Yongfu YU 2014 4 Working Group Ming ZENG 2006 Chief Strategist 12 Sam Songbai ZENG 2012 SVP, HR, ANT 6 Jeff Jianfeng ZHANG 2004 CTO 14 Yu ZHANG 2004 Vice President 14 Head, Globalization Angel Ying ZHAO 2005 13 Leadership Group CRO & Chief Platform Jessie Junfang ZHENG 2010 8 Governance Officer MEDIAN 13.5 Cumulative Years with BABA 441

Source: Data compiled by Goldman Sachs Global Investment Research

4. Discipline around investments. We believe the company has a clear track record of meticulously planning a “push” to grow an asset, with execution often held off till the business model is optimized and key management personnel are in place to execute the strategy.

3 October 2018 34 Goldman Sachs Alibaba Group (BABA)

5. Return profile of past investments has exceeded returns earned by many VCs, according to company management. In our view, as the risk profile of a new investment is carefully managed, synergy benefits from the Alibaba ecosystem can be leveraged to achieve an even greater return.

M&A: The importance of synergies

Joe Tsai, Executive Vice Chairman

Mr. Tsai emphasized that the purpose of making M&A investments is to build long-term strategic value via integrations and synergies. He believes that existing business units and acquired assets create synergies through the network effect of Alibaba’s data platform. Three goals of Alibaba’s investments and acquisitions are to: 1) solidify market position of core business, 2) tap into new addressable markets, and 3) identify new technology trends.

The company’s 3-year cummulative free cash ﬂow was US$33.8bn vs. investment outﬂow of US$30.2bn from FY2016 to FY2018. The company expects the core business to continue to support future investments.

Financials & valuation

Target price valuation raised to US$257

We raise our 12-month SOTP-based TP to US$247 from US$241 on higher Ant Financial valuation from US$108bn to US$136bn on higher expected proﬁtability in CY2020E.

3 October 2018 35 Goldman Sachs Alibaba Group (BABA)

Exhibit 33: Our new SOTP valuation

FY20, in EV / Value to in US$ mn Description PE Value To BABA US$/sh % of NAV Comment Rmb Rev. BABA A. CORE 1 China commerce (ex Cainiao, Ele.me) 388,561 8.0 24 451,348 100.0% 451,348 170.0 69% 24x P/E of Global Internet (>US$50bn mkt cap) Advertising + commission 290,827 New retail/Other 86,662 Wholesale 11,071 2 Cainiao Logistics 24,225 5.7 20,075 51.0% 10,238 3.9 2% Last transaction 3 Ele.me O2O 32,510 5.3 25,000 92.1% 23,025 8.7 4% Last transaction 4 International commerce 43,802 2.9 18,677 94.9% 17,716 6.7 3% Lazada ASEAN ecomm. 22,406 1.7 5,653 83.0% 4,692 1.8 1% DCF, FY20 Others Int’l wholesale, Int retail ex Laz) 21,397 4.2 15 13,024 100.0% 13,024 4.9 2% 15x PE 5 Youku Tudou Online video 25,448 4.5 16,717 100.0% 16,717 6.3 3% DCF 6 Cloud, other 63,819 11.6 107,162 100.0% 107,162 40.4 16% 12x revenue Cloud Computing Aliyun 46,703 14.0 94,759 100.0% 94,759 35.7 14% 14x revenue Other UC Web, Autonavi 17,116 5.0 12,403 100.0% 12,403 4.7 2% 5x revenue

Total, Core 578,365 626,206 235.9 96%

B.Associate/investments 1 Ant Financial Internet finance 135,868 33.0% 44,837 16.9 7% SME lending 30% 5,242 9.9% 519 0.2 0% 30x CY20 earnings Consumer lending 100% 47,129 33.0% 15,553 5.9 2% 20x CY20 earnings Payment 100% 41,813 33.0% 13,798 5.2 2% 30x CY20 earnings Other financial products Wealth management 100% 41,418 33.0% 13,668 5.1 2% 25x CY20 earnings Ele.me Food delivery 7.9% 25,000 2.6% 652 0.2 0% Last transaction PayTM 20% 9,800 6.6% 647 0.2 0% Last transaction 2 YTO Logistics 8,889 11.1% 986 0.4 0% Market cap 3 Best Logistics Logistics 5,652 28.2% 1,594 0.6 0% GS targeted valuation 5 Didi Chuxing O2O - taxi app 56,000 8.5% 4,760 1.8 1% Last transaction; estimated shareholding 6 Weibo Social media 32,035 31.0% 9,931 3.7 2% GS targeted valuation 7 Alibaba Health Healthcare 4,920 46.0% 2,263 0.9 0% Market cap 8 Alibaba Pictures Entertainment 4,102 49.5% 2,030 0.8 0% Market cap 9 Intime Retail Retail 3,942 73.7% 2,906 1.1 0% Privatization value 10 Suning Retail 18,917 20.0% 3,781 1.4 1% Market cap 11 Evergrande Football Club Entertainment 2,836 37.8% 1,072 0.4 0% Market cap 12 Singapore Post Logistics 2,148 14.4% 309 0.1 0% Market cap 13 Meizu Smartphones 3,933 15.0% 590 0.2 0% Last transaction 14 Magic Leap Entertainment/3D VR 6,000 1.7% 103 0.0 0% Last transaction 15 PayTM Payments, India 9,800 20.0% 1,960 0.7 0% Last transaction 16 Momo Social networking 7,200 4.3% 312 0.1 0% Market cap 17 Shiji Technology Hotel IT system 3,919 13.1% 512 0.2 0% Market cap 18Sanjiang Retail 1,567 9.3% 146 0.1 0% Market cap 19Sunart Retail 12,866 36.2% 4,658 1.8 1% Market cap Total Assoc./Inv. 320,594 82,751 31.2 13% C. Net cash 18,621 7.0 3% Total 727,579 274.1 111% D. Less holdco discount 10% (72,758) (27.4) -11% NAV 654,821 247.0 100%

