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ALIBABA GROUP HOLDING LIMITED INDEX TO FINANCIAL STATEMENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One) | ||
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, | |
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report……………
For the transition period from to
Commission file number 001-36614
Alibaba Group Holding Limited (Exact name of Registrant as specified in its charter) |
Cayman Islands (Jurisdiction of incorporation or organization) |
c/o Alibaba Group Services Limited 26/F Tower One, Times Square 1 Matheson Street, Causeway Bay Hong Kong (Address of principal executive offices) |
Timothy A. Steinert, Esq., General Counsel and Secretary Telephone: +852-2215-5100 Facsimile: +852-2215-5200 Alibaba Group Holding Limited c/o Alibaba Group Services Limited 26/F Tower One, Times Square 1 Matheson Street, Causeway Bay Hong Kong (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) |
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
---|---|---|
Ordinary Shares, par value | ||
American Depositary Shares, each representing | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 2,495,499,0362,473,927,859 Ordinary Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
oý Yes ýo No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes ý No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
oý Yes ýo No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer o | Non-accelerated filer |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ý | International Financial Reporting Standards as issued by the International Accounting Standards Board o | Other o |
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
o Yes ý No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
o Yes o No
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PART I | ||||
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PART II | ||||
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PART III | ||||
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i
CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F
Unless the context otherwise requires, references in this annual report on Form 20-F to:
ii
ii
Our reporting currency is the Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.1990RMB6.4480 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2015.2016. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On June 19, 2015,May 20, 2016, the noon buying rate for Renminbi was RMB6.2085RMB6.5485 to US$1.00.
iii
This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us, our industry and the regulatory environment in which we and companies integral to our ecosystem operate. All statements other than statements of historical facts are forward-looking statements. These forward-looking statements are made under the "safe harbor" provision under Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as "may," "will," "expect," "anticipate," "aim," "estimate," "intend," "plan," "believe," "potential," "continue," "is/are likely to" or other similar expressions. The forward-looking statements included in this annual report relate to, among others:
The global and PRC Internet, retail, wholesale, online and mobile commerce, media and entertainment, cloud computing and data industries market may not grow at the rates projected by market data, or at all. The failure of these industries or markets to grow at the projected rates may have a material adverse effect on our business, financial condition and results of operations and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we have referred to in this annual report completely and with the understanding that our actual future results may be materially different from what we expect.
iv
ITEM 1.1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2.2 OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
A. Selected Financial Data.Data
The selected consolidated statements of operations data for the years ended March 31, 2013, 2014, 2015 and 2015,2016, and the selected consolidated balance sheet data as of March 31, 20142015 and 20152016 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statements of operations data for the yearyears ended March 31, 2012 and 2013 and the selected consolidated balance sheet data as of March 31, 2012, 2013 and 20132014 have been derived from our audited consolidated financial statements not included in this annual report. Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. Our selected consolidated statements of operations data for the year ended March 31, 2011 and the selected consolidated balance sheet data as of March 31, 2011 have been derived from our unaudited consolidated financial statements not included in this annual report.
The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to and should be read in conjunction with our consolidated financial statements and related notes and "Item 5. Operating and Financial Review and Prospects," both of which are included elsewhere in this annual report.
Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.
Consolidated Statements of Operations Data:
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011(1) | 2012 | 2013 | 2014 | 2015 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | US$ | RMB | RMB | RMB | RMB | RMB | US$ | ||||||||||||||||||||||||||
| (in millions, except per share data) | (in millions, except per share data) | ||||||||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||
China commerce | 7,665 | 15,637 | 29,167 | 45,132 | 62,937 | 10,153 | 15,637 | 29,167 | 45,132 | 62,937 | 84,321 | 13,077 | ||||||||||||||||||||||||||
International commerce | 3,433 | 3,765 | 4,160 | 4,851 | 6,486 | 1,046 | 3,765 | 4,160 | 4,851 | 6,486 | 7,629 | 1,183 | ||||||||||||||||||||||||||
Cloud computing and Internet infrastructure | 425 | 515 | 650 | 773 | 1,271 | 205 | ||||||||||||||||||||||||||||||||
Cloud computing | 515 | 650 | 773 | 1,271 | 3,019 | 468 | ||||||||||||||||||||||||||||||||
Others | 380 | 108 | 540 | 1,748 | 5,510 | 889 | 108 | 540 | 1,748 | 5,510 | 6,174 | 958 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Total | 11,903 | 20,025 | 34,517 | 52,504 | 76,204 | 12,293 | 20,025 | 34,517 | 52,504 | 76,204 | 101,143 | 15,686 | ||||||||||||||||||||||||||
Cost of revenue | (3,497 | ) | (6,554 | ) | (9,719 | ) | (13,369 | ) | (23,834 | ) | (3,845 | ) | (6,554 | ) | (9,719 | ) | (13,369 | ) | (23,834 | ) | (34,355 | ) | (5,328 | ) | ||||||||||||||
Product development expenses | (2,062 | ) | (2,897 | ) | (3,753 | ) | (5,093 | ) | (10,658 | ) | (1,720 | ) | (2,897 | ) | (3,753 | ) | (5,093 | ) | (10,658 | ) | (13,788 | ) | (2,138 | ) | ||||||||||||||
Sales and marketing expenses | (3,154 | ) | (3,058 | ) | (3,613 | ) | (4,545 | ) | (8,513 | ) | (1,373 | ) | (3,058 | ) | (3,613 | ) | (4,545 | ) | (8,513 | ) | (11,307 | ) | (1,753 | ) | ||||||||||||||
General and administrative expenses(2) | (1,724 | ) | (2,211 | ) | (2,889 | ) | (4,218 | ) | (7,800 | ) | (1,258 | ) | ||||||||||||||||||||||||||
