Alibaba

Morningstar Equity Analyst Report | Report as of 22 May 2023 09:28, UTC | Reporting Currency: CNY | Trading Currency: USD
| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 21
Alibaba Group Holding Ltd ADR BABA QQQQQ 19 May 2023 21:17, UTC
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Last Price Fair Value Estimate Price/FVE Market Cap Economic Moat Moat Trend Uncertainty Capital Allocation ESG Risk Rating Assessment1
83.98 USD 177.00 USD 0.47 215.94 USD Bil Wide Negative High Exemplary ;;;;;
19 May 2023 3 May 2023 05:00, UTC
19 May 2023 9 Jan 2023 14:33, UTC
Price vs. Fair Value
Fair Value: 177.00

9 Jan 2023 14:33, UTC
400
Last Close: 83.98
300 Over Valued
Under Valued
200
100
0
Analysis
2018 2019 2020 2021 2022 YTD
0.57 0.88 0.79 0.63 0.49 0.47 Price/Fair Value
-20.51 54.74 9.73 -48.96 -25.84 -4.67 Total Return %
Morningstar Rating
Total Return % as of 19 May 2023. Last Close as of 19 May 2023. Fair Value as of 9 Jan 2023 14:33, UTC.
Contents
Analyst Note (19 May 2023) Alibaba Earnings: The Stock Dividend Distribution of the
Business Description
Business Strategy & Outlook (9 Jan 2023) Cloud Business Is Good for Shareholders
Bulls Say / Bears Say (22 May 2023)
Analyst Note Chelsey Tam, Senior Equity Analyst, 19 May 2023
Economic Moat (9 Jan 2023)
Fair Value and Profit Drivers (22 May 2023)
Although Alibaba Group’s adjusted EBITA rose 60% year on year, 15% higher than Refinitiv consensus
Risk and Uncertainty (9 Jan 2023) as of May 18, the share price fell 5% in U.S. trading on May 18. We think the market reacted negatively
Capital Allocation (9 Jan 2023) because the company's investment in users, a robust ecosystem, and technology in the China commerce
Analyst Notes Archive business is likely to cause year-on-year declines in adjusted EBITA margin during the next three years,
Financials
and the pace and magnitude of unlocking value missed expectations. The Alibaba international digital
Appendix
commerce group, which contributes 10% to our sum-of-the-parts valuation, will raise external capital
Research Methodology for Valuing Companies
instead of going public in the foreseeable future.
Important Disclosure
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and Alibaba will fully spin off its cloud intelligence group via a stock dividend to Alibaba shareholders and
Investment Research Policy. For information regarding conflicts of interest, please
visit: http://global.morningstar.com/equitydisclosures.
concurrently publicly list the cloud intelligence group in the next 12 months, which we think is a net
The primary analyst covering this company does not own its stock.
positive for Alibaba’s shareholders before the distribution of the stock dividend. However, after the
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk

1
stock dividend distribution, some Alibaba investors may keep the more promising cloud business shares
Rating. and reduce their stake in Alibaba, whose main business is the slowing Taobao/Tmall group. Our fair
value estimate, driven by our discounted cash flow valuation, remains at USD 177/HKD 171 per share.
We believe the shares are undervalued for investors with a three- to five-year horizon, who can benefit
as the restructuring unlocks value.
Business Strategy & Outlook Chelsey Tam, Senior Equity Analyst, 9 Jan 2023
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Morningstar Equity Analyst Report | Report as of 22 May 2023 09:28, UTC | Reporting Currency: CNY | Trading Currency: USD | Exchange: NEW YORK STOCK EXCHANGE, INC. Page 2 of 21
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Alibaba is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics
Sector Industry businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and
t Consumer Cyclical Internet Retail online-to-offline services. We think a strong network effect allows leading e-commerce players to
Business Description
extend into other growth avenues, and nowhere is that more evident than with Alibaba.
Alibaba is the world’s largest online and mobile
Alibaba’s internet services had annual active consumers of over 1 billion as of March 2022, versus the
commerce company as measured by gross merchandise
volume (CNY 8.3 trillion for the fiscal year ended March 1.2 billion online population in June 2022 per QuestMobile and the 1.4 billion population in China. This
2022). It operates China’s online marketplaces, including provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer
Taobao (consumer-to-consumer) and Tmall (business-to- brands develop personalized mobile marketing and content strategies to expand their target audiences,
consumer). Alibaba's China commerce retail division
increase click-through rates and physical store transactions, and bolster return on investment. Alibaba's
accounted for 67% of revenue in the year ended March
marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws,
2022. Additional revenue sources include China
commerce wholesale (2%), international commerce more competition, and weak consumer sentiment. Gross merchandise volume per annual active user
retail/wholesale (5%/2%), local consumer services (5%), was CNY 8,833 for the year ended March 2022 for Alibaba, higher than CNY 3,285 in 2021 for
cloud computing (9%), digital media and entertainment Pinduoduo and CNY 5,905 in 2021 for JD.com.
platforms (4%), Cainiao logistics services (5%), and
innovation initiatives/other (1%). While we view the Taobao/Tmall marketplaces as Alibaba's core cash flow drivers, we also believe
AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in
the medium term, accelerating revenue per user suggests a migration to value-added content delivery
and database services that can drive segment margins higher over time. On globalization, third-party
merchants are successfully reaching Lazada's users across Southeast Asia, something that should
continue as the company rolls out incremental personalized mobile marketing and content
opportunities. While early, we share management’s views about Ele.me offering incremental
monetization opportunities from Alibaba’s user base.
Bulls Say Chelsey Tam, Senior Equity Analyst, 22 May 2023

u Gross merchandise volume per annual active user was CNY 8,833 for the year ended March 2022 for
Alibaba, higher than CNY 3,285 in 2021 for Pinduoduo and CNY 5,905 in 2021 for JD.com.
u Core annual active users on Alibaba's China retail marketplaces had a retention rate of over 90% for the
year ended September 2021.
u Alibaba’s China commerce adjusted EBITA margin was 32.5%, higher than JD Retail’s 3.1% non-GAAP
EBIT margin and PDD’s 12.4% non-GAAP EBIT margin for the 12 months ended December 2021.
Bears Say Chelsey Tam, Senior Equity Analyst, 22 May 2023

u Expansion of other e-commerce players could slow Alibaba's growth. Pinduoduo's active buyers have
started to exceed Alibaba's since December 2020.
u Expansion into non-physical-goods-marketplace businesses and other regions lead to lower margins and
the timing of profitability of these businesses is unknown.
u Any internet companies with traffic like Douyin and Tencent can enter the e-commerce space due to its
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Competitors
JD.com Inc Ordinary Shares - Class A
Alibaba Group Holding Ltd ADR BABA Tencent Holdings Ltd 00700 Meituan Class B 03690
09618
Fair Value Fair Value Fair Value Fair Value

