Independent TMT Analyst

Edison Lee, CFA

Equity Bottom-Up

<ul><li>This is the second of a series of in-depth research reports comparing major Chinese and US Internet stocks.</li><li>China's inflated online sales growth has likely peaked, driven by <a href="https://www.smartkarma.com/entities/787" target="_blank" data-smartkarma-citation="entities:787:1">Alibaba Group Holding Ltd (BABA US)</a> continued efforts to contain fictitious transactions, and affluent consumers' migration to more selective shopping of branded products. However, Alibaba's margin and free cash flow will remain healthy, as it has engineered to push loss-making services such as logistics, payment and digital media off balance sheets.</li><li>Driven by its trusted platform and highly efficient logistics system globally, <a href="https://www.smartkarma.com/entities/409" target="_blank" data-smartkarma-citation="entities:409:1">Amazon.Com Inc (AMZN US)</a>  is expected to be able to grow its market shares across a wide range of markets. Together with its dominant position in cloud computing, that will translate into a 4.3x increase in free cash flow (amid from a low base) over the next five years.</li><li>On DCF, Alibaba offers slightly more attractive risk/reward in my scenario analysis. However, Amazon is more attractive on growth vs multiples, and implied FCF growth. Amazon's stock price suggests FCF will grow only at 0.5% pa post 2020 vs. 3.6% for Alibaba, if both can meet my FCF forecasts by 2020.</li><li>The valuation risk on Alibaba is higher, as 20% of its value comes from mostly unlisted equity investees. Ant Financial accounts for 42% of that. But if the tech IPO market remains strong, Alibaba can outperform Amazon.</li><li>For Asia-focused investors, Alibaba is a BUY. For global investors, I suggest splitting the position between the two.  </li></ul>

This is the second of a series of in-depth research reports comparing major Chinese and US Internet stocks.China's inflated online sales growth has likely peaked, driven by Alibaba Group Holding Ltd (BABA US) continued efforts to contain fictitious transactions, and affluent consumers' migration to more selective shopping of branded products. However, Alibaba's margin and free cash flow will remain healthy, as it has engineered to push loss-making services such as logistics, payment and digital media off balance sheets.Driven by its trusted platform and highly efficient logistics system globally, Amazon.Com Inc (AMZN US)  is expected to be able to grow its market shares across a wide range of markets. Together with its dominant position in cloud computing, that will translate into a 4.3x increase in free cash flow (amid from a low base) over the next five years.On DCF, Alibaba offers slightly more attractive risk/reward in my scenario analysis. However, Amazon is more attractive on growth vs multiples, and implied FCF growth. Amazon's stock price suggests FCF will grow only at 0.5% pa post 2020 vs. 3.6% for Alibaba, if both can meet my FCF forecasts by 2020.The valuation risk on Alibaba is higher, as 20% of its value comes from mostly unlisted equity investees. Ant Financial accounts for 42% of that. But if the tech IPO market remains strong, Alibaba can outperform Amazon.For Asia-focused investors, Alibaba is a BUY. For global investors, I suggest splitting the position between the two.  

Alibaba Vs Amazon - Very Different Model, Similar Risk/Reward, Both BUY

Singapore

Lazada Group SA provides online shopping services. The Company offers consumer electronics, household, toys, fashion, and sports equipment. Lazada Group serves customers worldwide.   

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Lazada Group (LAZADA SP)

Alibaba Vs Amazon - Very Different Model, Similar Risk/Reward, Both BUY

This is the second of a series of in-depth research reports comparing major Chinese and US Internet stocks. China's inflated online sales growth...

Edison Lee, CFA

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