General and administrative expenses(1) | (2,211 | ) | (2,889 | ) | (4,218 | ) | (7,800 | ) | (9,205 | ) | (1,428 | ) | ||||||||||||||||||||||||||
Amortization of intangible assets | (144 | ) | (155 | ) | (130 | ) | (315 | ) | (2,089 | ) | (337 | ) | (155 | ) | (130 | ) | (315 | ) | (2,089 | ) | (2,931 | ) | (455 | ) | ||||||||||||||
Impairment of goodwill and intangible assets | — | (135 | ) | (175 | ) | (44 | ) | (175 | ) | (28 | ) | (135 | ) | (175 | ) | (44 | ) | (175 | ) | (455 | ) | (71 | ) | |||||||||||||||
Yahoo TIPLA amendment payment(3) | — | — | (3,487 | ) | — | — | — | |||||||||||||||||||||||||||||||
Yahoo TIPLA amendment payment(2) | — | (3,487 | ) | — | — | — | — | |||||||||||||||||||||||||||||||
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Income from operations | 1,322 | 5,015 | 10,751 | 24,920 | 23,135 | 3,732 | 5,015 | 10,751 | 24,920 | 23,135 | 29,102 | 4,513 | ||||||||||||||||||||||||||
Interest and investment income, net | 549 | 258 | 39 | 1,648 | 9,455 | 1,525 | 258 | 39 | 1,648 | 9,455 | 52,254 | 8,104 | ||||||||||||||||||||||||||
Interest expense | (4 | ) | (68 | ) | (1,572 | ) | (2,195 | ) | (2,750 | ) | (443 | ) | (68 | ) | (1,572 | ) | (2,195 | ) | (2,750 | ) | (1,946 | ) | (301 | ) | ||||||||||||||
Other income, net | 68 | 327 | 894 | 2,429 | 2,486 | 401 | 327 | 894 | 2,429 | 2,486 | 2,058 | 319 | ||||||||||||||||||||||||||
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Income before income tax and share of results of equity investees | 1,935 | 5,532 | 10,112 | 26,802 | 32,326 | 5,215 | 5,532 | 10,112 | 26,802 | 32,326 | 81,468 | 12,635 | ||||||||||||||||||||||||||
Income tax expenses | (327 | ) | (842 | ) | (1,457 | ) | (3,196 | ) | (6,416 | ) | (1,035 | ) | (842 | ) | (1,457 | ) | (3,196 | ) | (6,416 | ) | (8,449 | ) | (1,310 | ) | ||||||||||||||
Share of results of equity investees | — | (25 | ) | (6 | ) | (203 | ) | (1,590 | ) | (257 | ) | (25 | ) | (6 | ) | (203 | ) | (1,590 | ) | (1,730 | ) | (269 | ) | |||||||||||||||
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Net income | 1,608 | 4,665 | 8,649 | 23,403 | 24,320 | 3,923 | 4,665 | 8,649 | 23,403 | 24,320 | 71,289 | 11,056 | ||||||||||||||||||||||||||
Net income attributable to noncontrolling interests | (425 | ) | (437 | ) | (117 | ) | (88 | ) | (59 | ) | (9 | ) | ||||||||||||||||||||||||||
Net (income) loss attributable to noncontrolling interests | (437 | ) | (117 | ) | (88 | ) | (59 | ) | 171 | 27 | ||||||||||||||||||||||||||||
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Net income attributable to Alibaba Group Holding Limited | 1,183 | 4,228 | 8,532 | 23,315 | 24,261 | 3,914 | 4,228 | 8,532 | 23,315 | 24,261 | 71,460 | 11,083 | ||||||||||||||||||||||||||
Accretion of convertible preference shares(4) | — | — | (17 | ) | (31 | ) | (15 | ) | (2 | ) | ||||||||||||||||||||||||||||
Dividends accrued on convertible preference shares(4) | — | — | (111 | ) | (208 | ) | (97 | ) | (16 | ) | ||||||||||||||||||||||||||||
Accretion of convertible preference shares(3) | — | (17 | ) | (31 | ) | (15 | ) | — | — | |||||||||||||||||||||||||||||
Dividends accrued on convertible preference shares(3) | — | (111 | ) | (208 | ) | (97 | ) | — | — | |||||||||||||||||||||||||||||
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Net income attributable to ordinary shareholders | 1,183 | 4,228 | 8,404 | 23,076 | 24,149 | 3,896 | 4,228 | 8,404 | 23,076 | 24,149 | 71,460 | 11,083 | ||||||||||||||||||||||||||
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Earnings per share/ADS attributable to ordinary shareholders: | ||||||||||||||||||||||||||||||||||||||
Basic | 0.49 | 1.71 | 3.66 | 10.61 | 10.33 | 1.67 | 1.71 | 3.66 | 10.61 | 10.33 | 29.07 | 4.51 | ||||||||||||||||||||||||||
Diluted | 0.48 | 1.67 | 3.57 | 10.00 | 9.70 | 1.56 | 1.67 | 3.57 | 10.00 | 9.70 | 27.89 | 4.33 | ||||||||||||||||||||||||||
Supplemental information:(5) | ||||||||||||||||||||||||||||||||||||||
Weighted average number of shares used in computing earnings per share: | ||||||||||||||||||||||||||||||||||||||
Basic | 2,479 | 2,294 | 2,175 | 2,337 | 2,458 | |||||||||||||||||||||||||||||||||
Diluted | 2,522 | 2,389 | 2,332 | 2,500 | 2,562 | |||||||||||||||||||||||||||||||||
Supplemental information:(4) | ||||||||||||||||||||||||||||||||||||||
Non-GAAP EBITDA | 3,009 | 7,274 | 16,607 | 30,731 | 40,753 | 6,574 | 7,274 | 16,607 | 30,731 | 40,753 | 52,340 | 8,117 | ||||||||||||||||||||||||||
Non-GAAP net income | 2,778 | 6,452 | 13,869 | 28,274 | 34,981 | 5,643 | 6,452 | 13,869 | 28,274 | 34,981 | 42,741 | 6,629 | ||||||||||||||||||||||||||
Non-GAAP diluted EPS | 0.95 | 2.38 | 5.76 | 12.09 | 13.97 | 2.25 | 2.38 | 5.76 | 12.09 | 13.97 | 16.75 | 2.60 | ||||||||||||||||||||||||||
Free cash flow | 4,881 | 8,752 | 19,745 | 32,269 | 48,121 | 7,763 | 8,752 | 19,745 | 32,269 | 48,121 | 51,279 | 7,953 |
Non-GAAP Measures
We use non-GAAP EBITDA, non-GAAP net income, non-GAAP diluted EPS and free cash flow, each a non-GAAP financial measure, in evaluating our operating results and for financial and operational decision-making purposes.
We believe that non-GAAP EBITDA, non-GAAP net income and non-GAAP diluted EPS help identify underlying trends in our business that could otherwise be distorted by the effect of thecertain income or expenses that we include in income from operations, net income and diluted EPS. We believe that non-GAAP EBITDA, non-GAAP net income and non-GAAP diluted EPS provide useful information about our core operating results, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.
We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic corporate transactions, including investing in our new business initiatives, making strategic investments and acquisitions and strengthening our balance sheet. We use free cash flow to manage our business, make planning decisions, evaluate our performance and allocate resources. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in our cash balance for a reporting period.
Non-GAAP EBITDA, non-GAAP net income, non-GAAP diluted EPS and free cash flow should not be considered in isolation or construed as an alternative to income from operations, net income, diluted EPS, cash flows or any other measure of performance or as an indicator of our operating performance. Non-GAAP EBITDA,These non-GAAP net income, non-GAAP diluted EPS and free cash flowfinancial measures presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our data.
Non-GAAP EBITDA represents net income from operations (which excludesbefore (i) interest and investment income, net, interest expense, other income, net, income tax expenses and share of results of equity investees) before (i)investees, (ii) certain non-cash expenses, consisting of share-based compensation expense, amortization, depreciation, impairment of goodwill and intangible assets as well as (ii)(iii) one-time expense items consisting of the Yahoo TIPLA amendment payment and an equity-settled donation expense that we do not believe are reflective of our core operating performance during the periods presented.
