Alibaba: Scaling Rapidly With Partnerships – Alibaba Group Holding Limited (NYSE:BABA)

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Investment Thesis

Alibaba (BABA) has in recent weeks established several alliances around the world. The partnerships revolved around two key themes. First, the rising trend of Chinese travelers making their own travel arrangements instead of relying on a travel agent. Second, the encroachment of e-commerce players into the traditional retail space. Notably, all the deals announced include the usage of Alipay for payment, which has emerged as the clear market leader with 35% of the transaction volume (see the chart below), compared with second placed Union Pay at 22%. The partnerships will make good use of Alibaba’s e-commerce platforms and its highly scalable Alipay payment arm. These deals should ensure Alibaba continues to grow rapidly.

The market share of electronic payment services by transaction volume in Q1, 2017: (Source: Chinese SEO Shifu)

Rising Trend of Independent Chinese Travelers

We have already been aware for some time that the Chinese are traveling in larger numbers over the years. In 2016, China registered an estimated 122 million tourists, which was around the total population of Japan, rising steadily from just 35 million tourists ten years ago. The Global Financial Crisis did little to dampen the growth. What has changed is that there is now a greater proportion of them doing so independently. The percentage of Chinese tourists making their own travel arrangements is rising fast. Based on a consultancy report which surveyed more than 800 mainland Chinese travelers in May and June, “some 70 percent of Chinese outbound travelers plan to either make their own travel arrangements or buy a travel package but travel on their own for their next overseas trip”. The implication of this is that the number of travelers doing their own hotel bookings is increasing. Given that Alipay is the leading payment mode among the Chinese, naturally, international partners are now head over heels in as they approach Alibaba to enable Alipay in their booking systems. Without Alipay as a payment option, it is akin to shutting their doors to the huge Chinese market.

(Source: Singapore Tourism Board)

(Source: Skift Take)

The latest hotel operator in action is Marriot Hotel (MAR), the largest hotel chain in the world after its acquisition of Starwood Hotels & Resorts Worldwide last year. The alliance extends beyond the convenience of payment. The two partners will integrate their respective loyalty programs, both very strong in terms of membership numbers and benefits in their own right. Alibaba’s digital travel platform will also come into play.

“We are proud to join forces with Marriott International – combining our large-scale consumer base, leading-edge technology and consumer insights with their unparalleled hospitality expertise… Together, we are elevating and redefining the travel experience for Chinese consumers to be more seamless and personalized as they embark on adventures to discover the world.”

– Daniel Zhang, Chief Executive Officer of Alibaba Group

For Alibaba, the inclusion of another partner means more captive volume and therefore revenue, as it receives a cut of every transaction. There is little incremental cost associated with incorporating a merchant, yet the added volume will further increase the economy of scale and consequently increase the operating margin. With higher revenue and better margins, what you get is, of course, higher operating profitability.

In Africa, to which the Chinese population is increasingly exposed -especially after the launch of the “Belt and Road” initiative – Alibaba has also made a deal with tour bus operator City Sightseeing. The partnership will provide Chinese tourists with a payment mode that they are well accustomed to, to pay for sightseeing buses using Alipay. Due to the business opportunities on the continent, many Chinese have ventured there over the years. With the rising awareness of the region, there are now tourist facilities catering specifically to the Chinese and that has played a strong part in making the Chinese feel welcome. A movie playing in theatres in China right now featuring a former Chinese special forces soldier single-handedly rescuing Chinese citizens besieged in Africa has broken box office records. Wolf Warrior 2 is already China’s top-grossing movie and analysts are expecting it to eventually earn around 60% more than the previous leading film The Mermaid. The movie has thus greatly raised the interest of the Chinese in the continent. Following the media hype, Alibaba will certainly form more partnerships in Africa.

Strategic Collaboration in Traditional Retail

Amazon (AMZN) has done it with its Whole Foods (WFM) acquisition. JD.com (JD) has an ongoing partnership with Wal-Mart (WMT). For Alibaba, it recently tied up with South East Asia’s largest property company, Capitaland (OTCPK:CLLDF) (OTCPK:CLLDY) (primary listing on the SGX with ticker code C31), in two ways. Capitaland will be managing parts of Alibaba’s new Shanghai headquarters, comprising four office buildings and a retail podium, which has a total Gross Floor Area (GFA), excluding car park, of about 80,000 square meters. Capitaland has demonstrated its savviness in navigating the retail downturn. Its malls continue to see upward revaluation. Alibaba will in turn host Capitaland’s exclusive online mall on Lazada Singapore, which is part of Lazada Group, Southeast Asia’s largest e-commerce platform. Alibaba is Lazada Group’s largest shareholder, and have invested over $2 billion for an 83% stake.

This arrangement would thus see each of the two parties focusing on what they do best – one managing the physical asset and the other providing the digital platform. A win-win situation.

Conclusion

The few deals mentioned in this article are not going to be game-changers for Alibaba. Nevertheless, they offer an indication of the direction Alibaba is heading. I have realized the validity of Alibaba’s rapid scaling potential too late and have missed riding the speed boat. I was previously concerned that Alibaba’s strong growth might hit a plateau, given a seemingly high base. However, it’s better late than never and this realization means that I will be confident of making a long-term investment when the opportunity arises.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WMT, BABA over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.



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