June 12, 2017 Takeaways from 2017 Alibaba Investor Day 2 At Day 2 of the 2017 Alibaba Investor Day, the senior executive team shared its strategic vision for the company to make it easy to do business anywhere. 1) Executive Chairman Jack Ma outlined his long-term vision for Alibaba and identified globalization and China’s consumption upgrade opportunity which he believes will help the company reach US$1 trillion GMV by fiscal year 2019 and serve one-third of the world’s population by 2036. 2) Executive Vice Chairman Joe Tsai shared the chief tenets of the group’s investment strategy: driving interest alignment through minority stakes and post-M&A value creation. 3) President of AliCloud Simon Hu believes AliCloud will be able to maintain its rapid growth through its continued domestic dominance and overseas expansion. 4) Ant Financial CEO Eric Jing, President of Cainiao Network Wan Lin and Chairman and CEO of Alibaba Digital Media & Entertainment Group Yu Yongfu shared their vision of inclusive finance and how the business can leverage data and the platform economy to create value for customers and merchants globally. Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 1 Copyright © 2017 The Fung Group. All rights reserved. June 12, 2017 About Alibaba 2017 Investor Day Fung Global Retail & Technology attended Alibaba’s 2017 Investor Day at its headquarters in Hangzhou on June 8–9. Day 2 of the Investor Day focused on the following: • Executive Chairman Jack Ma expressed his long-term vision for Alibaba and the two major opportunities for the group: globalization and China’s consumption upgrade. • Executive Vice Chairman Joe Tsai talked about post-M&A integration, value creation and interest alignment through minority investment as key to the group’s investment strategy. • President of AliCloud Simon Hu gave an overview of the great strides that AliCloud has made since the decision to invest eight years ago. He believes AliCloud will be able to maintain rapid revenue growth through its domestic dominance and overseas expansion. • Senior leaders of Ant Financial, Cainiao Network and Alibaba Digital Media & Entertainment Group shared their vision of how the business can leverage data to create value for customers and merchants globally. Chairman’s Speech: “Born in China, Grow for the World” Executive Chairman Jack Ma expressed his vision for Alibaba and the two major opportunities—globalization and China’s consumption upgrade—that he has been witnessing. He wants to focus not merely on the next quarter, rather on his long-term vision for the group—to become a truly global company providing solutions to world problems. He believes Alibaba can help globalization by making trade more inclusive, and e-commerce is the best way to solve that. Ma expects Alibaba’s gross merchandise volume (GMV) to reach US$1 trillion by 2019, serve 2 billion customers—one-third of the world’s total population—by 2036, and support 10 million profitable businesses on its platform economy. Source: Fung Global Retail & Technology Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 2 Copyright © 2017 The Fung Group. All rights reserved. June 12, 2017 Opportunity 1: Making Globalization More Inclusive Ma expects the new global economy to be based on the Internet. With e-commerce the best solution, he views globalization as a huge opportunity for Alibaba and expects its cross-border e-commerce platforms—Lazada and AliExpress—to grow rapidly. At Davos, China’s President Xi Jinping said China will import US$8 trillion in the next five years. Alibaba is building a global network to leverage the network effect. By making the network available for all companies to join, Alibaba is making global trade more inclusive and leveling the playing field between large and small companies. The eWTP (Electronic World Trade Platform) is a concept to create digital free-trade zones where small and medium-sized enterprises (SME) can tap into global trade via e- commerce. Malaysia was the first country to join in March 2017, and Alibaba is inviting more countries to join. Opportunity 2: China’s Consumption Upgrade Ma believes Alibaba is well positioned to benefit from the structural trends in China: 1) a growing middle class; and 2) the country’s shift from an investment- and export-led economy to one that is driven by domestic consumption. First, there are over 300 million middle-class consumers in China today, and this number is expected to increase to 500 million in the next five years. Second, he believes e-commerce will play a major role in China’s consumption upgrade, which is expected to drive import growth. The Five “New” Ma discussed the concept of the five “New,”which he believea will drive the Chinese economy in the future. See our report on the topic: Deep Dive: New Retail―The Key To Unlocking Pent-Up Chinese Consumer Demand 1. New Retail—refers to retailers’ shift from selling products to servicing consumers. See Deep Dive: Intime Retail—The Roadmap to New Retail with Alibaba 2. New Manufacturing—refers to using cloud computing and IoT to solve China’s manufacturing upgrade 3. New Financing—refers to the company’s vision to make financing more inclusive. Ma stated that instead of serving 20% of the companies (i.e., the largest ones) and making 80% of the profits like other big financial institutions, Alibaba will focus on serving the remaining 80% of the companies which have been underserved. 