177.00 704.00 145.00 341.00
Uncertainty : High Uncertainty : High Uncertainty : Very High Uncertainty : High
Last Close Last Close Last Close
Last Close
83.98 333.20 128.60 137.20
Analysis Security 1 Security 2 Security 3 Security 4

Economic Moat Wide Wide None Wide
Moat Trend Negative Stable Stable Stable
Currency USD HKD HKD HKD
Fair Value 177.00 9 Jan 2023 14:33, UTC 704.00 12 Jan 2023 03:57, UTC 145.00 26 Mar 2023 23:35, UTC 341.00 12 May 2023 13:59, UTC
1-Star Price 274.35 1,091.20 253.75 528.55
5-Star Price 106.20 422.40 72.50 204.60
Significantly 21 May Significantly 21 May Fairly Valued 21 May 2023 Significantly 21 May
Assessment
Undervalued 2023 Undervalued 2023 Undervalued 2023
Morningstar Rating QQQQQ19 May 2023 21:17, UTC QQQQQ19 May 2023 16:35, UTC QQQ19 May 2023 16:35, UTC QQQQQ19 May 2023 16:35, UTC
Analyst Chelsey Tam, Senior Equity Analyst Ivan Su, Senior Equity Analyst Kai Wang, Senior Equity Analyst Chelsey Tam, Senior Equity Analyst
Capital Allocation Exemplary Exemplary Poor Exemplary
Price/Fair Value 0.47 0.47 0.89 0.40
Price/Sales 1.80 5.21 3.22 0.38
Price/Book 1.53 3.96 5.58 1.83
Price/Earning 21.54 15.42 — 20.12
Dividend Yield — 0.72% — 1.77%
Market Cap 215.94 Bil 3,194.70 Bil 802.64 Bil 431.88 Bil
52-Week Range 58.01—125.84 188.63—416.60 112.80—211.60 131.60—275.20
Investment Style Large Growth Large Core Large Growth Large Core
low barriers of entry. Douyin has gained market share in the apparel and beauty space against Alibaba.
Economic Moat Chelsey Tam, Senior Equity Analyst, 9 Jan 2023