Source: Goldman Sachs Global Investment Research

Insight into Alibaba’s future

Jack Ma, Founder and Executive Chairman

Mr. Ma highlighted that globalization, rural development and technology innovation would continue to be Alibaba’s long-term vision. The company hopes to expand its global footprint by 2036 to:

n Serve 2 billion consumers,

n Create 100 million jobs,

n Support 10 million proﬁtable businesses.

The goal is to be achieved through a combination of continuous development domestically, and value creation globally. Mr. Ma believes that Alibaba invests in technology not just for today, but also for the future. Just like playing the abstract strategy game “Go”, Alibaba continues to think multiple steps ahead with a longer-term vision.

In the face of rising concerns regarding a potential US-China trade war, Mr. Ma said there could be macro turbulence, but at the same time two things remain unchanged: (1) Consumption upgrade and consumption difference in China (the transition of 500mn people from middle-income to middle class create opportunities for Tmall, while other

3 October 2018 36 Goldman Sachs Alibaba Group (BABA)

people who are not middle income yet offer added opportunities for Taobao); (2) The economy is still driven by technology in this digital era (New Retail, manufacturing, IoT and etc.). Alibaba aims to generate more opportunities for and facilitate the growth of small businesses.

Responding to his recent step-down plan in a year, the chairman reiterated his conﬁdence in the senior management team. Management has been together since CEO, Daniel Zhang, was passed the baton from Jack Ma three years ago. Mr. Ma emphasized the importance of cultivating a system and culture that develops talent and young leaders within the group to continuously steer sustainable growth and express the desire to set a good example for China/Asian entrepreneurs. He further highlighted that Alibaba looks to capture new opportunities and adapt its business model in this fast-changing decade.

3 October 2018 37 Goldman Sachs Alibaba Group (BABA) Disclosure Appendix

Reg AC

I, Piyush Mubayi, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division. GS Factor Profile The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock. The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows: Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for financial stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock’s forward-looking P/E, P/B, price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns percentile and (100% - Multiple percentile). Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics). For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative. M&A Rank Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2 representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not factor into our price target, and may or may not be discussed in research. Quantum Quantum is Goldman Sachs’ proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy focused on the generation of long-term alpha through identifying high quality industry leaders. The GS SUSTAIN 50 list includes leaders we believe to be well positioned to deliver long-term outperformance through superior returns on capital, sustainable competitive advantage and effective management of ESG risks vs. global industry peers. Candidates are selected largely on a combination of quantifiable analysis of these three aspects of corporate performance. Disclosures Coverage group(s) of stocks by primary analyst(s) Piyush Mubayi: Asia Internet. Ronald Keung, CFA: Asia Internet, China Logistics. Asia Internet: 58.com Inc., Alibaba Group, Aurora Mobile Ltd., Baidu.com Inc., Ctrip.com International, Gridsum, Huya Inc., Info Edge India Ltd., iQIYI Inc., JD.com Inc., Jianpu Technology Inc., MakeMyTrip Ltd., NetEase Inc., New Oriental Education & Technology, Pinduoduo Inc., Qeeka Home (Cayman) Inc., Sea ltd., SINA Corp., Sogou Inc., Sunlands Online Education Group, TAL Education Group, Tarena International Inc., Tencent Holdings, Uxin Ltd., Vipshop Holdings, Weibo Corp., Xiaomi Corp., YY Inc.. China Logistics: BEST Inc., Kerry Logistics Network Ltd., Sinotrans Air Transportation Dev, Sinotrans Ltd., ZTO Express (Cayman) Inc.. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, “Goldman Sachs”) and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs has received compensation for investment banking services in the past 12 months: Alibaba Group ($160.23) Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Alibaba Group ($160.23) Goldman Sachs had an investment banking services client relationship during the past 12 months with: Alibaba Group ($160.23) Goldman Sachs had a non-securities services client relationship during the past 12 months with: Alibaba Group ($160.23) Goldman Sachs makes a market in the securities or derivatives thereof: Alibaba Group ($160.23) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

3 October 2018 38 Goldman Sachs Alibaba Group (BABA)

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 35% 53% 12% 63% 56% 51%

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