Investor Day 2020 Part 1

Sep 30, 2020

Slides

Hello, everyone. Thank you for joining me on our financial and investment discussion. I will segment it in 4 parts. As you roll, I will start off with our financial review for the last 12 months ended June. And then I'll talk about our value proposition to consumers and merchants. I would also like to share with you on how we continuously innovate and invest to grow our business and then how to value our businesses. In the past 12 months, our consumer base has seen robust growth. We added 100 and 40,000,000 consumers globally and reached 1,000,000,000 milestone for our AAC and new active consumers. So in China market, we have over 800,000,000 of AAC, and there's another 200,000,000 in overseas markets. For the financial highlights in the past 12 months, our total revenue has witnessed strong growth of 34% year on year and reached RMB550 1,000,000,000. Our core commerce business contributed RMB470 1,000,000,000 with 33% year on year growth. And if you look at many new businesses that we have investing into, they all show strong growth. New retail, cloud computing and China. If you look at new retail, the growth rate is over 100% and revenue already reached RMB100 1,000,000,000 in 12 months. And Alibaba Cloud Computing showing 60% year on year growth and then Cainiao showing over 50% year on year growth. We also see healthy profit growth for the group as the total adjusted EBITDA grew 29% year over year to almost RMB150 1,000,000,000. Our free cash flow grew 35% year over year to over RMB140 1,000,000,000. So that is US20 $1,000,000,000 if you think about it, it's a very strong operating cash flow that could support our reinvestment back to our business for longer term growth. If you compare against our global technology peers, Alibaba's robust growth in both revenue and profit exceeded all of our global peer companies. In the case of Facebook, please note that they have a special item in prior period. If taking that out, their net profit grew 7% year on year. Next, I would like to dedicate a session to talk about our value proposition to consumers and merchants. This is our core value and this is how we make it easy to do business anywhere and how we could achieve sustainable growth. Alibaba is an important driver of China consumption. Our digital economy GMV reached RMB7.3 trillion, which is over $1,000,000,000,000 And if you look at the net adds, it's over RMB900,000,000,000 in 12 months' time. So back in 2015, we accounted for about 10% of this total China consumption. And then as China consumption continues to grow, we have now expanded to accounted for 18% of the total pie. Let's take a look at the demographic of China, Chinese consumers. So China has 1,400,000,000 population, and we estimated there is about 1,200,000,000 total addressable consumer base. This number is taking out people above 80 years old and under 10. So our AAC in China retail marketplace is 742,000,000. If you separate it into the high we call it the developed areas and less developed areas, our penetration for developed areas is about 90%, very high and 45%, less than 50% in the less developed areas, which means there is still big potential for us to further penetrate. So the average ARPU for our annual active consumers on the platform is RMB9000, which is around USD1300. Let's take a further look at the quality of these consumers. If we separate it into 2 big groups, one is the ARPU spending is over RMB7000 per annum. For this group, we have 190,000,000 AACs. So you may ask why 7,000? There is a reason. There is a recent survey that's been quoted by many people, company, including experts. And it says that there are about 230,000,000 consumers who has annual income of about RMB36000. So if you take a look at this number and times the 20% online penetration, it gives you around RMB7000. So then this is the high spending growth. For this part of the consumers on our platform, their retention rate is as high as 98%. Of course, the blended ARPU, the spending level is much higher than that $7,000 And it tells you that once people come to our platform, they will stay. Right hand side, you will see 550,000,000 of consumers whose spending level is less than RMB7000. If we further divide them into 2 groups, so for the group that spent less than RMB2,000 per annum, this is most likely the year 1, year 2 consumers. Their retention on our platform is about 67%. And for the group that whose annual spending is between RMB 2,000 to RMB 7,000, Their retention rate is 96%, also very high. Okay. Longer consumers stay with us, more spending they will make and higher stickiness and engagement they have shown. So for year 1 consumers whose average spending level is RMB2500, if you look at the year 5, their spending would go up to RMB 10000. This is not only a case for the past year, but but 93 orders in year 5. And they purchased like 7 categories. And then in year 5, this number of categories go up to 19. There is a uniqueness about Alibaba Digital Economy. There are many businesses within this ecosystem. So that longer the people stay, more activities they have conducted. And you've seen synergy actually could increase our consumer engagement. So the left hand chart shows that for consumers who use one of our services, one of our platforms, they averagely spend 10 days in a month on our platform. And for the consumers who use 5 of our services or more than 5, youku, Ele. Me and Alter Navy, etcetera, they spend 27 days a month on our platform. It's very sticky. And then when you look at our 88 VIP members, this is our loyalty program for the high end of consumer. These people spend 9 times more than the overall users and they visited 3 times more categories than overall users. Now let's take a look at our value creation for merchants. Merchants are customers who pays us directly. And for those of you who attended our 2016 Investor Day, you might still remember