Despite increasing competition, we're maintaining our wide economic moat rating based on Alibaba's
strong network effect, where the value of the platform to consumers increases with a greater number of
sellers and vice versa. Alibaba is monetizing its network effect better than any other e-commerce
platform in China. None of its new competitors, mainly third-party e-commerce platforms Pinduoduo
and short video platforms Douyin and Kuaishou, have proved they can monetize the physical goods e-
commerce market with a durable profit margin, but Alibaba has been profitable for a decade and we
believe it will remain profitable for the next 20 years. In addition, we think that the live-streaming e-
commerce that Kuaishou and Douyin offer is a supplement to e-commerce offerings, not a replacement
of the mainstream e-commerce platforms. Live-streaming e-commerce tends to satisfy impulsive
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purchase instead of planned or urgent purchases. The return and refund ratio of live-streaming is high,
which we think is inherent in its impulse purchase nature; this makes it difficult for brands to rely on
this channel solely in the long term.
Even if these new competitors are successful in generating long-term durable profit, we still see
Alibaba's position in the e-commerce market as being irreplaceable due to its consumer mind share,
vastest range of stock-keeping units, logistics infrastructure, operational expertise (governance of
products and merchants, protection of consumers), and tools for merchants to manage full product
lifecycles. It is the largest e-commerce platform that provides to its merchants predictability in sales and
production volume, which leads to predictable production costs. Alibaba has reported over 90%
retention for its core annual active consumers who are 25-44 years old and contributed 70% of gross
merchandise volume for the year ended September 2021, despite the competition. Core annual active
users on Alibaba's China retail marketplaces had a retention rate of over 90% for the year ended
September 2021. In the year ended June 30, 2022, there were over 123 million annual active
consumers, each of which spent over CNY 10,000 on Taobao and Tmall. This represents a retention rate
of approximately 98% versus the prior 12-month period, similar with the data as of March 2022. Alibaba
is the pioneer in new retail and has solutions for diversifying consumption scenarios like on-demand
delivery, online-to-offline, offline, and content e-commerce. We think Alibaba will always have its place
in China's increasingly complex retail market.
Alibaba continues to most effectively monetize the network in terms of GMV and profit per buyer and
margin. This should last for the next 20 years. Gross merchandise volume per annual active user was
CNY 8,833 for the year ended March 2022 for Alibaba, higher than CNY 3,285 in 2021 for Pinduoduo
and CNY 5,905 in 2021 for JD.com. In terms of estimated non-GAAP EBITA per annual active user,
Alibaba's China commerce businesses (includes China retail marketplace-based businesses, Taocaicai,
Tmall Supermarket, Tmall Global, Freshippo, Alibaba Health, Sun Art, and wholesale business) rank the
highest at CNY 36 for the quarter-end March 2022, versus JD Retail's CNY 12 and PDD's CNY 4. Starting
from the June quarter of 2022, we no longer have annual active user numbers for PDD and Alibaba to
update this metric.
Alibaba's China commerce estimated adjusted EBIT margin was 32%, higher than JD Retail's 3.1% non-
GAAP EBIT margin and PDD's 12.4% non-GAAP EBIT margin (Pinduoduo has been profitable only since
the June quarter of 2021). With regard to Alibaba's retail and wholesale marketplace businesses, the
main source of its network effect, the adjusted EBITA margin was 77.9% for the year ended March 2019
and 78.2% and 74.9% in the two subsequent years. Alibaba didn't report this number for the year ended
March 2022 but we think it should be at the 70% level. Even though we think there will be a decline in
the adjusted EBITA margin in the marketplace businesses in the next five years due to investment in
engagement, live streaming, and so on, we don't think this will be enough to reduce Alibaba's return on
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invested capital to below that of Pinduoduo and JD Retail.
We do think that JD.com will increase its margin in the long run partly due to increasing bargaining
power in its first-party platform and increased mix of the higher-margin third-party platform. But we
believe Alibaba's first-party supermarket business that has similar estimated revenue size with JD.com
should also grow and see higher bargaining power over time. Like Pinduoduo, it is known for subsidizing
its customers heavily to acquire customers. PDD has turned profitable at the non-GAAP operating level
in the quarters ended June 2021. Its strategy has shifted to more focus on research and development
from a previous focus on sales and marketing in the first five years of the company's history. Agricultural
products are a differentiator at PDD, which is one of the largest online agricultural product platforms. It
is increasing its investment in technological solutions in agriculture, bringing more agriculture products
online, upskilling farmers on e-commerce, and improving efficiency in the agriculture supply chain. The
agriculture base in China is very disperse, not industrialized. Agricultural products--for example, green
leaf vegetables--are nonstandardized, and the perishable nature and low ticket size make fulfillment
costs as a percentage of sales higher than for higher-ticket-size and less bulky items, for instance,
beauty products that have higher e-commerce penetration.It has started its overseas e-commerce
platform Temu to take on Shein. Management also reiterated the importance to invest and profitability
is not the priority. These lead us to think that Pinduoduo's adjusted EBIT margin is likely to remain at a
teens percentage on a full-year basis in the medium term. ByteDance is fighting many internet
companies on many new fronts: gaming, cloud, business services, search, and e-commerce. As per The
Wall Street Journal, ByteDance registered an operating loss of USD 2.1 billion in 2020 and USD 684
million in 2019, there is no report on its 2021 profit level. It is unclear if ByteDance's China e-commerce
segment will be able to register profit consistently.
Short-form video platforms Douyin and Kuaishou have entered the e-commerce arena with quick GMV
growth, but we don't think they will overtake Alibaba and JD.com in the next 20 years. These newer
platforms monetize their network of users by content e-commerce (content such as short videos or live-
streaming) or interest e-commerce (selling products by understanding and predicting users' interests).
Douyin targeted to achieve GMV of CNY 1,000 billion, and we estimate it achieved just below CNY 900
billion in 2021. Douyin's GMV was up 220% in the year ended May 2022. Kuaishou achieved CNY 680
billion GMV in 2021, up 78% year-over-year. However, a reported 98.8% and an estimated 72% of GMV
of Kuaishou and Douyin respectively are transacted within their own platforms, up from 16% and 30%,
respectively in 2020, with the rest transacted in third-party platforms like Alibaba and JD.com. Douyin is
trying to create a closed loop e-commerce platform, and we predict it does not want to direct its traffic
to external e-commerce companies eventually. Nevertheless, a successful e-commerce company cannot
only rely on traffic to succeed; customer services, governance of e-commerce platforms to balance the
interests of merchants and consumers (management of issues like false advertisement and promise,
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formulating return policies), supply chain, logistics, and merchant support are critical. According to
Paidai, an e-commerce tutorial company, distribution of products and after-sales customer service are
