Internet observation – e-commerce – Alibaba – analysis of the first quarter of 2018

Alibaba released the FY2018Q4 quarterly report (corresponding to CY2018Q1), and FY2018Q4 Alibaba earned RMB61.93 billion, a year-on-year increase of 60.5%. The core business income was 51.29 billion yuan, a year-on-year increase of 62.5%. Excluding (1) rookie network statistical caliber changes, (2) Yintai department store consolidated, (3) box horse freshsheng new contribution, we expect Q18 Ali traditional e-commerce business (mainly Taobao + Tmall) real income growth rate in about 2018 37%, the chain continued to decline (after the same caliber split, it is estimated that the Q1-2018 Q1 Ali traditional e-commerce revenue growth rate in 2017 is 54%, 53%, 39%, 37%) . The further slowdown in traditional e-commerce revenue growth means that companies need to find new growth points, and the development of online consumption habits and the rapid development of social logistics have paved the way for new retail. The new retail opened Ali’s imagination in the penetration rate of the entire retail market and continued to be the key word for this quarter.

First, the core point of view

[1] The growth rate of traditional e-commerce business continued to slow down, the decline in advertising growth rate and the rebound of GMV growth rate, and the monetization ability toward price-driven

Excluding (1) rookie network statistical caliber changes, (2) Yintai department store consolidated, (3) box horse freshsheng new contribution, it is expected that in 2018 Q1 Ali traditional e-commerce business (mainly composed of Taobao + Tmall) real income growth rate For the 37%, the chain continued to decline (after the same caliber split, it is expected that the Q1-2018 Q1 Ali traditional e-commerce revenue growth rate in 2017 will be 54%, 53%, 39%, 37%). Traditional e-commerce revenue is mainly composed of customer management (advertisement) and commission (commission). With the continuous development of advertising resources, the release of advertising stocks has weakened, and the growth rate of advertising revenue has slowed down. Beginning in Q4 2017, advertising revenues moved from click-through to price-driven (CPC). Commission income continues to benefit from the rapid growth of JD.com.

A noteworthy data is: benefiting from channel sinking and consumption upgrades, Ali’s annual active buyer growth rate bottomed out in 2017. In the 2018 fiscal year (2017Q2-2018Q1), the growth rate of Taobao GMV and Tmall GMV increased significantly. In the 2016-2018 fiscal year, Taobao GMV growth rate was 17.53%, 17.31%, 22.12%, and Jingdong GMV growth rate was 43.45%, 28.81%, and 36.17%, respectively. The growth rate of advertising revenue continued to be higher than the growth rate of GMV, reflecting that Taobao’s monetization ability is still strong, but the deviation between the slowdown in advertising revenue growth and the bottoming out of Taobao’s GMV growth rate also reflects the advertising revenue from quantity-driven to price-driven. After that, the growth rate is facing greater pressure. In the future, Taobao APP content (such as Taobao live broadcast, Taobao headlines) and community (such as buyer reviews) will bring organic traffic to enhance advertising inventory, and further precision of product distribution under the progress of the algorithm will continue to drive Ali monetization.

[2] New retail opened a new category, aiming at the 5 trillion US dollar full retail market, is expected to recreate Ali

It is estimated that the penetration rate of e-commerce in social commodity retailing in 2017 is about 14%-16%, among which the penetration rate of such products as consumer electronics, home appliances, books has reached a high level, and the penetration space in the future is limited (according to Euromonitor’s data: 2017) China’s consumer electronics, consumer electronics e-commerce penetration rate reached 43.5%, 38.4%), E-commerce giants urgently need to make a difference in non-standard products, and further expand the growth space by expanding the category. . Fresh and high frequency and just needed, the market is huge, but because of the high requirements for the procurement and distribution system, it has always been a gold category that traditional e-commerce is difficult to open. At present, in the era of consumer online consumption habits, LBS technology rapid advancement, and socialized logistics are sufficiently developed, local service e-commerce has become operational, and new retail has emerged. E-commerce through the offline retail store sales integration, and then through the APP + home service way to open fresh and other categories become a viable and efficient business model (APP + home service model can effectively open the sales radius, significantly improved The offline store is utilitarian, and currently the box is 50% online. The new retail has a very important strategic significance for Ali, mainly in several aspects: (1) The expansion category opens more than 5 trillion US dollars of total retail market space; (2) The current e-commerce APP has high customer acquisition costs, and a MAU is generally between 150-250. The expansion category can bring organic traffic to customers. Great help; (3) Fresh high frequency and just needed, can precipitate a large amount of data, and can increase the user’s stickiness to the e-commerce platform and payment methods, and strengthen consumption habits.