Non-GAAP net income represents net income before share-based compensation expense, amortization, impairment of goodwill, intangible assets and investments, gain (loss) on deemed disposals/disposals/revaluation of investments, amortization of excess value receivable arising from the restructuring of commercial arrangementarrangements with Ant Financial Services, and one-time expense items consisting ofrelating to the Yahoo TIPLA amendment payment, an equity-settled donation expense, the expenses relating to the sale of shares by existing shareholders in our initial public offering, and charge for financing-related fees as a result of early repayment of bank borrowings.borrowings and others.
Non-GAAP diluted EPS represents non-GAAP net income attributable to ordinary shareholders divided by the weighted average number of shares outstanding during the periods on a diluted basis, including accounting for the effects of the assumed conversion of convertible preference shares prior to our initial public offering in September 2014.
Free cash flow represents net cash provided by operating activities as presented in our consolidated cash flow statement less purchases of property and equipment and intangible assets (excluding acquisition of land use rights
and construction in progress), and adjusted for changes in loan receivables relating to micro loans of our SME loan business and(which we transferred to Ant Financial Services in February 2015), the Yahoo TIPLA amendment payment.payment and others. We present the adjustment for changes in loan receivables because such receivables are reflected under cash flow from operating activities, whereas the secured borrowings and other bank borrowings used to finance them are reflected under cash flows from financing activities, and accordingly, the adjustment is made to show cash flows from operating activities net of the effect of changes in loan receivables.
The following table below sets forth a reconciliation of our net income from operations to non-GAAP EBITDA for the periods indicated:
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||||||||||||||
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| 2011 | 2012 | 2013 | 2014 | 2015 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | US$ | RMB | RMB | RMB | RMB | RMB | US$ | ||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||||
Net income | 4,665 | 8,649 | 23,403 | 24,320 | 71,289 | 11,056 | ||||||||||||||||||||||||||||||||
Less: Interest and investment income, net | (258 | ) | (39 | ) | (1,648 | ) | (9,455 | ) | (52,254 | ) | (8,104 | ) | ||||||||||||||||||||||||||
Add: Interest expense | 68 | 1,572 | 2,195 | 2,750 | 1,946 | 301 | ||||||||||||||||||||||||||||||||
Less: Other income, net | (327 | ) | (894 | ) | (2,429 | ) | (2,486 | ) | (2,058 | ) | (319 | ) | ||||||||||||||||||||||||||
Add: Income tax expenses | 842 | 1,457 | 3,196 | 6,416 | 8,449 | 1,310 | ||||||||||||||||||||||||||||||||
Add: Share of results of equity investees | 25 | 6 | 203 | 1,590 | 1,730 | 269 | ||||||||||||||||||||||||||||||||
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Income from operations | 1,322 | 5,015 | 10,751 | 24,920 | 23,135 | 3,732 | 5,015 | 10,751 | 24,920 | 23,135 | 29,102 | 4,513 | ||||||||||||||||||||||||||
Add: Share-based compensation expense | 932 | 1,254 | 1,259 | 2,844 | 13,028 | 2,102 | 1,254 | 1,259 | 2,844 | 13,028 | 16,082 | 2,494 | ||||||||||||||||||||||||||
Add: Amortization of intangible assets | 144 | 155 | 130 | 315 | 2,089 | 337 | 155 | 130 | 315 | 2,089 | 2,931 | 455 | ||||||||||||||||||||||||||
Add: Depreciation and amortization of property and equipment and land use rights | 611 | 715 | 805 | 1,339 | 2,326 | 375 | 715 | 805 | 1,339 | 2,326 | 3,770 | 584 | ||||||||||||||||||||||||||
Add: Impairment of goodwill and intangible assets | — | 135 | 175 | 44 | 175 | 28 | 135 | 175 | 44 | 175 | 455 | 71 | ||||||||||||||||||||||||||
Add: Yahoo TIPLA amendment payment | — | — | 3,487 | — | — | — | — | 3,487 | — | — | — | — | ||||||||||||||||||||||||||
Add: Equity-settled donation expense | — | — | — | 1,269 | — | — | — | — | 1,269 | — | — | — | ||||||||||||||||||||||||||
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Non-GAAP EBITDA | 3,009 | 7,274 | 16,607 | 30,731 | 40,753 | 6,574 | 7,274 | 16,607 | 30,731 | 40,753 | 52,340 | 8,117 | ||||||||||||||||||||||||||
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| | | | | | | | | | | | | | | | | | | |
The following table sets forth a reconciliation of our net income from operations to non-GAAP net income for the periods indicated:
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2012 | 2013 | 2014 | 2015 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | US$ | RMB | RMB | RMB | RMB | RMB | US$ | ||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||||
Net income | 1,608 | 4,665 | 8,649 | 23,403 | 24,320 | 3,923 | 4,665 | 8,649 | 23,403 | 24,320 | 71,289 | 11,056 | ||||||||||||||||||||||||||
Add: Share-based compensation expense | 932 | 1,254 | 1,259 | 2,844 | 13,028 | 2,102 | 1,254 | 1,259 | 2,844 | 13,028 | 16,082 | 2,494 | ||||||||||||||||||||||||||
Add: Amortization of intangible assets | 144 | 155 | 130 | 315 | 2,089 | 337 | 155 | 130 | 315 | 2,089 | 2,931 | 455 | ||||||||||||||||||||||||||
Add: Impairment of goodwill, intangible assets and investments | — | 399 | 420 | 163 | 1,032 | 166 | 399 | 420 | 163 | 1,032 | 2,319 | 360 | ||||||||||||||||||||||||||
Add: Loss (gain) on deemed disposals/disposals/ revaluation of investments | 94 | (21 | ) | (76 | ) | (384 | ) | (6,715 | ) | (1,083 | ) | |||||||||||||||||||||||||||
Less: Gain on deemed disposals/disposals/ revaluation of investments and others | (21 | ) | (76 | ) | (384 | ) | (6,715 | ) | (50,144 | ) | (7,777 | ) | ||||||||||||||||||||||||||
Add: Amortization of excess value receivable arising from the restructuring of commercial arrangements with Ant Financial Services | — | — | — | — | 166 | 27 | — | — | — | 166 | 264 | 41 | ||||||||||||||||||||||||||
