War of words with SAIC (State Administration for Industry and Commerce)
Timeline
• Jan 23: SAIC published a survey which said Alibaba’s Taobao rate of counterfeit
merchandise was 63%, the lowest among a group of 6 e-commerce firms.
•
Jan 27: Alibaba published an open letter accusing SAIC director Liu Hongliang of
commissioning an unfair quality survey. (The letter was later removed).
Schulte Research
• Jan 28: SAIC posted a white paper on its website about Alibaba, saying that :
1) it had discovered “the long-term existence of illegal problems regarding the
management of transaction activity and other issues”;
2) t had discussed the document with Alibaba last July 2014; and
3) SAIC kept the report confidential at the time so as “not to affect Alibaba’s IPO
preparations”. (The white paper was removed from SAIC’s website on Thurs.)
•
Jan 28: Alibaba submitted official complaint against Liu Hongliang to SAIC.
•
Jan 29: Joseph Tsai called the methods and tactics of SAIC “flawed”, and said
Alibaba never saw the white paper before the IPO and never requested SAIC to
delay the publication of any report.
Source: SCMP, ifeng, New York Times, Financial Times, Schulte Research Estimates
1
Implication of the counterfeit dispute
Is the SAIC result true?
• SAIC only made a sample of 51 items which cannot represent the enormous
trade volume on Taobao. (more than 1 billion items listed on Taobao)
• However, actual counterfeit rate of Taobao is high based on consumer
experience. The survey was deeply flawed, but not off the mark.
Schulte Research
Why is Taobao’s counterfeit rate higher than other e-commerce platforms?
• Business Model: Taobao is a C2C platform which is only responsible for building
a marketplace to connect sellers and buyers. This is different from B2C
companies (e.g. JD.com) where a brand sells items in its inventory to customers
directly.
• Demand for Fakes: There is a large demand from people who want to buy
counterfeits at a much lower price than genuine item price.
• Demand for Authentic: People who want to buy real LV bags will go to the LV
store. Those who want to buy fake LV bags in Taobao at a lower price know
what they are getting.
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What is the impact of the counterfeit dispute?
•
Risk1) the biggest concern is whether this dispute will affect Alibaba’s
relationship with regulators. In the worst scenario, if regulators force Alibaba to
remove all counterfeits in Taobao, the transaction volume, which leads to the
revenue, may be largely affected.
•
Risk 2) Potential lawsuits are also a concern.
•
Mitigation 1: The Chinese know the game. Few will dump Taobao due to SAIC
result. You get what you pay in Taobao. Genuine items & counterfeits are both
available)
Mitigation 2: Taobao has around 90% market share of China C2C market. There
is basically no alternative. (Tencent’s Paipai is the second largest but still
relatively small at about 5% market share.)
Mitigation 3: Alibaba has already started to crack down on counterfeits, and
the fast growth in Tmall’s (Alibaba’s B2C platform) business will compensate for
fakes).
•
Schulte Research
•
3
Q4 Result and Valuation
P/E
P/B
EV/EBITDA
EV/Sales
Alibaba
58.1
11.7
20.9
51.4
21.6
Tencent
44.9
13.3
13.1
33.1
13.1
NASDAQ Average
31.9
10
4.7
19.6
4.8
Alibaba (in $mn)
Schulte Research
P/S
14Q4
YoY Growth
Revenue
4,258
39.7%
Gross Profit
3,035
28%
Net Income
965
-28.9%
Gross Margin
71.3%
-6.5%
Net Margin
22.7%
-21.4%
Margin Decrease Reason: Share based compensation in 14Q4 was $695mn, or 16% of revenue, an
increase of 554% compared to $106mn, or 4% of revenue, in Q4 2013.
• The increase was primarily caused by (1) performance-based and retention grants of share-based
awards granted prior to IPO, with vesting periods of four years for employees and six years for
senior management, (2) the “mark-to-market” accounting.
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