that this merchant P and L I illustrated when I talk about our value creation for merchants. So typically, every $100 revenue these merchants generated, they spent around 55 in the cost of sales, including cost of inventory, logistics and they spent another $20 in the distribution costs and then $10 in the sales and marketing expenses. And then they also have spendings in R and D, customer service and financial services. So by the end of the day, they have around $4 left as their net profit, which means approximately 4% of the margin. If you look at the list of the icon in the middle of this slide, all of these are products and services our Alibaba Group provided to these merchants to help them operate at a higher efficiency, at a higher productivity. To give you an example, like China Logistics, it provides digital logistics infrastructures to help these merchants to provide better consumer experience, deliver faster. Taobao and Tmall, they're not only providing distribution value to our merchants to help them reach GMV, but they're also providing services to help them acquire new consumers, retain these consumers, help their brand building and help their new products launching. So there are whole set of the value at the sales and marketing and customer service that we provided to the merchants. We also provide IT infrastructures to these merchants. For example, Ali Cloud, right, offered differentiated solutions to these customers across all of these industries. And our DingTalk also enhanced office communication and collaborations. So you can tell that GMV is not our TAM. Merchants cost and expenditures, these are our TAM. We aim to enable these merchants to operate at a higher efficiency. And when they realize and recognize this value we provided to them, they will pay us and our revenue will grow. As of now, we have around 3,900,000 of paying merchants in our China retail marketplaces and over 3,000,000 paying enterprises on Ali Cloud. Our digital economy platforms has provided services, multi services to more than 60% of the companies listed in Asia market in China. Now through Alibaba Business Operating Systems, which we call ADOS, we provide our merchants with so many various services and products to enable them to operate better is not only the distribution cost, but also sales marketing, but also help them to do this branding and product launching, product development, channel management, etcetera. And we at the same time, through Mai, we provide financial service and provide technology related Ali Cloud service and also logistics service by China. All of these help the merchants and then they could continue sales growth and then accordingly, they will pay us and our revenue will also grow. Back in 2014 IPO roadshow, so one of the most asked question is about our take rate, right? So you asked us about how much our take rate can further grow. By that time, by the way, we had 2.5% of our take rate. And you asked whether we could go up to 4%, 5%. Okay. So as of June 2017, our take rate went up to 3.3%. And as of June quarter this year, the overall take rate is 4.5%. So take rate went up It's not because we charge higher fee rate. It's because we provide broader value to our merchants. So if you look at the 4.5% take rate, actually there are 2 parts. The 4 percent coming from the CMR and the commission, this is our traditional revenue sources and 0.5% coming from China Logistics Services and also local services. Okay. So this increased rate represents the incremental value. And going forward, we're going to continue to broaden the value provision to our merchants. So companies in the market talk about GMV growth. We believe that revenue and profit growth tells you more about the value creation, about how much value the company provided to its customers. Next, I want to talk about how our revenue composition has evolved. Our overall business has become more diversified, which provides multi engine driver for revenue growth. So in 2015, CMR and commission as a percentage of total revenue was 77%, very significant. And when you look at the last 12 months, the CMR plus commission contributed less than 50% our total revenue to 47%. Besides 47% revenue contribution from CMR and commission, we have evolved to add other businesses such as new retail and direct sales now accounting for 18% of total revenue Cainiao 5%, local consumer services 5% and cloud has grown to 8% of total revenue. Even within customer management revenue, we have evolved and launched new formats, which if you look at the number, it contributes around 20% of CMR revenue now. But in 5 years ago, it was 0. So here, we listed some of these new formats such as super recommendation. This is which is the recommendation feed ad and this is a product promotion, which helps brands to attract new consumers. Well, it is monetized based on the GMV transacted. We also have Taobao Life, Taobao Jibo, you're familiar with this. And this is the largest e commerce live streaming platform in China and several others like Chuhua Sun subsidy program and also Tmall Farm. Historically, we have presented our financials by separating marketing and distribution aspects of our revenue stream between CMR and commission. But increasingly, we see merchants treating the fees they pay us as something related to a holistic packages and services that we provided to them, not only increase the sales rule, but also help them to acquire and retain users consumers, which resulted in more sales in the future. So therefore, you can see the changes. And we also noticed there are blur lines to draw between the CMR commission. For example, like Pingpaixinxiang, right, it's a GMV based such as commission revenue type. However, its function is to acquire new consumers for the brands. Therefore, we have made a decision that instead of thinking about marketing and distribution separately, we will not make an artificial distinction between the