Add: Yahoo TIPLA amendment payment | — | — | 3,487 | — | — | — | — | 3,487 | — | — | — | — | ||||||||||||||||||||||||||
Add: Equity-settled donation expense | — | — | — | 1,269 | — | — | — | — | 1,269 | — | — | — | ||||||||||||||||||||||||||
Add: Expenses relating to the sale of shares by existing shareholders at initial public offering | — | — | — | — | 231 | 37 | — | — | — | 231 | — | — | ||||||||||||||||||||||||||
Add: One-time charge for financing-related fees as a result of early repayment of bank borrowings | — | — | — | 664 | 830 | 134 | — | — | 664 | 830 | — | — | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Non-GAAP net income | 2,778 | 6,452 | 13,869 | 28,274 | 34,981 | 5,643 | 6,452 | 13,869 | 28,274 | 34,981 | 42,741 | 6,629 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
| | | | | | | | | | | | | | | | | | | |
The following table sets forth a reconciliation of our diluted EPS to non-GAAP diluted EPS for the periods indicated:
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2012 | 2013 | 2014 | 2015 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | US$ | RMB | RMB | RMB | RMB | RMB | US$ | ||||||||||||||||||||||||||
| (in millions, except per share data) | (in millions, except per share data) | ||||||||||||||||||||||||||||||||||||
Net income attributable to ordinary shareholders | 1,183 | 4,228 | 8,404 | 23,076 | 24,149 | 3,896 | 4,228 | 8,404 | 23,076 | 24,149 | 71,460 | 11,083 | ||||||||||||||||||||||||||
Add: Reversal of accretion upon assumed conversion of convertible preference shares | — | — | 17 | 31 | 15 | 2 | — | 17 | 31 | 15 | — | — | ||||||||||||||||||||||||||
Add: Dividend eliminated upon assumed conversion of convertible preference shares | — | — | 111 | 208 | 97 | 16 | — | 111 | 208 | 97 | — | — | ||||||||||||||||||||||||||
Less: Dilution effect on earnings arising from option plans operated by a subsidiary | (2 | ) | (7 | ) | — | — | — | — | (7 | ) | — | — | — | — | — | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Net income attributable to ordinary shareholders for computing diluted EPS | 1,181 | 4,221 | 8,532 | 23,315 | 24,261 | 3,914 | 4,221 | 8,532 | 23,315 | 24,261 | 71,460 | 11,083 | ||||||||||||||||||||||||||
Add: Non-GAAP adjustments to net income(1) | 1,170 | 1,787 | 5,220 | 4,871 | 10,661 | 1,720 | 1,787 | 5,220 | 4,871 | 10,661 | (28,548 | ) | (4,427 | ) | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Non-GAAP net income attributable to ordinary shareholders for computing non-GAAP diluted EPS | 2,351 | 6,008 | 13,752 | 28,186 | 34,922 | 5,634 | 6,008 | 13,752 | 28,186 | 34,922 | 42,912 | 6,656 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Weighted average number of shares on a diluted basis | 2,466 | 2,522 | 2,389 | 2,332 | 2,500 | 2,522 | 2,389 | 2,332 | 2,500 | 2,562 | ||||||||||||||||||||||||||||
Diluted EPS(2) | 0.48 | 1.67 | 3.57 | 10.00 | 9.70 | 1.56 | 1.67 | 3.57 | 10.00 | 9.70 | 27.89 | 4.33 | ||||||||||||||||||||||||||
Add: Non-GAAP adjustments to net income per share(3) | 0.47 | 0.71 | 2.19 | 2.09 | 4.27 | 0.69 | 0.71 | 2.19 | 2.09 | 4.27 | (11.14 | ) | (1.73 | ) | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Non-GAAP diluted EPS(4) | 0.95 | 2.38 | 5.76 | 12.09 | 13.97 | 2.25 | 2.38 | 5.76 | 12.09 | 13.97 | 16.75 | 2.60 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
| | | | | | | | | | | | | | | | | | | |
The following table sets forth a reconciliation of net cash provided by operating activities to free cash flow for the periods indicated:
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2012 | 2013 | 2014 | 2015 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | US$ | RMB | RMB | RMB | RMB | RMB | US$ | ||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||||
Net cash provided by operating activities | 5,914 | 9,275 | 14,476 | 26,379 | 41,217 | 6,649 | 9,275 | 14,476 | 26,379 | 41,217 | 56,836 | 8,815 | ||||||||||||||||||||||||||
Less: Purchase of property and equipment and intangible assets (excluding land use rights and construction in progress) | (1,033 | ) | (749 | ) | (1,046 | ) | (3,285 | ) | (4,770 | ) | (769 | ) | (749 | ) | (1,046 | ) | (3,285 | ) | (4,770 | ) | (5,438 | ) | (843 | ) | ||||||||||||||
Add: Changes in loan receivables, net | — | 226 | 2,828 | 9,175 | 11,674 | 1,883 | ||||||||||||||||||||||||||||||||
Add: Changes in loan receivables, net and others | 226 | 2,828 | 9,175 | 11,674 | (119 | ) | (19 | ) | ||||||||||||||||||||||||||||||
Add: Yahoo TIPLA amendment payment | — | — | 3,487 | — | — | — | — | 3,487 | — | — | — | — | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Free cash flow | 4,881 | 8,752 | 19,745 | 32,269 | 48,121 | 7,763 | 8,752 | 19,745 | 32,269 | 48,121 | 51,279 | 7,953 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
| | | | | | | | | | | | | | | | | | | |
Consolidated Balance Sheet Data:
| As of March 31, | As of March 31, | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2011 | 2012 | 2013 | 2014 | 2015 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | US$ | RMB | RMB | RMB | RMB | RMB | US$ | ||||||||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents and short-term investments | 15,940 | 21,744 | 32,686 | 43,632 | 122,341 | 19,735 | 21,744 | 32,686 | 43,632 | 122,341 | 111,518 | 17,295 | ||||||||||||||||||||||||||
Investment securities and investment in equity investees | 3,933 | 2,483 | 2,426 | 22,131 | 52,146 | 8,412 | 2,483 | 2,426 | 22,131 | 52,146 | 125,031 | 19,390 | ||||||||||||||||||||||||||
Property and equipment, net | 1,905 | 2,463 | 3,808 | 5,581 | 9,139 | 1,474 | 2,463 | 3,808 | 5,581 | 9,139 | 13,629 | 2,114 | ||||||||||||||||||||||||||
Goodwill and intangible assets | 11,846 | 11,791 | 11,628 | 13,699 | 48,508 | 7,825 | 11,791 | 11,628 | 13,699 | 48,508 | 87,015 | 13,495 | ||||||||||||||||||||||||||
Total assets | 37,830 | 47,210 | 63,786 | 111,549 | 255,434 | 41,206 | 47,210 | 63,786 | 111,549 | 255,434 | 364,450 | 56,521 | ||||||||||||||||||||||||||
Current bank borrowings | 807 | 1,283 | 3,350 | 1,100 | 1,990 | 321 | 1,283 | 3,350 | 1,100 | 1,990 | 4,304 | 667 | ||||||||||||||||||||||||||