4. New Technology—refers to solving customers’ problems with technology 5. New Energy—refers to the use of data to fuel the future economy Investments, Acquisitions and Capital Allocation Executive Vice Chairman Joe Tsai started his presentation by reiterating the investment philosophy of Alibaba, which is to build long-term strategic value and drive synergies for the business. 1. Integration is key to strategic M&A 2. Prefer minority investments over controlling-stake acquisitions Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 3 Copyright © 2017 The Fung Group. All rights reserved. June 12, 2017 Source: Fung Global Retail & Technology Integration Is Key to Strategic M&A He also emphasized the importance of planning for the eventual integration into the group, as investment outcomes are likely to be binary. Success or failure will depend mostly on people and innovation as they drive value creation. He gave the example of the group’s acquisition of UC Web in 2014. Yu Yongfu, the current Chairman of Alibaba Digital Media & Entertainment Group, came with the acquisition and was responsible for helping Alibaba integrate UC Web into the group. Source: Company data Prefer Minority Investments Tsai also mentioned that Alibaba prefers to make minority investments over full acquisitions for three key reasons: 1. Minority investments align the interests of the management team and assists in talent retention 2. Alibaba is able to generate strategic synergies through equity relationships 3. Alibaba can minimize capital or integration risk through a phased-in approach Tsai wrapped up his presentation by reviewing the group’s strategic investment track record and the value that has been created as a result. Strategic investments that have been made over the past two years totaled US$21 billion. The large minority investments have yielded over a fourfold return. Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 4 Copyright © 2017 The Fung Group. All rights reserved. June 12, 2017 Source: Company data Source: Company data Technology – Infrastructure, AI and More The core message of Alibaba CTO Jeff Zhang was that technology has been fundamental in driving growth in the Alibaba economy, and will continue to be the way forward. He stated that Alibaba’s technology prowess is manifest in the record-setting Singles’ Day, in which 175,000 transactions were handled every second at peak, and 657 million delivery orders were processed. The stable and efficient performance has accelerated business innovation. He used the business integration of the investment in Lazada as an example of using technology to innovate. Alibaba was able to rebuild Lazada’s seller platform and list over 10 million Taobao products on Lazada within three months. Source: Company data Deborah Weinswig, Managing Director, Fung Global Retail & Technology [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 5 Copyright © 2017 The Fung Group. All rights reserved. June 12, 2017 Zhang provided several examples of how Alibaba made technology available for merchants to enable them to do business. 1. Personalization: Alibaba made ‘personalized’ technology available on its platforms, enabling merchants to target 507 million mobile MAUs through personalized recommendations and marketing. 2. Big data: Alibaba runs 30 billion protective scans each day and uses biometric identification on users for risk management and security. 3. AI-powered customer service: The “Store Concierge” chatbot is used by 100,000 merchants to handle millions of customer enquiries. To prepare for the future, Alibaba has been focusing efforts on R&D in the following fields: deep learning, speech technology, voice-controlled intelligent platform, image and video technology, IoT cloud-based integration services and new retail infrastructure. AliCloud—Strategies for Growth President of AliCloud Simon Hu shared his vision for AliCloud and the impressive strides that the business has made since Alibaba’s decision to invest eight years ago. Between fiscal year 2015 and 2017, AliCloud revenue increased at a two-year compounded annual growth rate (CAGR) of 115% to US$0.97 billion.