1 Schulte Research War of words with SAIC (State Administration for Industry and Commerce) Source: SCMP, ifeng, New York Times, Financial Times, Schulte Research Estimates 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). 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.

2 Schulte Research 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. 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.

3 Schulte Research 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).

4 Schulte Research Q4 Result and Valuation P/EP/BP/SEV/EBITDAEV/Sales Alibaba Tencent NASDAQ Average Alibaba (in $mn)14Q4YoY Growth Revenue4, % Gross Profit3,03528% Net Income % Gross Margin71.3%-6.5% Net Margin22.7%-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 Q 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.