CMR and the commission. Going forward, on a reporting basis, we will fold the commission revenue stream into customer management revenue because commissions generated today are the results of our platform's effective customer management services provided yesterday. We believe the reason why we can have multi engine growth is because we continuously innovate and invest for the future. While other companies work for next quarters, today, we work for the next 3 to 5 years and setting 10 years ago, 15 years ago. We have the ability to innovate continuously and incubate the growth organically. This is because as a large scale platform company and with the clear mission, vision and value, we're able to recruit best talent, who is attracted to solve the world class challenges through solving this technology and business problems for our customers. You should be very familiar with this slide that we show every quarter in our earnings announcement. In the last 12 months, we have seen losses narrowing in our developing businesses. And if you look at adjusted EBITDA growth, which is 29% year over year, that represents both the growth from our core business and also the narrowing of our losses in the developing businesses. I want to highlight some of the progress of these businesses that we nurtured over the years. Hema has 65% of GMV generated online in June and its same store sales growth reached 32% for June quarter. Cainiao, its package level from Guogua and Cainiao Post grew 110% in the past 12 months. Our overseas business Lazada has 80,000,000 AACs and over 100% order growth. We have also had 290,000,000 annual active consumers of our local services and 2,500,000 merchants on Olima and Kobe. So for Ali Cloud, over 3,000,000 paying enterprises are using our services, driving robust Ali Cloud revenue growth of 60% for the 12 months ended June. And our YouKu witnessed narrowing losses in the last 12 months and also the member growth. To put these new businesses into historical context, you can see that over the past 20 years, we have always innovated and developed new businesses organically as the primary driver of revenue growth. So more than 20 years ago, we set up our B2B business, which is a wholesale business. We started from alibaba.com and then 1688. And later on, we have established this top up marketplace, which becomes the largest shopping mall in the whole world. So every day, there are more than 300,000,000 people coming to Taobao app. And then Alipay was born after this Taobao because of the demands for the trust and payment services. Now it's already growing to the biggest tech FIM company as ANZ. And then you've seen cloud, right? And this is the number one cost service provider in Asia. And we have our B2C e commerce export market place, AliExpress, and we have the number one new retail business, Hema. Well, on the other hand, our core marketplaces business also keeps innovating and evolving to maintain leadership in the e commerce area. Our products and services are often followed and copied by other companies, but there is one thing hard to be copied or cannot be copied. This is the innovation in our DNA. In the past few years, we have invested over RMB100 1,000,000,000 each year in technology, research and development. As I laid out in this slide, we have launched so many new businesses and services along these years. Taobao, Tmall, Alimama China, Henma, Lingzhou, Tong, Fliki and so many of them, we made each one of them from the first one to number 1. This is all because we have always set the first priority as helping merchants and our customers to solve their problems and to operate at higher efficiencies through our technology and solutions. This slide shows that we see the development of our business in 3 phases: seat, traction and profitability. We have multiple businesses that in each of these development stages. Our core marketplace businesses like Taobao, Tmall and wholesale business, they are highly profitable and they generate strong cash flow, which could enable us to reinvest this profit to incubate the new businesses that have tens of millions or hundreds of millions of users such as new retail, local services, import, international businesses, they have gained traction. This really positions them well for the future profitability and cash flow. Underneath these tree trunks and the grass dams, their roots are being nurtured by the soil enriched by our technology and consumer insights. And this is how our business can continue to prosper. Today, we want to make an important announcement about 2 of our important businesses that seeing great traction and are about to be graduated to a profitability phase. So here it is. We expect Ali Cloud to turn profitable within fiscal 2021. The Cainiao is expected to generate positive operating cash flow in fiscal 2021. On top of investing in our organic business growth, we also leverage M and A and targeted strategic important investment areas and companies. Here is our rationale. We separate them into 3 buckets. First, for the core strategic business like Ant, China and AliHealth, we made additional investment in the past year to further increase our equity interest in these companies. This not only reflects their strategically important position within our ecosystem, but also shows our strong confidence in this business. So the second bucket, we made investment to strengthen our core businesses. For example, we have user acquisition, we have user experience enhancement, like we acquired Cola to further enhance our leading position in the cross border e commerce business. We invested in express delivery services to enhance the consumer experience in logistic areas. And we have put in emphasis on the synergy between our businesses and these Investec companies, which when we make such investment later on, we're going to follow-up to generate more value, make it 1 plus 1 more than 10 effect. The 3rd bucket, we