Second, financial data

Alibaba’s FY2018 Q4 (corresponding to CY2018 Q1) revenue was RMB61.93 billion, a year-on-year increase of 60.5%. Excluding the impact of rookie (Rookie Logistics consolidated in mid-October 17), total revenue increased by 53.1% year-on-year. The main drivers of continued revenue growth are the rapid growth of domestic retail revenue, cloud computing revenue and international retail revenue, as well as the company’s integration of rookie network logistics and Intime Department Store. The company’s FY18Q4 gross margin was 47.5%, down 12.3pct year-on-year. Adjusted EBITA was RMB16.81 billion, an increase of 11% year-on-year. The core business segment adjusted EBITA was RMB 22.19 billion, a year-on-year increase of 19%. Net profit was RMB 6.64 billion, down 14.8% year-on-year. The decrease in net profit was mainly due to the fact that CY2017Q1 had approximately 5.6 billion non-recurring gains and losses and a high base. Excluding the impact of current profit and loss, 2018Q1 net profit increased by 27%. According to the Non-GAAP calibre, the actual growth rate of net profit of 2018Q1 is 35% (the Q1 share-based compensation expense is about 4.3 billion in 2017, and the Q1 share-based compensation expense is about 6.5 billion in 2018).

[1] Core Business: Core Commerce

Core Commerce includes both domestic and foreign retail and wholesale. Specifically, including Taobao, Tmall, Poly cost-effective, Ali Mama, Tmall International, Lazard, 1688.com Intime, Yintai Department Store, Box Horse Fresh Food and Rookie Logistics: FY18Q4 Core Commerce revenue was 51.29 billion yuan, an increase of 62.5% year-on-year, accounting for 82.8% of total revenue. The core e-commerce Adjusted EBITA increased by 19% year-on-year to reach RMB22.186 billion, and Adjusted EBITA Margin was 43%, down 16pct year-on-year. The main reason for the decline in Adjusted EBITA Margin was the increase in business investment in new retail, rookie network, Lazada and user acquisition expenses. If the above effects are deducted, the core business adjusted EBITA Margin is close to the same period last year. FY2018 core business income was RMB214.02 billion, a year-on-year increase of 59.9%, accounting for 85.5% of total revenue.

(1) China – Retail (including Taobao, Tmall, Poly cost-effective, Yintai, box horse) this quarter was RMB 40.19 billion, a year-on-year increase of 55.6%, a decrease of 33.1% from the previous quarter, accounting for 64.9% of the overall revenue. The rapid growth of the retail business is due to the rapid development of Boxma and Yintai under the new retail business.

Advertising business grew by 35% year-on-year to RMB 23 billion. The main driver was the significant increase in average click price and click volume in the advertising business. The increase in price and quantity is mainly due to the fact that Ali’s personalized algorithm and relevance recommendation have brought substantial benefits to the merchants, so the click price and click volume have increased. Trading commissions increased by 38.5% year-on-year to RMB11.37 billion. Again, this is because the algorithm effectively helps merchants and buyers match, and has a higher conversion rate, which increases commission income. Other items benefited from the contribution of Intime and Box Horse Fresh Life, with revenue increasing by 1011.6% year-on-year to 5.83 billion;

(2) China – Wholesale 1688.com ) RMB 1.88 billion for the quarter, up 28.2% year-on-year, accounting for 3.0% of total revenue. The increase in revenue was mainly due to 1688.com Paid users grow.

(3) International – Retail This quarter was RMB 3.97 billion, a year-on-year increase of 63.3%. The increase in revenue was mainly due to the growth of GMV on both Lazada and AliExpress.