Secured borrowings | — | — | 2,098 | 9,264 | — | — | — | 2,098 | 9,264 | — | — | — | ||||||||||||||||||||||||||
Non-current bank borrowings | — | — | 22,462 | 30,711 | 1,609 | 260 | — | 22,462 | 30,711 | 1,609 | 1,871 | 290 | ||||||||||||||||||||||||||
Unsecured senior notes | — | — | — | — | 48,994 | 7,903 | — | — | — | 48,994 | 51,596 | 8,002 | ||||||||||||||||||||||||||
Redeemable preference shares | — | — | 5,191 | — | — | — | — | 5,191 | — | — | — | — | ||||||||||||||||||||||||||
Total liabilities | 9,413 | 12,797 | 52,740 | 70,731 | 97,363 | 15,707 | 12,797 | 52,740 | 70,731 | 97,363 | 114,561 | 17,767 | ||||||||||||||||||||||||||
Convertible preference shares | — | — | 10,447 | 10,284 | — | — | — | 10,447 | 10,284 | — | — | — | ||||||||||||||||||||||||||
Total Alibaba Group Holding Limited shareholders' equity (deficits) | 26,052 | 31,488 | (24 | ) | 29,338 | 145,439 | 23,462 | 31,488 | (24 | ) | 29,338 | 145,439 | 216,987 | 33,652 | ||||||||||||||||||||||||
Total equity | 28,402 | 34,383 | 513 | 30,417 | 157,413 | 25,393 | 34,383 | 513 | 30,417 | 157,413 | 249,539 | 38,700 |
Selected Operating Data
GMV
The following chart sets forth the GMV transacted on our China retail marketplaces and mobile GMV as a percentage of GMV for the periods indicated:
| Three months ended | Three months ended | ||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jun. 30, 2013 | Sep. 30, 2013 | Dec. 31, 2013 | Mar. 31, 2014 | Jun. 30, 2014 | Sep. 30, 2014 | Dec. 31, 2014 | Mar. 31, 2015 | Jun. 30, 2014 | Sep. 30, 2014 | Dec. 31, 2014 | Mar. 31, 2015 | Jun. 30, 2015 | Sep. 30, 2015 | Dec. 31, 2015 | Mar. 31, 2016 | ||||||||||||||||||||||||||||||||||
| (in billions of RMB, except percentages) | (in billions of RMB, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||
GMV(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Taobao Marketplace GMV | 257 | 275 | 346 | 295 | 342 | 380 | 494 | 381 | 342 | 380 | 494 | 381 | 427 | 438 | 563 | 449 | ||||||||||||||||||||||||||||||||||
Tmall GMV | 88 | 99 | 183 | 135 | 159 | 176 | 293 | 219 | 159 | 176 | 293 | 219 | 246 | 275 | 401 | 293 | ||||||||||||||||||||||||||||||||||
Total GMV | 345 | 374 | 529 | 430 | 501 | 556 | 787 | 600 | 501 | 556 | 787 | 600 | 673 | 713 | 964 | 742 | ||||||||||||||||||||||||||||||||||
Mobile GMV (as a percentage of total GMV) | 12% | 15% | 20% | 27% | 33% | 36% | 42% | 51% | 33% | 36% | 42% | 51% | 55% | 62% | 68% | 73% |
Annual Active Buyers
The following chart sets forth the number of active buyers on our China retail marketplaces for the periods indicated:
| Twelve months ended | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jun. 30, 2013 | Sep. 30, 2013 | Dec. 31, 2013 | Mar. 31, 2014 | Jun. 30, 2014 | Sep. 30, 2014 | Dec. 31, 2014 | Mar. 31, 2015 | |||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
Active buyers | 185 | 202 | 231 | 255 | 279 | 307 | 334 | 350 |
| Twelve months ended | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jun. 30, 2014 | Sep. 30, 2014 | Dec. 31, 2014 | Mar. 31, 2015 | Jun. 30, 2015 | Sep. 30, 2015 | Dec. 31, 2015 | Mar. 31, 2016 | |||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
Annual active buyers | 279 | 307 | 334 | 350 | 367 | 386 | 407 | 423 |
Mobile
The following charts set forth the mobile GMV, mobile revenue, mobile monetization rates realized and mobile MAUs in respect of our China retail marketplaces for the periods indicated:
| Three months ended | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jun 30, 2014 | Sep 30, 2014 | Dec 31, 2014 | Mar 31, 2015 | Jun 30, 2015 | Sep 30, 2015 | Dec 31, 2015 | Mar 31, 2016 | |||||||||||||||||
| (in millions of RMB, except percentages) | ||||||||||||||||||||||||
China retail marketplaces: | |||||||||||||||||||||||||
GMV | 500,916 | 555,666 | 787,047 | 600,092 | 673,198 | 712,933 | 964,317 | 741,937 | |||||||||||||||||
Mobile GMV | 164,428 | 199,054 | 326,889 | 303,772 | 370,578 | 440,113 | 651,139 | 541,024 | |||||||||||||||||
as a percentage of GMV | 33% | 36% | 42% | 51% | 55% | 62% | 68% | 73% | |||||||||||||||||
Revenue | 12,639 | 12,769 | 21,275 | 13,049 | 15,712 | 17,267 | 28,714 | 18,340 | |||||||||||||||||
Mobile revenue | 2,454 | 3,719 | 6,420 | 5,247 | 7,987 | 10,520 | 18,746 | 13,084 | |||||||||||||||||
as a percentage of revenue | 19% | 29% | 30% | 40% | 51% | 61% | 65% | 71% | |||||||||||||||||
Monetization rate | 2.52% | 2.30% | 2.70% | 2.17% | 2.33% | 2.42% | 2.98% | 2.47% | |||||||||||||||||
Mobile monetization rate | 1.49% | 1.87% | 1.96% | 1.73% | 2.16% | 2.39% | 2.88% | 2.42% |
| Month ended | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jun 30, 2014 | Sep 30, 2014 | Dec 31, 2014 | Mar 31, 2015 | Jun 30, 2015 | Sep 30, 2015 | Dec 31, 2015 | Mar 31, 2016 | |||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
Mobile MAUs | 188 | 217 | 265 | 289 | 307 | 346 | 393 | 410 |
Revenue per Active Buyer / Mobile Revenue per Mobile MAU
The following chart sets forth annual China commerce retail revenue per annual active buyer and annualized mobile revenue per mobile MAU from China commerce retail for the periods indicated:
| Twelve months ended | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Jun 30, 2014 | Sep 30, 2014 | Dec 31, 2014 | Mar 31, 2015 | Jun 30, 2015 | Sep 30, 2015 | Dec 31, 2015 | Mar 31, 2016 | |||||||||||||||||
| (in RMB) | ||||||||||||||||||||||||
Annual China commerce retail revenue per annual active buyer(1) | 168 | 166 | 168 | 171 | 171 | 174 | 184 | 189 | |||||||||||||||||
Mobile revenue per mobile MAU from China commerce retail — annualized(2) | 27 | 39 | 52 | 62 | 76 | 87 | 108 | 123 |
Exchange Rate Information
Most of our revenues and expenses are denominated in Renminbi. This annual report contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.4480 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2016. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On May 20, 2016, the noon buying rate was RMB6.5485 to US$1.00.