are also making investment in these new areas, which could become significant in our long term development. We make investment in EV like Xiaoping, Qichu and we make investment in real estate sector and we also invested in music. Our investment has generated significant synergy. For example, we invested in Sun Art, the largest hypermarket in China. It's a chain hypermarket business. And we helped Sun Art to digitize their business and operations. We bring in online traffic and synchronize this onlineoffline inventory management capability and added to their last mile fulfillment capability. Last quarter, SunR's online business contributed approximately 15% of total sales, which is a big leap from the 6.5% last year. During last year's Investor Day, we shared that the eHOME offline furniture malls have been connected to our digital operations systems. And together, we enabled consumers to have an O2O shopping experience. This year, we increased our cooperation with them and incubated new business called Tampin, which is a platform providing professional tools and designers and merchants to ensure better user experience, better consumer experience. So under the corporation, we plan to integrate the value going end to end from design to merchant sales, realizing the vision of a one stop shopping destination in this category. A Log and Bestling, Belin are 2 leading e commerce warehousing and supply chain providers. Through acquisition and integration with Cainiao, we're able to improve operating efficiency to reduce Tmall Supermarket Warehouse cost by 10%. Xiaopeng, you know, is a newly listed EV company and they are very closely working with our team. So this Chuhua Shan recent promotions helped Xiaoping efficiently attracted over 6,000 orders within 5 days' time from online. Okay. Finally, let's take a look at valuation. Since we report our financials in 4 segment, let's take a look at each segment 1 by 1. First, let's dig deeper into our core commerce businesses. We have so many businesses within this core commerce. In last 12 months, our marketplace based platform generated US29 $1,000,000,000 of adjusted EBITDA. So the marketplace based business is our core, providing profitability and cash flow. We also list out our peer groups and companies' multiples and valuation method. Let's pick the lowest multiples used on peers. If we apply 25 times multiple on the suggested EBITDA, then the equity value of our China retail core core business alone would be US725 $1,000,000,000 which approaches the current BABA market cap. Please note that this valuation is before we assign any value to our promising new businesses within this core commerce segment, such as Freshable, Local Services, Lazada, Tmall Global, China Logistics. So if you look at these new businesses, each of them occupied a leading position in their sector. Freshippo is the leading FMCG retailer in China. It is more efficient and grows faster than traditional FMCG retailers with much higher efficiency measured by sales per square meter per annum. And the same store sales growth has multiple times than the other offline businesses. Cainiao is the leading digital logistics service provider. They're handling package volume at almost two times of the total U. S. Country's volumes. It also has the largest last mile delivery network and the largest crowdsourcing package delivery platform in China. Tmall Global is the number 1 in cross border e commerce market and is the biggest import platform in whole China, including online, offline. And they're still growing at more than 40% year on year in GMV. Lazada is positioned well in Southeast Asia e commerce market with more than 80,000,000 AECs and more than 100,000,000 MAUs. And at the same time, it doubled its order from prior year. So it has continued showing strong growth in the past few quarters. So the point I want to make here is that the market is reflecting only the value of our core commerce businesses and not yet give any credit to any of our other businesses within the core. So if you want to get a sense of the valuation of new businesses with this core commerce segment, At the bottom of the slide, we have laid out some of these peer companies with market valuations and map to these new businesses. Now coming back to a full view of all of the business segments, let's look at the cloud computing. Based on the last quarter of revenue of US1.7 billion dollars this business is growing nearly 60% year on year and running at the annual revenue run rate of US7 $1,000,000,000 assuming no growth at all in the subsequent quarters. What is our cloud computing business worth? It seems that the market has not assigned basically assigned a very little value to our cloud business. Next, the market is also assigning very little value to our stake in Ant Group. Well, since many of you want to invest in Ant and you're looking for allocation, you know the valuation and the market will soon tell the valuation. Now take a look at our cash and strategic investments. As of June 30, we had US36 billion dollars in net cash and $45,000,000,000 in the strategic investment. These are measured by the fair market value. So without ends, based on these public traded values, you've seen RMB 45,000,000,000 in this domestic portfolios. To summarize, a sum of the part approach to value our company suggests that the market is not assigning much value to many parts of our business. From the new businesses in the core to cloud computing, to our stake in ANZ Group, to our value in the MST companies. We believe that these businesses will produce strong growth drivers for our tomorrow's growth. I do hope the above discussion is helpful for you to think about our overall business. I would like to end today's presentation by reiterating our conviction in our ability to innovate, investment for the future and deliver robust growth for our shareholders. This is all from me today. Thank you very much.