far from perfect on Douyin. Besides, Alibaba aims to be a retail giant online and offline in many
shopping scenarios. Both Alibaba and JD.com have business operations in on-demand delivery (30
minutes to an hour), half-/same-/next-day delivery and next-day pickup (community marketplaces),
online, and offline. These are capabilities that the short-form video companies do not have and will take
a lot of capital and time to develop.
In addition, we think the live-streaming e-commerce that Kuaishou and Douyin offer is a supplement to
the e-commerce offerings, not a replacement of the mainstream e-commerce platforms. Live-streaming
e-commerce GMV was CNY 2,200 billion in 2021 as per iResearch, about 15.5% of the China internet
shopping market, and is expected to grow to CNY 4,900 billion by 2023. Key opinion leaders and live-
streaming hosts in these short video platforms conduct live-streaming sessions to sell products online.
Live-streaming e-commerce tends to satisfy impulsive purchases instead of planned or urgent
purchases. The return and refund ratio of live streaming is high, which we think is inherent in its
impulse purchase nature, which makes it difficult for brands to rely on this channel solely in the long
term. As per Xiaohulu, a live-streaming e-commerce service provider, the live-streaming industry's return
rate can be as high as 30%-40%, much higher than the traditional online sales return ratio. The return
rate of the leading live-streaming hosts is 10%-15%. We think such a ratio will take time to reduce for
live-streaming e-commerce platforms, as it takes time to improve e-commerce operations (customer
protection), but the impulse purchase nature of live-streaming should keep the return rate higher than
traditional e-commerce. The uncertainty in sales volume makes it difficult for established brands to plan
production volume, which is difficult to achieve economies of scale. Such merchants wouldn't rely on
content e-commerce companies as their sole e-commerce channel. Thanks to the support of venture
capitalists in China, new brands can spend generously on advertising dollars on the short video
platforms to get brand exposure and sell their products, but maintaining the GMV of these brands is
questionable if they reduce their advertising spending on these platforms.
We harbor some concerns about Douyin being able to successfully build a third-party e-commerce
platform that can not only recommend products to users, which would reduce the budget to spend on
other e-commerce platforms. If users also develop a habit of proactively searching for products on
Douyin, it will be a bigger blow to Alibaba. However, we reckon such a conclusion is far-fetched at this
point, given that building a successful e-commerce company requires operational excellence. For
instance, longtime e-commerce rival JD.com started to develop its 3P platform in 2010 but has not been
able to rival Alibaba in 3P businesses. The last time JD.com reported the number of merchants on its
online marketplace, in the fourth quarter of 2019, it had over 270,000 merchants, which pales in
comparison with Alibaba, which had millions of merchants. During Alibaba's 2021 investor day, Jiang
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Fan, then the president of Taobao/Tmall, said merchants have the highest operating efficiency on its
platforms as Alibaba provides marketing, supply chain, and digitalization solutions. Alibaba provides
comprehensive merchant support infrastructure throughout the entire consumer and product lifetime
value. It consists of its business advisor, strategy center, CRM and brand databank platforms and tools.
For instance, during the product introduction phase, merchants can make use of Tmall's new centers for
product innovation, trend, and strategy to uncover insights and make predictions. There are also tools to
support R&D, test of concept, and new product launches. We have checked the tools offered by Douyin
and PDD and they are not nearly as comprehensive. It will take time for new competitors to build such
comprehensive offerings for merchants, especially when related to Big Data. What's more, ByteDance's
core competencies are not supply chain and logistics, unlike JD.com and Alibaba. ByteDance's
successful products are all related to feed-based algorithms. We think it is unreasonable to assume
Douyin will be able to overtake Alibaba in its pull-based e-commerce business.
Anticompetitive exclusivity arrangements between merchants and Alibaba are a key environmental,
social, and governance risk. We think the end of exclusive merchants on Alibaba's platform has some,
but not significant impact on Alibaba's wide moat due to reasons aforementioned in this section, and
we have accounted for the share loss in GMV to other platforms in our wide moat.
Fair Value and Profit Drivers Chelsey Tam, Senior Equity Analyst, 22 May 2023
Our fair value estimate is USD 177 per ADS or HKD 171 per share.
We assume a revenue compound annual growth rate of 7% for the next 10 years. We anticipate that
increasing e-commerce penetration in underpenetrated categories, the growing Chinese middle class,
and better technology for merchants to operate their businesses on the platforms will all contribute to
Alibaba's online retail revenue growth. Our 10-year revenue forecast is largely a function of average
annual China retail GMV growth around 2%. China retail marketplace monetization rates increase
slowly, aided by new technology, but should stay below 3.9% in the next 10 years due to fierce
competition.
We believe Alibaba will continue investing in technology infrastructure, logistics improvement, user
experience, and strategic businesses with long-term value, but with more focus on profitability
compared with before. We expect adjusted EBITA margin to reach 15.6% at the end of this decade to
account for the strategy of prioritizing profitability over top-line growth. We expect margin trends to rise
very gradually over the long term as investments wind down and Alibaba's more nascent businesses
scale.
Risk and Uncertainty Chelsey Tam, Senior Equity Analyst, 9 Jan 2023
We assign Alibaba a High Morningstar Uncertainty Rating. China's e-commerce landscape has become
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increasingly competitive, with Pinduoduo registering faster GMV and user growth than Alibaba and
JD.com demonstrating its quality services amid COVID-19. Short video platforms and Tencent have also
entered the e-commerce sector. Pinduoduo's number of active buyers in the year ended December 2020
already surpassed that of Alibaba.
The largest material environmental, social, and governance issue for Alibaba is its business ethics with
regard to anticompetitive measures. It was fined CNY 18.2 billion in April 2021 for forcing merchants to
choose its platform exclusively and required to curb its anticompetitive behavior. Financial regulators in
China have continuously scrutinized online financial services, leading to the cancelation of investee Ant
Financial's IPO. Alibaba has persistently faced the issue of counterfeit and infringing goods on its
marketplaces. The Hangzhou government’s assigning of representatives to work inside Alibaba also
raises concerns, although there is no any evidence of value destruction for Alibaba.
Expansion into peripheral businesses might distract management and reduce profitability without
materially improving Alibaba's ecosystem. While we're optimistic about Alibaba's ability to become a
preferred partner for international retailers and consumer brands looking to sell in China, the firm does
not enjoy the same network effect and brand recognition in other countries, and it may face challenges
directly expanding in these markets.
Another ESG issue is corporate governance. In 2011, the company transferred the ownership of Alipay
to a new company (now called Ant Financial, which is 33% owned by Alibaba) controlled by Jack Ma,
without the approval of key shareholders Yahoo and SoftBank.
Capital Allocation Chelsey Tam, Senior Equity Analyst, 9 Jan 2023