(4) International – Wholesale This quarter was RMB 1.70 billion, a year-on-year increase of 12.6%.

(5) Rookie Contribution revenue was RMB 2.85 billion, a decrease of 27% from the previous quarter.

[2] Cloud computing business

Cloud Computing: The quarterly revenue of cloud computing reached a new high in the quarter, up 102.7% year-on-year to RMB4.4 billion, up 21.8% quarter-on-quarter, accounting for 7.1% of total revenue. In the quarter, the cloud computing business adjusted Ebita was a loss of RMB353 million. In the same period, it was a loss of RMB 169 million. The adjusted Ebita margin remained at -8% consistent with the same period last year. In the 2018 fiscal year, the cloud computing business contributed revenue of RMB 13.39 billion, an increase of 101% year-on-year. The growth of cloud computing business is mainly due to the continuous increase in the number of paying users, and paying users are using more complex and costly products.

[3] Digital Media and Entertainment

The business segment is dominated by Youku Tudou and UCWeb: this quarter achieved revenue of 5.27 billion, an increase of 34.3%. The main driver of revenue growth is the growing number of Youku potato subscribers, as well as some of UCWeb’s paid value-added business growth. Adjusted Ebita suffered a loss of RMB 2.60 billion in the quarter and a loss of RMB 1.71 billion in the same period last year. The adjusted Ebita margin fell from -44% in CY17Q1 to -49% in CY18Q1. Mainly due to increased investment in video content. Revenue for the fiscal year 2018 was RMB 19.54 billion, an increase of 33% year-on-year.

[4] Innovation field investment incubation future

Based on the high-tech map and nail business: this quarter achieved revenue of 990 million, an increase of 7.5%. This quarter, adjusted Ebita was a loss of RMB 8.6 billion, a loss of RMB 680 million in the same period last year. The adjusted Ebita margin fell from -74% in CY17Q1 to CY18Q1-87%. The main reason for the decline in profit margins is the investment in new businesses. Revenue for the fiscal year 2018 was RMB 3.29 billion, an increase of 10% year-on-year. It should be noted that in this quarter, Ali removed the box horse business from this category and moved to the core business, so the statistical caliber has changed.

[5] Profit margin and cash situation

With the gradual re-emphasis of the core business business and the continuous increase in the share of Alibaba Cloud’s revenue, the company’s profit margin continued to decline. Gross Margin fell to 48% this quarter, EBITDA Margin slipped to 31%, and net profit margin fell to 11%. As of the fiscal year of 2018, the company’s cash, cash equivalents and short-term investment balances were RMB 205.4 billion;

Third, the core operational data

GMV: The overall GMV reached 482 million yuan, +27.95% (YoY); Tmall GMV reached 213.1 million yuan, +36.17% (YoY)

Number of active buyers: Reaching 552 million, +21.6% (YoY), +7.2% (QoQ), the number of active buyers increased by 37 million this quarter, the most growing quarter in history;

The annual contribution income of active buyers reached RMB320 in the quarter. +27.5%(YoY),+1.6%(QoQ);

Mobile MAU: 620 million, +21.7% YoY, +6.4% QoQ;

Annual contribution income of mobile users : This quarter reached RMB 230 yuan, +28.5% (YoY), +0.4% (QoQ);

Fourth, the 2018 financial year Q4 company conference call minutes

E-commerce is related to new retail:

Question 1: Regarding the new retail, please explain the operational and financial comparison between the box and the similar offline retailers.

Answer 1: When we designed the box model, Ali wanted to create a new retail model that would allow for more efficient operation of food, fresh produce and other fast moving consumer goods. Now, 50% of the box horse orders are generated on the mobile side, and the items are sent to the consumer’s home through the logistics system of the box store. In this way, the customer base of Box Horse has been expanded to improve the operational efficiency of the store. When the fixed cost and operating cost of the store remain the same, if the nearby consumers generate orders to complete the transaction on the mobile side, this additional business will help us improve store operation efficiency and increase productivity. The second thing is about logistics costs. When we built the box horse model, we wanted to upgrade e-commerce logistics from a central radiation model to an integrated logistics model that would be integrated offline and online. For online orders, customers want to be able to deliver on demand. The box horse can achieve the fastest delivery of goods to the buyer within 30 minutes and meet the buyer’s delivery time requirements, so Ali’s other advantage.

