Is Alibaba's Logistics Strategy a Long-Term Win?
We view positively Alibaba's (BABA) decision to take a majority stake in the Cainiao logistics joint venture with a CNY 5.3 billion ($807 million) investment and plans to invest an additional CNY 100 billion ($15.2 billion) in logistics over the next five years. These endeavors should improve the experience for both merchants and consumers--enhancing the network effect behind our wide-moat rating--while creating incremental "new retail" monetization opportunities. This will shift Alibaba from a delivery data model, where merchants assume responsibility for order fulfillment from their warehouses via couriers backed by Cainiao data, to a more traditional fulfillment model, where Cainiao assumes responsibility for fulfillment through owned or partner warehouses. This could weigh on near-term margins (the segment posted a loss of CNY 2.2 billion last year and is on track for a CNY 4 billion loss this year), but it will create fulfillment and inventory storage bundling opportunities (similar to Fulfillment by Amazon), which should drive improved monetization rates. By consolidating Cainiao, we believe this move will help to alleviate some investor concerns about the company utilizing the JV to mask greater losses than reported.
We estimate that Cainiao will benefit second-half revenue by roughly CNY 7 billion (which will bring our full-year revenue outlook to CNY 243 billion, putting the company ahead of its 2018 revenue growth forecast of 45%-49%) but will have a negative impact on operating income by CNY 2 billion, resulting in a CNY 1 billion net income hit after factoring in Cainiao's other equity partners. We plan to raise our fair value estimate to $185 per ADS from $175 based on new fulfillment opportunities with domestic and international merchants and greater China retail monetization rate assumptions (pushing 5% by fiscal 2027), partly tempered by lower adjusted EBITDA margins (mid-40s in fiscal 2027 versus previous high-40s assumptions).
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