We assign Alibaba a Morningstar Capital Allocation Rating of Exemplary.
The shareholder distribution policy of Alibaba is appropriate with a sound balance sheet. Alibaba had
CNY 325 billion net cash as of March 31, 2021, and the amount of net cash has increased from fiscal
2019 to 2021. However, Alibaba does not distribute a dividend, consistent with e-commerce peers
Amazon, JD.com, Pinduoduo, and Mercado Libre, a Latin American e-commerce company. Tencent, an
internet peer of similar size in China, pays a small dividend. Most of the other profitable Chinese
internet companies we cover also don’t pay dividends. We believe this is because of the common
practice of Chinese internet companies expanding ecosystems and investing in new businesses.
Return on invested capital for Alibaba fell from fiscal 2017's (ended March) 52% to fiscal 2021’s 23% as
the firm has invested heavily in emerging businesses for future growth at the expense of margin.
Tencent also saw a reduction in ROIC from 2016’s 26% to 15% in 2020. Alibaba has been enriching its
vast ecosystem so we think it is justified. For the year to May 13, 2021, Alibaba repurchased
approximately 1.7 million of ADSs or approximately 13.6 million of ordinary shares, or 0.62% of the
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ordinary shares issued and outstanding as of March 31, 2021, at an average price of USD 218 per ADS,
lower than our fair value estimate at the time. Alibaba upsized its share-repurchase program, effective
for two years through the end of 2022, from USD 6 billion to USD 10 billion. We think a share-
repurchase program makes sense as the shares are still undervalued.
We believe management has done a commendable job investing in businesses to solidify its leadership
in e-commerce, cloud, and logistics. For example, Alibaba invested in leading logistic companies and
Cainiao to improve the delivery quality of e-commerce goods. It started its cloud business in China early
in 2009, earlier than its largest wide-moat competitor Tencent, and commanded a share of 41.6% in
China’s public cloud services (infrastructure as a service and platform as a service) in the first half of
2020 as per IDC. We expect the current investment will pay off, helping Alibaba to maintain its position
as a retail giant and enabler of digitalization for businesses.
We expect Alibaba’s adjusted EBITA margin to be lower than historically, mainly due to investment in its
retail business, which we think is necessary amid heavy investments among its Chinese e-commerce
peers. The areas of investments in descending order are community marketplace and Taobao Deals (to
target customers in the less developed areas and those who like value-for-money products), local
consumer services (to expand to services e-commerce), and Lazada, its Southeast Asia e-commerce
business. These investments will go into technology, merchant supports, user acquisition, user
experience enhancement, improving supply chain, and merchandising for high-frequency categories.
We like management’s goal to increase annual active consumers in China by over 100 million versus 85
million achieved in the fiscal 2021, which is one of the outcomes of the investments. This should
enhance the network effect of wide-moat Alibaba.
Analyst Notes Archive
Alibaba’s Restructuring Call Indicates Improved Capital Allocation and Return to Shareholders
Chelsey Tam, Senior Equity Analyst, 30 Mar 2023
Our takeaways from the conference call on restructuring with wide-moat Alibaba Group on March 30
were positive. We view management’s comments on the sale of less strategic investments positively,
and we expect there to be capital returned to shareholders following the spinoffs.
With Alibaba establishing six major business groups to be independently managed by its own CEO and
board with the flexibility to raise external capital and seek IPO (except the Taobao Tmall business group,
which will remain wholly owned under Alibaba Group), we think investors are more inclined to value
Alibaba using sum-of-the-parts valuation. We maintain our fair value estimate, based on a discounted
cash flow model of the consolidated business, of USD 177 per ADS (HKD 171 per share), and we believe
Alibaba is significantly undervalued. Under an SOTP valuation, we also believe Alibaba is undervalued.
Assuming a 20% holding discount of all the five business segments, we value Alibaba at USD 172 per
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ADS (HKD 166 per share), using SOTP valuation. The shares are trading at just 11.6 times next-12-month
P/E as per PitchBook as of March 30, which is undemanding. We think the current market capitalization
ascribes zero value to all the other five businesses, its 33% stake in Ant Group, and all the strategic
investments booked on the balance sheet.
Alibaba’s Historic Restructuring Will Unlock the Value of Its Key Business Segments; Shares Cheap
Chelsey Tam, Senior Equity Analyst, 29 Mar 2023
Wide-moat Alibaba Group’s plan to split itself into six main companies is a continuation of the policy of
empowering business units, which began in 2020. Alibaba's shares rose 14% in U.S. trading on March
28 following the news. We expect this restructuring to enhance the operating efficiency and margins of
Alibaba Group's business units. We are maintaining our fair value estimate, based on a discounted cash
flow model of the consolidated business, of USD 177 per ADS (HKD 171 per share), and we believe
Alibaba is significantly undervalued. We estimate the value of the separated business units to be
essentially the same as our fair value estimate based on a sum-of-parts valuation, indicating that a
future spinoff of the businesses could unlock further value. The key assumptions in our SOP valuation
are 11 times fiscal 2023 price/earnings ratio for the China commerce business and 4.9 times fiscal 2023
price/sales ratio for the international commerce business—the latter multiple is based on the average
multiple of its peers. The most cash-generative Taobao Tmall business group will remain wholly owned
by Alibaba Group. We think all of these other five businesses can meet the requirements of Hong Kong
Stock Exchange Main Board listing rules, thus eventual listing of these businesses, potentially after
three financial years, is possible, in our estimate. As a holding company, we suspect Alibaba Group may
experience a holding company discount, offset by the crystallization of the value (and potentially higher
valuation) of these five other business groups. Under SOP valuation, assuming a 20% holding discount
of all the five business segments, we think Alibaba’s current value would be USD 172 per ADS (HKD 166
per share).
Correction (March 29, 2023): This report has been corrected to reflect that Taobao Tmall will stay wholly
owned by Alibaba Group; and SOP valuation of Alibaba's current value has been corrected to USD 172
per ADS (HKD 166 per share) from USD 152 (HKD 147).
Alibaba Provided Positive Outlook; Investment Will Only Put Small Pressure on Margins; Shares
Cheap Chelsey Tam, Senior Equity Analyst, 24 Feb 2023
Although wide-moat Alibaba's December quarter revenue was roughly in line with Refinitiv consensus
and our own estimates, adjusted EBITA was better than consensus and our estimates, and management
provided a positive outlook. We maintain our fair value estimate at USD 177 per ADS and HKD 171 per
share. The shares are trading at 17 times PE ratio for fiscal 2023 and only 10 times PE ratio for fiscal
2024. The share price is undemanding. We continue to think Alibaba will benefit from the reopening of
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TM TM
19 May 2023 3 May 2023 05:00, UTC
19 May 2023 9 Jan 2023 14:33, UTC
China due to its exposure to discretionary goods and the rebound in higher-margin apparel category
following Chinese New Year.
Revenue in the December quarter came in at CNY 248 billion, up 2% year on year, and slightly above
Refinitiv consensus estimate of CNY 245 billion as of Feb. 23, but in line with our estimate of CNY 247
billion. Adjusted EBITA was CNY 52.0 billion, increasing by 16% year on year, beating the consensus
estimate of CNY 46.7 billion and our estimate of CNY 47.0 billion, both by 11%. The largest
improvements in absolute adjusted EBITA on a year-on-year basis came from international commerce
and local consumer services. Free cash flow was up 15% year on year.
We expect Alibaba's revenue to grow at 2.5% in fiscal year 2023, lower than the 3.1% previously
estimated, and adjusted EBITA to rise at 8.5% for fiscal 2023, lower than 9.1% previously estimated, due
to worse-than-expected gross merchandise volume performance in January and February. For fiscal
2024, we maintain our revenue growth of 11.9%. As a result of more investments and higher mix
toward lower-margin first-party business, we assume adjusted EBITA margins in the year-over-year
basis for fiscal year 2024 will be down by only 30 basis points to 15.9% and trimmed our adjusted EBITA
growth to 10.1% from 13.5% previously estimated for fiscal-year 2024.
COVID-19 Disruption Lowers Our Alibaba December-Quarter Revenue and Adjusted EBITA Growth
Outlook Chelsey Tam, Senior Equity Analyst, 9 Jan 2023
As a result of lower-than-expected delivery capacity due to COVID-19 disruptions during wide-moat
Alibaba's December quarter, we have lowered our forecasts to 1.8% for the quarter's year-on-year
revenue growth from our previous expectation of 4.8% (Refinitiv consensus of 2.0% as of Jan. 9); to
4.9% for the quarter's adjusted EBITA growth from 23%; (Refinitiv consensus of 5.0%); and to 9.1% for
fiscal 2023 adjusted EBITA year-on-year growth from 10.1% (Refinitiv consensus of 9.5%). Despite that,
we think management’s outlook on reopening is more important for short-term stock performance than
fourth-quarter results. We have lowered our fair value estimate to USD 177 per ADS from USD 179 and
to HKD 171 per share from HKD 173. There is 60% upside to our new valuation as at the close of
business on Jan. 9. The rapid removal of China’s zero-COVID policies, improving sentiment toward
internet stocks following the progress made in Ant Group’s potential IPO, and the government’s more
positive rhetoric toward platform companies like Alibaba are the positive catalysts to the share price of
Alibaba.
Alibaba Is the Best Play on China Reopening Among Traditional E-Commerce Companies Chelsey
Tam, Senior Equity Analyst, 18 Nov 2022
We are very pleased with the cost-cutting efforts by wide-moat Alibaba, leading to 29% year-on-year
higher adjusted EBITA in the quarter. We have revised our fiscal 2023 adjusted EBITA margin up from
12.7% to 16.2% and we expect adjusted EBITA margin to reach 16.7% at the end of this decade versus
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TM TM
19 May 2023 3 May 2023 05:00, UTC
19 May 2023 9 Jan 2023 14:33, UTC
12.0% previously to account for the strategy of prioritizing profitability over top-line growth. Alibaba’s
near-term revenue outlook is weaker than our expectations, leading to our 7% cut in fiscal 2023
revenue. We lowered our 10-year revenue growth from 9.7% to 8.7% to factor in stronger competition in
the China consumption sector, and expect to see slower-than-previously-expected China retail gross
merchandise volume growth and monetization rate rises. Our fair value estimate remains USD 179 or
HKD 173. Given the catalysts of easing coronavirus restrictions in China and more positive government
rhetoric regarding the tech sector, we think it is time to add Alibaba to investors’ shopping carts.
Adjusted EBITA and adjusted EBITA margin improved year over year for all segments except the small
segments of innovation initiatives and others, and the unallocated segments that collectively only had a
negative 10% contribution to company-adjusted EBITA. We are particularly happy to see a huge
reduction in losses in heavy loss-making businesses like local consumer services and international
commerce and to a smaller extent digital media and entertainment.
Wide-Moat Alibaba Should See Positive Catalysts in Fiscal 2023 Chelsey Tam, Senior Equity Analyst,
6 Oct 2022
We think the probability of year-over-year adjusted EBITA increase at wide-moat Alibaba—a reverse
from year-over-year adjusted EBITA decline since the June quarter of 2021—is high in the coming
September and December quarters. We believe registering positive year-over-year adjusted EBITA
growth, together with continuous cost rationalization, should help investors to gain more confidence
over Alibaba’s ability to register profit growth in the longer term. This should be a positive catalyst for
the share price.
However, we think year-over-year decline in the customer management revenue and gross merchandise
volume in Taobao and Tmall amid weak consumer sentiment and competition is another concern for
investors about Alibaba’s resilience. In the June quarter of 2022, customer management revenue was
down 10% year-over-year, while paid gross merchandise volume, or GMV, on Taobao and Tmall was
down mid-single digits year-over-year due to COVID-19 restrictions. The June quarter of calendar year
2023 should have an easy year-over-year comparison and we expect to see positive year-over-year
growth in customer management revenue and GMV in that quarter. In addition, consumer spending
improvements and COVID-19 restriction easing are more likely next year, which should help customer
management revenue. This marks the second catalyst. We think Alibaba shares continue to be cheap,
trading at a fiscal year 2023 price/earnings ratio of 10.5 times. K
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Competitors Price vs. Fair Value
Tencent Holdings Ltd 00700
Fair Value: 704.00

