Alibaba Group Holding:Solid core business,softening FY17F margin

4QFY16E tracking well

    We think Ali will likely report stronger 4QFY16 (ended 31 March) revenue and in-line earnings. We expect 32% YoY top-line growth (revenue: Rmb23bn) and 23% earnings growth (non-GAAP EPS: Rmb3.53). Our revenue forecast is in line with consensus, but we believe the risk to our and street forecasts is likely on the upside. Gross Merchandise Value (GMV) for China retail services likely increased 21% to Rmb729bn, while the blended take rate could improve 25bp YoY to 2.43%, in our view.

    … but margin remains under pressure in FY17F

    Ali’s investments as a whole are still loss-making and likely generated Rmb1.4bn in equity loss to Ali in 4Q16F, of which Koubei likely contributed Rmb1bn. In FY17F, we expect Ali to consolidate Youku (100% holding) and recently-acquired Lazada (67% stake), both of which are loss making. We estimate Ali’s non-GAAP operating margin to decline 2pp in FY17F.

    Ant Financial raising new fund

    Bloomberg reported on 26 April that Ant Financial had raised USD4.5bn giving the company a total valuation of USD60bn. The report also mentioned that Ant Financial may consider an IPO as early as this year. Ali’s share price could benefit from an IPO of Ant Financial, which represents 13% of our valuation for Ali. But we doubt if the IPO will take place this year as there are more than 600 companies waiting to list on China’s main board.

    Maintain Buy with USD91TP

    We cut our FY17/18F non-GAAP earnings by 15% and 14% respectively mainly due to lower operating margin estimates. We maintain our Buy rating and USD91 target price based on SOTP. We valued Ali’s core business at USD182bn based on 26x FY16F PE, which is in line with the multiple for large-cap Chinese internet peers.