Alibaba:1Q17topline beat;Lift TP on higher ebiz and cloud valuation

1Q17 revenue beat; profit in line. Total revenue was RMB38.6bn, up 60% YoY, exceeding ourestimate and consensus by 8%, on better-than-expected e-commerce business performance.

    Non-GAAP EPS was RMB4.35, in line with our estimate of RMB4.26. Gross margin was 60%, flatYoY, with cost of revenue increasing by 62% on higher content cost for the video business,consolidation of Lazada and logistics costs for Tmall Supermarket business. Adjusted EBITDAmargin was 43%, in line with our estimate, down 4ppts on a YoY basis, due to consolidation ofnew businesses, partially offset by improved operating leverage.

    Healthy growth for e-commerce business (22% in GMV, and 43% in revenue for FY2017), drivenby traffic growth and more personalized content recommendation. Revenue of the corecommerce business increased by 47% in 1Q17 to RMB31.6bn, contributing 82% of total revenue,compared with 89% in 1Q16. Online marketing revenue from China retail e-commerce businessincreased by 44% YoY, thanks to increased number of clicks, as a result of 1) traffic growth: thenumber of mobile MAU reached 507mn, up 24% YoY; and 2) more personalized and relevantproduct recommendation supported by intelligent data processing capability. Mobile revenueincreased by 69% YoY, contributing 85% of total China e-commerce retail revenue, with averagespending per mobile MAU reaching RMB179, up 46% YoY. Adjusted EBITDA margin for the corecommerce business remained flattish at 59%, despite continuous investment. For Fiscal Year 2017,GMV of the China retail e-commerce business increased by 22% to RMB3.8bn, with the growthdriven by more active buyers as well as higher spending per user and more frequent orders.

    Ali Cloud business grew rapidly; loss margin narrowed. Ali Cloud continued strong growthmomentum, with revenue reaching RMB2.2bn, up 23%/103% QoQ/YoY, driven by the increase inthe number of paying customers as well as their usage of cloud services, partially offset by pricecut. The number of paying customers reached 874k, with a net add of over 100k from theprevious quarter. Driven by economies of scale, adjusted EBITDA margin for the cloud businessnarrowed from -16% in 1Q16 to -8%. We expect to see Ali Cloud’s margin improvement goingforward. Ali Cloud will focus on expanding customer base in new sectors, and providing morevalue-added services to increase the usage of cloud services by existing customers. Digitalcontent and entertainment revenue grew by 234% YoY to RMB3.9bn, due to the consolidation ofYouku Tudou and growth in ad revenue from UCWeb. Revenue from innovation initiativesincreased by 88%, driven by increased revenue from YunOS and AutoNavi. The loss margins forboth digital content and entertainment segment and innovation initiatives segment are likely tonarrow in FY2018, in our view.

    Valuation. We lift our revenue estimate for FY2018E/19E by 5%/3% on strong monetizationcapability on marketplace with growing ad budget allocation and various types of promotionactivities and cloud revenue forecast. Given continuous video content investment and reducingloss in cloud business and new initiatives at the current stage, we adjust bottom line forFY2018E/19E by 0.6%/1.1% respectively. On the back of the new forecast, we lift valuation fore-Commerce and cloud business, to US$260bn and US$50bn, implying 27x 2017E PE fore-Commerce and 32x 2017E PS for cloud. Lift TP from US$124 to US$139, maintain buy rating.