Question 2: Ali gives guidance on 19 years of revenue growth will exceed 60%. What is the driving factor for its strong growth? In the 18 years, management has made it clear that Alibaba will focus on the growth of market share and the acceleration of GMV growth. As a result, both of them have grown significantly. At the same time, Ali has spent more money to improve the user experience. In FY 2019, will the growth of market share continue to rank first in the company?

Answer 2: The company proposes a 60% year-on-year growth in FY 2019. The strong growth is mainly supported by Ali’s core business and Alibaba Cloud. The company will continue to invest and expand its leadership position in the B2C market, and the company’s strategic measures will drive revenue growth. Although 60% seems to be high, there are new businesses (hungry) to support their growth. The rookie network only operated for half a year last year (this year will have full year revenue), and the new retail plan will accelerate, which will promote the continued growth of revenue. The main revenue growth will still come from the company’s China retail business, which now accounts for only 10% of China’s retail business, with huge growth potential. Whether the growth of market share will be a priority issue, the new retail plan is to continue to seize the market. China’s total retail sales are 5 trillion US dollars, which will be our total target market. The company will continue to expand market penetration (market share), and Ali will have a big advantage in the market share competition.

Question 3: In what areas is the investment budget for 2019? Is it user acquisition, globalization, or new retail?

Answer 3: Regarding the investment in 2019, Ali will continue to invest for 18 years. These are strategically important business areas and will not be invested for only one year, mainly new retail, rookie networks and Lazada projects. The company’s goal is to expand business and profit growth, rather than just looking at profit margins. The company’s profit structure may change, but in the long run, profit growth will be sustainable and healthy.

Question 4: Regarding the advertising business, the personalized algorithm has greatly promoted the growth of advertising revenue last year. Please update the latest developments in the advertising business. Will new algorithms or new ad formats be introduced this year, such as news ads, user traffic, or ad inventory? Considering that the company’s advertising revenue is growing at a very high rate in FY 2018, can you share the prospects for future customer management (advertising) revenue growth?

Answer 4: The growth in customer management revenue is the same as in the previous fiscal year. The growth rates in the first two quarters were very high, mainly due to algorithms. In addition, in March of this year we took several measures to improve the return on business investment. For example, we discussed the right to choose, that is, consumers can enter the store without clicking on the product list. This is good for the business. Because this may reduce the amount of clicks, but it can promote the growth of GMV. Customer management revenue growth may slow down slightly, and commission income may grow faster. Everyone should pay attention to overall income growth, and part of the income. For future advertising costs, because the company provides value to the business, this gives the company full confidence in the advertising business. Considering the efforts of data technology, the user experience and the ROI of the merchant, Ali retains some technology and will update it when appropriate.

Question 5: Regarding the Southeast Asian strategy, Southeast Asia is an early market with low e-commerce penetration. Now some local competitors have entered this field. If you want to be the winner of this market in 3 to 5 years, what kind of incremental resources does the company need to achieve this goal?

Answer 5: Southeast Asia is still in the early days of the Internet economy. Now we are applying our technology to Lazada. We hope that through the implementation of technology, we can serve Southeast Asia. Indonesia is one of the largest markets in Southeast Asia, but Indonesia’s GMV is still below 10 billion, so it is still in its infancy. For the future, in addition to the delivery of technology and software applications, Ali will also transfer human capital for development. Ali will build a new ecosystem here and build infrastructure, such as payment facilities, logistics facilities and partners in this market. Regarding your question of how to succeed, I think that if you look at the user experience and from the perspective of the merchant, Ali has just completed the re-construction of the platform technology, which will enable us to quickly launch products and new With features that lead to a better user experience, Ali will be able to respond quickly to changes in the market. In addition, in terms of business, Southeast Asian countries are not strong manufacturing countries, and merchants are still looking for procurement opportunities for Chinese manufacturing, which will increase the ties between the two places.

Question 6: In the next 5 to 10 years, Alibaba will apply artificial intelligence. What is the potential impact of artificial intelligence on a company’s core business? Is it cost efficiency or revenue? Or personalization services.