12 Jan 2023 03:57, UTC
800
Last Close: 333.20
600 Over Valued
Under Valued
400
200
0
Analytics
2018 2019 2020 2021 2022 YTD
0.63 0.82 0.86 0.59 0.45 0.47 Price/Fair Value
-22.44 19.94 51.01 -19.01 -29.99 4.43 Total Return %
Morningstar Rating
Total Return % as of 19 May 2023. Last Close as of 19 May 2023. Fair Value as of 12 Jan 2023 03:57, UTC.
Meituan Class B 03690
Fair Value: 145.00

26 Mar 2023 23:35, UTC
400
Last Close: 128.60
300 Over Valued
Under Valued
200
100
0
Analytics
2018 2019 2020 2021 2022 YTD
— — — 1.13 1.06 0.89 Price/Fair Value
— 132.12 188.52 -23.33 -22.49 -26.39 Total Return %
Morningstar Rating
Total Return % as of 19 May 2023. Last Close as of 19 May 2023. Fair Value as of 26 Mar 2023 23:35, UTC.
ß
JD.com Inc Ordinary Shares - Class A 09618
Fair Value: 341.00

12 May 2023 13:59, UTC
400
Last Close: 137.20
300 Over Valued
Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD Analytics
— — 1.21 0.63 0.55 0.40 Price/Fair Value

— — — -19.93 -17.83 -36.59 Total Return %
Morningstar Rating
Total Return % as of 19 May 2023. Last Close as of 19 May 2023. Fair Value as of 12 May 2023 13:59, UTC.
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TM TM
19 May 2023 3 May 2023 05:00, UTC
19 May 2023 9 Jan 2023 14:33, UTC
Morningstar Historical Summary