The following table sets forth, for the periods indicated, information concerning exchange rates between the RMB and the U.S. dollar based on the exchange rates set forth in the H.10 statistical release of the Federal Reserve Board.
| Noon buying rate | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Period | Period end | Average(1) | Low | High | |||||||||
| (RMB per US$1.00) | ||||||||||||
2011 | 6.2939 | 6.4475 | 6.6364 | 6.2939 | |||||||||
2012 | 6.2301 | 6.2990 | 6.3879 | 6.2221 | |||||||||
2013 | 6.0537 | 6.1412 | 6.2438 | 6.0537 | |||||||||
2014 | 6.2046 | 6.1704 | 6.2591 | 6.0402 | |||||||||
2015 | 6.4778 | 6.2869 | 6.4896 | 6.1870 | |||||||||
November | 6.3883 | 6.3640 | 6.3945 | 6.3180 | |||||||||
December | 6.4778 | 6.4491 | 6.4896 | 6.3883 | |||||||||
2016 | |||||||||||||
January | 6.5752 | 6.5726 | 6.5932 | 6.5219 | |||||||||
February | 6.5525 | 6.5501 | 6.5795 | 6.5154 | |||||||||
March | 6.4480 | 6.5027 | 6.5500 | 6.4480 | |||||||||
April | 6.4738 | 6.4754 | 6.5004 | 6.4571 | |||||||||
May (through May 20) | 6.5485 | 6.5124 | 6.5485 | 6.4738 |
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Related to Our Business and Industry
Maintaining the trusted status of our ecosystem is critical to our success, and any failure to do so could severely damage our reputation and brand, which would have a material adverse effect on our business, financial condition and results of operations.
We have established a strong brand name and reputation for our ecosystem in China. Any loss of trust in our ecosystem or platformplatforms could harm the value of our brand and result in buyersconsumers, merchants and sellers ceasing to transact business on our marketplaces as well asother participants reducing thetheir activity level of their commercial activity in our ecosystem, which could materially reduce our revenue and
profitability. Our ability to maintain our position as a trusted platform for online and mobile commerce is based in large part upon:
Increased investments in our business, strategic acquisitions and investments as well as our focus on long-term performance and maintaining the health of our ecosystem may negatively affect our margins and our net income.
We have experienced significant growth in our profit margins and net income. Our operating profit and net income grew 26% and 193%, respectively, from fiscal year 2015 to fiscal year 2016. However, we cannot assure you that we will be able to maintain our growth at these levels, or at all. Our operating profit declined by 7% and net income only grew 4% from fiscal year 2014 to fiscal year 2015. Consistent with our focus on the long-term interests of our ecosystem participants, we may take actions that fail to generate positive short-term financial results, and we cannot assure you that these actions will produce long-term benefits.
We continue to increase our spending and investment in our business to support our future growth, including in improving our technological infrastructure and cloud computing capacities. All of these initiatives are crucial to the success of our business but will have the effect of increasing our costs and lowering our margins and profit, and such effect may be significant, at least in the short-term. Moreover, many of our business initiatives emphasize expanding our user base and enhancing user experience, rather than initially prioritizing monetization.
Furthermore, we have made, and intend to continue to make, strategic investments and acquisitions to expand our user base and geographic coverage and add complementary offerings and technologies to further strengthen our ecosystem. For example, we expect to continue to make strategic investments and acquisitions relating to entertainment, international expansion, cloud computing and big data, logistics services, local commerce, category expansion, e-commerce marketplaces, healthcare and new technologies. Our strategic investments and acquisitions may adversely affect our future financial results, including by decreasing our margins and net income. For example, our acquisitions, including those of UCWeb and AutoNavi, have negatively impacted our financial results historically. We also believe that our expansion into the mobile media and entertainment sectors, including our recent acquisition of Youku Tudou and our international expansion through our recent acquisition of a controlling stake in Lazada, are important to our overall business but will have a negative effect on our financial results, at least in the short-term. In addition, the performance of minority investments we make that are accounted for under the equity method investments may also adversely affect our net income. There can be no assurance that we will be able to sustain our net income growth rates or our margins.
If we are unable to compete effectively, our business, financial condition and results of operations would be materially and adversely affected.
We face increasingly intense competition, mainly from Chinese and global Internet companies as well as certain offline retailers and e-commerce players, including those that specialize in a limited number of product categories. We compete to:
In addition, we face increasing competition in the diversified mobile commerce industry for mobile users in China from established as well as emerging mobile commerce platforms.
Our ability to compete depends on a number of other factors as well, some of which may be out of our control, including:
We face uncertainties and may fail to anticipate competitive conditions as we expand our operations in overseas markets, including, for example, through our recent acquisition of a controlling stake in Lazada. If we are not able to compete effectively, the GMV transacted on our marketplaces and the user engagement level and activity level on our platforms may decrease significantly, which could materially and adversely affect our business, financial condition and results of operations as well as our brand.
We may not be able to maintain and improve the network effects of our ecosystem, which could negatively affect our business and prospects.
Our ability to maintain a healthy and vibrant ecosystem that creates strong network effects between buyers, sellersamong consumers, merchants and other participants is critical to our success. The extent to which we are able to maintain and strengthen these network effects depends on our ability to:
In addition, changes we may make to enhance and improve our ecosystem and balance the needs and interests of the various participants on our ecosystem may be viewed positively from one participant group's perspective, (suchsuch as buyers)consumers, but may have negative effects from another group's perspective, (suchsuch as sellers).merchants. If we fail to balance the interests of all participants in our ecosystem, fewer buyers, sellersconsumers, merchants and other participants may visit our marketplaces, or they may spend less time, mind share and resources on our websites and conduct fewer transactions or use alternative platforms, any of which could result in a material decrease in our revenue and net income.
Our operating philosophy and interest in maintaining the health of our ecosystem may negatively influence our short-term financial performance.
Consistent with our operating philosophy and focus on the long-term interests of our ecosystem participants, we may take actions that fail to generate short-term financial results, and we cannot assure you that these actions will produce long-term benefits. For example, we share a significant portion of the revenue generated from our network of third-party marketing partners, or the Taobao Affiliate Network, with such marketing partners. In addition, our efforts relating to our mobile platform have emphasized expanding our user base and enhancing user experience, rather than prioritizing monetization of user traffic on our mobile platform. We also make investments in new products, services and business initiatives that may not provide economic benefits to us in the short-term or at all.
User behavior on mobile devices is rapidly evolving, and if we fail to successfully adapt to these changes, our competitiveness and market position may suffer.