Answer 6: In fact, Ali has been applying artificial intelligence. For example, data-driven technology has been used in business for a long time, but it was not called artificial intelligence before. This application is the reason for the rapid growth of revenue in the past few years, using data to analyze consumer demand. In the future, Ali will continue to invest in artificial intelligence and apply the technology to other business areas, such as user experience, products and advertising services. In the aspects of supply chain management and warehousing logistics, the use of artificial intelligence will be more extensive, not only to meet the existing needs of existing customers, but also to actively create new demands for customers. Ali will continue to expand the application of artificial intelligence to develop the real economy.

Question 7: Please compare the new retail strategy with other major competitors in the market. Does Ali have any sustainable competitive advantages? As a global player, it will soon face political risks similar to the Sino-US trade war. . How should Alibaba protect itself?

Answer 7: Regarding new retail, we have an advantage in infrastructure. Ali is China’s largest retailer, understanding the behaviors and needs of consumers and being able to provide better services. Now we are integrating offline retail business to better serve our customers’ needs. Ali will continue to expand in this direction, integrating online and offline retail. Regarding competition, Alibaba is a big platform for all consumers. In the United States, the big platform hits small businesses is very big, but not in China. The new retail strategy is one of Alibaba’s core strategies, and Ali has great advantages in building and implementing new retail strategies. Ali has built the largest retail consumer market for the past 19 years. Ali has consumer data, including their behavior, their preferences, and their demographic characteristics. Ali wants to get their offline spending. The new retail will integrate omni-channel operations, and through the channel of consumer data and consumer application pages, we will have a great competitive advantage. Second, we have been in the retail market for many years and have a wealth of experience, not only to connect consumers, but also to create value for businesses and customers. Today, Ali not only has to work hard to develop an online platform, but also to incubate new retail formats and upgrade existing retail formats. Through this technology, coupled with our retail experience, Ali’s retail partners will have a lot of room for development.

As far as trade wars are concerned, Alibaba is a very large platform that allows sellers around the world to reach Chinese consumers. There are now 550 million active users on Ali’s platform every year. This is a very attractive platform for these brands, retailers and producers, including farmers and SMEs. The trade war is actually only a war between the United States and China, so its impact is very limited. When Chinese consumers buy goods abroad, they can find other alternatives. For example, if we don’t import food from the US. We can import food from Southeast Asia, importing many fruits from Thailand, Malaysia and Taiwan. There will always be other channels to introduce imported products to meet the needs of Chinese consumers. Of course, the trade war is not good for anyone. We have openly passed, saying that trade wars will actually hurt small American companies, because Chinese consumers will find other ways to import goods through our platform.

Ant Financial Related:

Question 1: Regarding the CDR issue, please discuss the CDR plan? Please comment on the growth of Ant Financial. Now Ali Group only holds 33% of the shares?

Answer 1: CDR is still expanding the stage of research on how to issue, and there is no implementation content yet to be announced. We have not yet calculated the conversion ratio of the CDR. The issuance of CDRs is based on conditions that are beneficial to the company’s development. The possibility of CDR is currently being actively explored without any specific timetable. Regarding the issue of Ant Financial, the company does not currently provide guidance on the growth of the business. From a qualitative point of view, we have seen a lot of active users in the past two quarters and interacted with users on Alipay. Ant Financial has been very aggressively expanding, not only for online payments, but also for offline use of mobile devices.

Digital media and entertainment related:

Question 1: About video investment and payment services. Your main competition will increase your investment, so we can consider that when you expand in these areas, the demand for profit margin will increase, or can we see a longer investment cycle?

Answer 1: Ali will continue to invest in existing digital media. China’s demand is constantly escalating, people no longer only need physical goods, and now the demand for the spirit is gradually increasing. Digital media and entertainment is not a separate new business, it is an extension of a category of new customers we get. So this is an integral part of our ecosystem. For the Chinese, when quality of life is upgraded, they not only need more physical products, more local services, but also more digital content. This is why we are entering this field, and we think it is to meet the growing demand of 550 million active users. I believe this will also bring a very important stickiness to our customers, let them stay with us.