Financials as of 31 Dec 2022
Fiscal Year, ends 31 Mar 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (CNY Bil) 35 53 76 101 158 250 377 510 717 853 660 865
Revenue Growth % 72.4 52.1 45.1 32.7 56.5 58.1 50.6 35.3 40.7 18.9 1.8 3.4
EBITDA (CNY Bil) 13 31 40 90 77 126 138 214 218 128 101 101
EBITDA Margin % 36.6 58.4 51.9 89.4 48.7 50.3 36.8 42.0 30.4 15.0 15.2 11.7
Operating Income (CNY Bil) 11 25 23 30 49 70 57 92 90 95 88 105
Operating Margin % 32.8 48.0 30.6 29.6 30.7 28.1 15.2 18.1 12.5 11.1 13.3 12.1
Net Income (CNY Bil) 8.53 23.32 24.26 71.46 43.68 64.09 87.89 149.43 150.58 62.25 49.14 33.02
Net Margin % 24.3 44.0 31.7 70.7 27.6 25.6 23.3 29.3 21.0 7.3 7.4 3.8
Diluted Shares Outstanding (Mil) 2,389 2,332 2,500 2,562 2,573 2,610 2,624 2,668 2,748 2,723 2,649 2,662
Diluted Earnings Per Share (CNY) 3.57 10.00 9.70 27.89 16.97 24.48 33.36 55.92 54.72 22.72 18.48 12.56
Dividends Per Share (CNY) — — — — — — — — — — — —
Valuation as of 28 Apr 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales — 24.2 15.8 12.5 14.8 7.9 8.8 7.5 2.6 1.9 2.2 1.8
Price/Earnings — 52.4 21.9 46.9 47.8 41.0 25.6 23.3 16.7 120.5 55.9 46.7
Price/Cash Flow — 46.9 26.9 24.6 28.1 18.1 23.6 20.9 10.6 10.7 11.6 9.7
Dividend Yield % — — — — — — — — — — — —
Price/Book — 12.9 6.9 6.2 9.0 5.8 6.6 5.1 2.1 1.7 1.8 1.5
EV/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Operating Performance / Profitability as of 31 Dec 2022
Fiscal Year, ends 31 Mar 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 15.1 26.3 13.2 23.1 10.0 10.5 10.4 13.1 10.0 3.7 — 1.8
ROE % 53.4 157 27.6 39.4 17.6 19.9 20.4 23.9 17.8 6.6 — 3.4
ROIC % 23.4 47.9 14.0 11.1 12.1 9.7 9.9 11.8 9.3 7.0 — 5.5
Asset Turnover 0.6 0.6 0.4 0.3 0.4 0.4 0.4 0.4 0.5 0.5 — 0.5
Financial Leverage
Fiscal Year, ends 31 Mar 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % — 43.7 25.8 19.7 21.6 24.6 18.5 15.6 14.9 14.6 13.2 —
Equity/Assets % — 26.3 56.9 59.6 55.0 51.0 51.0 57.5 55.5 55.9 55.1 —
Total Debt/EBITDA — 1.8 1.3 0.6 1.2 1.0 1.0 0.7 0.8 1.4 1.6 —
EBITDA/Interest Expense 8.0 14.0 14.4 46.5 28.8 35.3 26.7 41.4 48.7 6.2 3.9 2.4
Morningstar Analyst Historical/Forecast Summary as of 22 May 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 03-31-2023 2021 2022 2023 2024 2025
Price/Sales 4.6 2.4 1.6 1.5 1.4
Revenue (CNY Mil) 853,062 868,687 963,051 1,045,544 1,133,306 Price/Earnings 13.1 12.9 8.8 8.2 7.5
Revenue Growth % 18.9 1.8 10.9 8.6 8.4 Price/Cash Flow 43.5 14.4 11.6 10.5 10.0
EBITDA (CNY Mil) 158,205 175,710 172,298 180,837 190,299 Dividend Yield % — — — — —
EBITDA Margin % 18.6 20.2 17.9 17.3 16.8 Price/Book 2.0 1.9 1.3 1.2 1.0
EV/EBITDA 22.5 9.8 6.8 6.5 6.2
Operating Income (CNY Mil) 94,779 103,065 110,996 116,955 124,033
Operating Margin % 11.1 11.9 11.5 11.2 10.9
Net Income (CNY Mil) 143,515 143,991 171,654 177,915 188,420
Net Margin % 16.8 16.6 17.8 17.0 16.6
Diluted Shares Outstanding (Bil) 22 21 20 20 19
Diluted Earnings Per Share(CNY) 6.59 6.82 8.40 9.00 9.87
Dividends Per Share(CNY) 0.00 0.00 0.00 0.00 0.00
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Appendix
Historical Morningstar Rating
Alibaba Group Holding Ltd ADR BABA 19 May 2023 21:17, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
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Tencent Holdings Ltd 00700 19 May 2023 16:35, UTC
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Meituan Class B 03690 19 May 2023 16:35, UTC
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JD.com Inc Ordinary Shares - Class A 09618 19 May 2023 16:35, UTC
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Overview timate of a firm’s cost of capital, or weighted average In this stage, which can last five to 10 years, analysts
At the heart of our valuation system is a detailed projec- cost of capital (or WACC). Without a moat, profits are make full financial statement forecasts, including items
tion of a company ’s future cash flows, resulting from our more susceptible to competition. We have identified five such as revenue, profit margins, tax rates, changes in
analysts’ research. Analysts create custom industry and sources of economic moats: intangible assets, switching workingcapital accounts, and capital spending. Based on
company assumptions to feed income statement, balance costs, network effect, cost advantage, and efficient scale. these projections, we calculate earnings before interest,
sheet, and capital investment assumptions into our glob- after taxes (EBI) and the net new investment (NNI) to de-
ally standardized, proprietary discounted cash flow, or Companies with a narrow moat are those we believe are rive our annual free cash flow forecast.
DCF, modeling templates. We use scenario analysis, inde- more likely than not to achieve normalized excess returns
for at least the next 10 years. Wide-moat companies are Stage II: Fade
pth competitive advantage analysis, and a variety of other
those in which we have very high confidence that excess The second stage of our model is the period it will take
analytical tools to augment this process. Moreover, we
returns will remain for 10 years, with excess returns more the company ’s return on new invested capital—the re-
think analyzing valuation through discounted cash flows
likely than not to remain for at least 20 years. The longer turn on capital of the next dollar invested (“RONIC”)—to
presents a better lens for viewing cyclical companies,
a firm generates economic profits, the higher its intrinsic decline (or rise) to its cost of capital. During the Stage II
high-growth firms, businesses with finite lives (e.g.,
value. We believe low-quality, no-moat companies will period, we use a formula to approximate cash flows in
mines), or companies expected to generate negative
see their normalized returns gravitate toward the firm’s lieu of explicitly modeling the income statement, balance
earnings over the next few years. That said, we don’t dis-
cost of capital more quickly than companies with moats. sheet, and cash flow statement as we do in Stage I. The
miss multiples altogether but rather use them as support-
length of the second stage depends on the strength of
ing cross-checks for our DCF-based fair value estimates.
When considering a company's moat, we also assess the company’s economic moat. We forecast this period to
We also acknowledge that DCF models offer their own
whether there is a substantial threat of value destruction, last anywhere from one year (for companies with no eco-
challenges (including a potential proliferation of estim-
stemming from risks related to ESG, industry disruption, nomic moat) to 10–15 years or more (for wide-moat com-
ated inputs and the possibility that the method may miss
financial health, or other idiosyncratic issues. In this con- panies). During this period, cash flows are forecast using
shortterm market-price movements), but we believe these
text, a risk is considered potentially value destructive if its four assumptions: an average growth rate for EBI over the
negatives are mitigated by deep analysis and our
occurrence would eliminate a firm’s economic profit on a period, a normalized investment rate, average return on
longterm approach.
cumulative or midcycle basis. If we deem the probability new invested capital (RONIC), and the number of years
of occurrence sufficiently high, we would not characterize until perpetuity, when excess returns cease. The invest-
Morningstar’s equity research group (” we,” “our”) be-
the company as possessing an economic moat. ment rate and return on new invested capital decline un-
lieves that a company’s intrinsic worth results from the
til a perpetuity value is calculated. In the case of firms
future cash flows it can generate. The Morningstar Rating
To assess the sustainability of excess profits, analysts per- that do not earn their cost of capital, we assume marginal
for stocks identifies stocks trading at a discount or premi-
form ongoing assessments of the moat trend. A firm’s ROICs rise to the firm’s cost of capital (usually attribut-
um to their intrinsic worth—or fair value estimate, in
moat trend is positive in cases where we think its sources able to less reinvestment), and we may truncate the
Morningstar terminology. Five-star stocks sell for the
of competitive advantage are growing stronger; stable second stage.
biggest risk adjusted discount to their fair values, where-
as 1-star stocks trade at premiums to their intrinsic worth. where we don’t anticipate changes to competitive ad-
vantages over the next several years; or negative when Stage III: Perpetuity
Four key components drive the Morningstar rating: (1) our we see signs of deterioration. Once a company’s marginal ROIC hits its cost of capital,
assessment of the firm’s economic moat, (2) our estimate we calculate a continuing value, using a standard per-
of the stock’s fair value, (3) our uncertainty around that 2. Estimated Fair Value petuity formula. At perpetuity, we assume that any
fair value estimate and (4) the current market price. This Combining our analysts’ financial forecasts with the growth or decline or investment in the business neither
process ultimately culminates in our singlepoint star rat- firm’s economic moat helps us assess how long returns creates nor destroys value and that any new investment
ing. on invested capital are likely to exceed the firm’s cost of provides a return in line with estimated WACC.
capital. Returns of firms with a wide economic moat rat-
ing are assumed to fade to the perpetuity period over a Because a dollar earned today is worth more than a dollar
1. Economic Moat
longer period of time than the returns of narrow-moat earned tomorrow, we discount our projections of cash
The concept of an economic moat plays a vital role not
firms, and both will fade slower than no-moat firms, in- flows in stages I, II, and III to arrive at a total present
only in our qualitative assessment of a firm’s long-term
creasing our estimate of their intrinsic value. value of expected future cash flows. Because we are
investment potential, but also in the actual calculation of
modeling free cash flow to the firm—representing cash
our fair value estimates. An economic moat is a structural
Our model is divided into three distinct stages: available to provide a return to all capital providers—we
feature that allows a firm to sustain excess profits over a
discount future cash flows using the WACC, which is a
long period of time. We define economic profits as re-
weighted average of the costs of equity, debt, and pre-
turns on invested capital (or ROIC) over and above our es- Stage I: Explicit Forecast
ferred stock (and any other funding sources), using ex-
Morningstar Equity Research Star Rating Methodology pected future proportionate long-term, market-value
weights.
3. Uncertainty Around That Fair Value Estimate

Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company ’s intrinsic
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
ß
aimed at identifying the confidence we should have in as- Morningstar Equity Research Star Rating Methodology
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
thing that can affect our ability to accurately predict
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we ’ d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain factors.
we are about the potential dispersion of outcomes, the For more details about our methodology, please go to
greater the discount we require relative to our estimate of https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be-
the value of the firm before we would recommend the low:
purchase of the shares. In addition, the Uncertainty Rat- Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad-
ing provides guidance in portfolio construction based on justed return is highly likely over a multiyear time frame.
Once we determine the fair value estimate of a stock, we
risk tolerance. Scenario analysis developed by our analysts indicates
compare it with the stock’s current market price on a
daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
Our Uncertainty Ratings are: Low, Medium, High, Very
lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
High, and Extreme.
which the stock is listed is open. Our analysts keep close ing upside potential.
tabs on the companies they follow, and, based on thor-
Margin of Safety
ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Qualitative Analysis
QRating estimates as warranted. justed return is likely.
Uncertainty Ratings QQQQQRating
Low 20% Discount 25% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
Medium 30% Discount 35% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
High 40% Discount 55% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Very High 50% Discount 75% Premium
serve as a gauge of the broader market’s valuation. When
Extreme 75% Discount 300% Premium QQ We believe investors are likely to receive a less than
there are many 5-star stocks, the stock market as a whole
is more undervalued, in our opinion, than when very few fair risk-adjusted return.
Our uncertainty rating is based on the interquartile range,
companies garner our highest rating.
or the middle 50% of potential outcomes, covering the Q Indicates a high probability of undesirable risk-adjus-
25th percentile–75th percentile. This means that when a ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
stock hits 5 stars, we expect there is a 75% chance that time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
the intrinsic value of that stock lies above the current our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
market price. Similarly, when a stock hits 1 star, we excessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
pect there is a 75% chance that the intrinsic value of that leaving the investor exposed to Capital loss.
prices may adjust).
stock lies below the current market price.
Our star ratings are guideposts to a broad audience and Other Definitions
4. Market Price individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
The market prices used in this analysis and noted in the goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
report come from exchange on which the stock is listed needs, and complete investment portfolio, among other
which we believe is a reliable source.
ß
Capital Allocation Rating: Our Capital Allocation (or Sustainalytics analyzes over 1,300 data points to assess a situation or particular needs of any specific recipient. This
Stewardship) Rating represents our assessment of the company’s exposure to and management of ESG risks. In publication is intended to provide information to assist in-
quality of management’s capital allocation, with particu- other words, ESG Risk Ratings measures a company’s un- stitutional investors in making their own investment de-
lar emphasis on the firm ’s balance sheet, investments, managed ESG Risks represented as a quantitative score. cisions, not to provide investment advice to any specific
and shareholder distributions. Analysts consider compan- Unmanaged Risk is measured on an open-ended scale investor. Therefore, investments discussed and recom-
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
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Morningstar Equity Analyst Report | Report as of 22 May 2023 09:28, UTC | Reporting Currency: CNY | Trading Currency: USD

| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 21

Price vs. Fair Value

Fair Value: 177.00

The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk

Bulls Say Chelsey Tam, Senior Equity Analyst, 22 May 2023

Bears Say Chelsey Tam, Senior Equity Analyst, 22 May 2023

Fair Value Fair Value Fair Value Fair Value

Analysis Security 1 Security 2 Security 3 Security 4

Economic Moat Chelsey Tam, Senior Equity Analyst, 9 Jan 2023

invested capital to below that of Pinduoduo and JD Retail.

Capital Allocation Chelsey Tam, Senior Equity Analyst, 9 Jan 2023

Analyst Notes Archive

Competitors Price vs. Fair Value

Tencent Holdings Ltd 00700

Fair Value: 704.00

Meituan Class B 03690

Fair Value: 145.00

JD.com Inc Ordinary Shares - Class A 09618

Fair Value: 341.00

— — 1.21 0.63 0.55 0.40 Price/Fair Value

Morningstar Historical Summary

Valuation as of 28 Apr 2023

Morningstar Analyst Historical/Forecast Summary as of 22 May 2023

Tencent Holdings Ltd 00700 19 May 2023 16:35, UTC

Meituan Class B 03690 19 May 2023 16:35, UTC

Research Methodology for Valuing Companies

3. Uncertainty Around That Fair Value Estimate

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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