Buyers, sellers and other participants are increasingly using mobile devices in China for a wide range of purposes, including for e-commerce. While a significant and growing portion of participants access our platforms through mobile devices, this area is relatively new and developing rapidly and we may not be able to continue to increase the level of mobile access to and engagement on our marketplaces. The variety of technical and other configurations across different mobile devices and platforms increases the challenges associated with this environment. Our ability to successfully expand the use of mobile devices to access our platform is affected by the following factors:
If we are unable to attract significant numbers of new mobile buyers and increase levels of mobile engagement, our ability to maintain or grow our business would be materially and adversely affected.
We may not be able to successfully monetize traffic on our mobile platform, which could have a material adverse effect on our business.
An increasing percentage of our users are accessing our marketplaces through mobile devices, a trend that we expect to continue. Our ability to monetize our mobile user traffic is critical to our business and our growth. We face a number of challenges to successfully monetizing our mobile user traffic, including:
If as we experience increased use of mobile devices for mobile commerce we are unable to monetize that increased use, our business may not grow or could decline, and our revenues and net income would be materially reduced. For instance, to date we have chosen not to display as many marketing impressions on our mobile apps as compared to on our personal computer-based websites. Although we do not believe the increasing use of mobile devices to conduct commerce has had an adverse effect on our business, our rapid overall growth may make less apparent any adverse effects of this trend on our near-term financial performance. In the quarter ended March 31, 2015, our mobile GMV exceeded 50% of our total GMV for the first time, and we expect mobile GMV as a percentage of total GMV will continue to grow and that our monetization rates for mobile interfaces in the near term will remain lower than those we have achieved from websites because to date our focus has not been on maximizing mobile monetization and we have only recently begun to increasingly monetize mobile activities. Going forward we believe our financial results will become increasingly dependent on our ability to monetize the use of mobile devices to access our marketplaces. We expect this trend will have a greater effect on our business to the extent that shopping on mobile devices displaces transactions that could have occurred on personal computers.
We may not be able to maintain our culture, which has been a key to our success.
Since our founding, our culture has been defined by our mission, vision and values, and we believe that our culture has been critical to our success. In particular, our culture has helped us serve the long-term interests of our customers, attract, retain and motivate employees and create value for our shareholders. We face a number of challenges that may affect our ability to sustain our corporate culture, including:
If we are not able to maintain our culture or if our culture fails to deliver the long-term results we expect to achieve, our business, financial condition, results of operations and prospects could be materially and adversely affected.
We may not be able to maintain or grow our revenue or our business.
We primarily derive our revenue from online marketing services, commissions based on transaction value derived from certain of our marketplaces, fees from the sale of memberships on our wholesale marketplaces and cloud service fees, and we have experienced significant growth in revenue in recent years. In particular, our revenue grew 45% from fiscal year 2014 to fiscal year 2015 and 33% from fiscal year 2015 to fiscal year 2016. Our ability to continue to generate and grow our revenue depends on a number of factors. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Factors Affecting Our Results of Operations — Our Ability to Create Value for Our Users and Generate Revenue" and "— Our Monetization Model."
Our future revenue growth also depends on our ability to expand into new geographic regions, including our expansion into international markets, and grow our other businesses, including our cloud computing business and the businesses we have acquired or invested in and new business initiatives we may explore in the future. In particular, we face risks associated with expanding into sectors or geographies in which we have limited or no experience. For example, as we expand our entertainment business, we may be unable to produce or license quality content on commercially reasonable terms or at all, fail to anticipate or keep up with changes in user preferences, user behavior and technological developments or fail to gain access to content distribution channels. In addition, as we expand into the online video industry following the acquisition of Youku Tudou, we may not be able to acquire and retain users, attract marketers to purchase online marketing services on our video websites, obtain professionally produced content at competitive prices or at all, encourage more user-generated content, or grow user acceptance and the popularity of our online video content. Our expansion into new sectors and geographic regions will subject us to additional regulatory risks, such as permit requirements and regulations over content in the PRC. If we are unable to compete effectively,successfully monetize and expand these businesses in our business, financial conditiontarget markets, our future revenue growth may be adversely affected.
In addition, our revenue growth may slow or our revenues may decline for other reasons, including decreasing consumer spending, increasing competition and results of operations would be materially and adversely affected.
We face increasingly intense competition, mainly from Chinese and global Internet companies as well as from offline retailers, particularly those establishing online marketplaces. We compete to attract, engage and retain buyers based on the variety and value of products and services listed on our marketplaces, overall user experience and convenience and availability of payment settlement and logistics services. We compete to attract and retain sellers based on our size and the engagement of buyers, and the effectiveness and valueslowing growth of the marketing services we offer. We also compete based on the usefulnessChina retail or China online retail industry and changes in government policies or general economic conditions. In addition, as our revenue grows to a higher base level, that rate of the services we provide, including marketing data and data science, cloud computing services, the availability of supporting services, including payment settlement and logistics services, and the qualitygrowth of our customer service. In addition, we compete for motivatedrevenue has slowed and effective talent and personnel, including engineers and product developers who serve critical functionsmay further slow in the development of our products and our ecosystem.
Our ability to compete depends on a number of other factors as well, some of which may be out of our control, including:
If we are not able to compete effectively, the GMV transacted on our marketplaces and the user activity level on our platform may decrease significantly, which could materially and adversely affect our business, financial condition and results of operations as well as our brand.future.
We rely on Alipay to conduct substantially all of the payment processing and all of the escrow services on our marketplaces. Alipay's business is highly regulated, and it is also subject to a range of risks. If Alipay's services are limited, restricted, curtailed or degraded in any way or become unavailable to us or our users for any reason, our business may be materially and adversely affected.
Through contractual arrangements with us, Alipay provides convenient payment processing and escrow services thatto us on preferential terms. These services are critical to our platform through contractual arrangements with us.platforms and the development of our ecosystem. In the twelve months ended March 31, 2015,2016, approximately 75% of GMV on our China retail marketplaces waswere settled through Alipay's escrow and payment processing services. We rely on the convenience and ease of use that Alipay and the settlement and escrow services and convenient payment mechanisms provided by Alipay are critical factors contributingprovides to our success andusers. If the developmentquality, utility, convenience or attractiveness of Alipay's services declines for any reason, the attractiveness of our ecosystem.
