Why Should Alibaba Be A China Macro Play? Nomura Sees 30% Upside

Alibaba Group lost about a third of its value in the last year mainly because it is “deemed as a China proxy due to its size and high profile,” according to Nomura Securities in a new China Internet anchor report.
But Alibaba is by no means Bank of China. Nomura sees China’s e-commerce to grow at an impressive annualized 33% over the next two years, far outpacing China’s sub-7% “crawl.”

First, China’s retail sector is a lot resilient thanks to the growing middle class. Consulting firm BCG estimates China’s domestic consumption will grow by an annualized 9% through 2020.

Second, and more importantly, e-commerce will grow a lot faster than physical retail, thanks to China’s vast rural population coming online. Currently, China’s online shoppers are still concentrated in the more affluent tier-1 and tier-2 cities, accounting for more than 80% of the 500 million online shoppers.

But the rural population is huge. As of June last year, China’s rural population was 619 million, or 45% of the total. Just imagine them starting to shop on Taobao! And the rural population is getting richer, especially now that Beijing allows them to sell their land. Rural consumption expenditure rose from 32.5% of the urban total in 2013 to 42% in 2015.

Alibaba Group knows where the growth is:

Ali’s rural e-commerce solution is a two-way model, ie, selling to and by farmers. On the one hand, farmers are also selling local produce or handmade crafts via Taobao to customer nationwide.

The Taobao-based entrepreneurship is thriving in some rural areas. The number of socalled “Taobao Villages” or clusters of rural online entrepreneurs who have opened shops on Taobao Marketplace has increased from three in 2009 to 211 by end- 2014, according to Alibaba.

Alibaba will report its December quarter earnings next week, before the US market opens on January 28. Nomura’s Jialong Shi is more bullish than the street, expecting the e-commerce to report 30% revenue growth, versus the street consensus of 26%. It has a price target of $91, implying 28.7% upside to yesterday’s close.