We established Alipay in December 2004 to operate our payment services. In June 2010, the PBOC issued new regulations that required non-bank payment companies to obtain a license in order to operate in China. These regulations provided specific guidelines for license applications only for domestic PRC-owned entities. These regulations stipulated that, in order for any foreign-invested payment company to obtain a license, the scope of business, the qualifications of any foreign investormarketplaces could be materially and any level of foreign ownership would be subject to future regulations to be issued, which in addition would require approval by the PRC State Council. Further, the regulations required that any payment company that failed to obtain a license had to cease operations by September 1, 2011. Although Alipay was prepared to submit its license application in early 2011, at that time the PBOC had not issued any guidelines applicable to license applications for foreign-invested payment companies (and no such guidelines have been issued as of the date of this annual report). In light of the uncertainties relating
to the license qualification and application process for a foreign-invested payment company, our management determined that it was necessary to restructure Alipay as a company wholly-owned by PRC nationals in order to avail Alipay of the specific licensing guidelines applicable only to domestic PRC-owned entities. Accordingly we divested all of our interest in and control over Alipay, which resulted in deconsolidation of Alipay from our financial statements. This action enabled Alipay to obtain a payment business license in May 2011 without delay and without any detrimental impact to our China retail marketplaces or to Alipay. Following the divestment of our interest in and control over Alipay, effective in the first calendar quarter of 2011, we entered into a framework agreement with Ant Financial Services (the parent company of Alipay), Alipay, SoftBank, Yahoo, Jack Ma and Joe Tsai to govern our relationship with Alipay and its parent company, Ant Financial Services. In August 2014, we entered into a share and asset purchase agreement or the 2014 SAPA, to further restructure the economic terms of our relationship with Alipay and Ant Financial Services. Pursuant to a commercial agreement we entered into with Alipay in connection with the 2011 framework agreement, as amended through August 2014, Alipay continues to provide payment services to us on terms preferential to us, which arrangement remains unchanged under the 2014 SAPA. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries."adversely affected.
Alipay's business is highly regulated, and it is also subject to a number of risks that could materially and adversely affect its ability to provide payment processing and escrow services to us, including:
Regulators and third parties in China have been increasing their focus on online and mobile payment services, such as those provided by Alipay, and recent regulatory and other developments could reduce the convenience or utility of Alipay users' accounts, including the following:
services. Buyers on our marketplaces could continue to pay for purchases through other means, such as online bank transfers and credit cards, and continue to fund their Alipay escrow accounts. So long as payments are not made outside of the Alipay escrow system, we would continue to collect commissions on such purchases if they were made on marketplaces on which we collect commissions. The PBOC has indicated that the purpose of these provisions and other parts of the draft regulations is prudential and that final regulations, including these provisions, would be subject to public consultation and revision.
In April 2014,addition, Alipay's business is highly regulated. Alipay is required to comply with numerous complex and evolving laws, rules and regulations and faces the risk of failure to manage its regulatory risks. In particular, regulators and third parties in China Banking Regulatory Commission, or the CBRC,have been increasing their focus on online and the PBOC issued Joint Circular 10, which, effective June 30, 2014, will require commercial banksmobile payment services, and recent regulatory and other financial institutions in Chinadevelopments could reduce the convenience or utility of Alipay users' accounts. See "— We and Ant Financial Services are subject to conducta broad range of laws and regulations, and future laws and regulations may impose additional customer verification procedures prior to establishing an automatic payment link between customers' bank accounts and their accounts with third-party payment services, such as Alipay. Once the accounts have been linked, Joint Circular 10 also requires commercial banksrequirements and other financial institutions in China to, upon the customer's request, adjust any limits imposedobligations on the amountsour business or otherwise that may be transferred to the linked accounts. It is unclear how commercial banks and other financial institutions will implement the additional customer verification procedures or the requirement to adjust the transfer limits.
We rely on the convenience and ease of use that Alipay provides to our users. If the quality, utility, convenience or attractiveness of Alipay's services declines as a result of these limitations or for any other reason, the attractiveness of our marketplaces could be materially and adversely affected.affect our business, financial condition and results of operations," and "Item 4. Information on the Company — B. Business Overview — Regulation — Regulation Applicable to Alipay."
If we needneeded to migrate to another third-party payment service, for any reason, the transition would require significant time and management resources, and the third-party payment service may not be as effective, efficient or well-received by buyersconsumers and sellersmerchants on our marketplaces. These third-party payment services also may not provide escrow services, and we may not be able to receive commissions based on GMV transacted through these systems. In addition, weWe would also no longer have the benefit of the terms preferential to us under our commercial agreement with Ant Financial Services and Alipay and would likely be required to pay more for payment processing and escrow services than we are currently paying.pay. There can be no assurance that we would be able to reach an agreement with an alternative online payments service on acceptable terms or at all.
Moreover, because of our close association with Alipay and overlapping user base, events that negatively affect Alipay could also negatively affect customers', regulators' and other third parties' perception of us. In addition, any actual or perceived conflict of interest between us and Alipay or any other company integral to the functioning of our ecosystem could also materially harm our reputation as well as our business and prospects.
We do not control Alipay or its parent entity, Ant Financial Services, over which Jack Ma effectively controls a majority of the voting interests. Accordingly, ifIf conflicts that could arise between us and Alipay or Ant Financial Services including conflicts that could threaten our ability to continue to receive payment services on preferential terms or conflicts relating to commercial opportunities that we or Alipay or Ant Financial Services wish to pursue, such conflicts mayare not be resolved in our favor, andthey could have a negative effect on our ecosystem and materially and adversely affect our business, financial condition, results of operations and prospects. Moreover, conflicts of interest may arise due to Jack Ma's role as executive chairman of our company and through his voting control over and his economic interest in Ant Financial Services, and he may not act to resolve such conflicts in our favor.
Although we rely on Alipay to conduct substantially all of the payment processing and all of the escrow services on our marketplaces, we do not have any control over Alipay. Following the divestment of our interests in and control over Alipay, effective as of the first calendar quarter of 2011, we entered into an agreement with Alipay pursuant to which Alipay provides payment services to us on preferential terms that are preferentialpursuant to us. Theour long-term commercial agreement as amended through August 2014, has an initial term of 50 years fromwith Ant Financial Services and Alipay. Following the date of the original agreement, and is automatically renewable for further periods of 50 years. Following such divestment and subsequent equity holding restructurings,restructuring related to Ant Financial Services, an entity controlled by Jack Ma, our executive chairman, has becomebecame the general partner of Hangzhou Junhan Equity Investment Partnership, or Junhan, a PRC limited partnership, and Junao Equity Investment Partnership, or Junao, a PRC limited partnership, which are two major equity holders of Alipay's parent, Ant Financial Services. Accordingly, Jack has an economic interest in Ant Financial Services and is able to exercise the voting power of the major shareholders of Ant Financial Services. We understand that through the exercise of suchthis voting power, Jack continues to control a substantial majority of the voting interests in Ant Financial Services.
As noted in the immediately preceding risk factor, Alipay's business is subject to a numberTable of risks.Contents
If Alipay were not able to successfully manage thesethe risks relating to its business, its ability to continue to deliver payment services to us on preferential terms may be undermined. Furthermore, if notwithstanding its existing obligations to us under the agreement,for any reason, Alipay sought to alter the terms of the agreement and to amend the terms of its agreements and arrangements with us, in order to improve its business by modifying the payment processing terms or otherwise, there is no assurance that Jack Ma, in light of his voting control over Alipay's parent, Ant Financial Services, willwould act in our interest. If we were to lose suchthe preferential terms with Alipay or if Alipay is unable to successfully manage its business, our ecosystem could be negatively affected, and our business, financial condition, results of operations and prospects could be materially and adversely affected.
In addition to the payment processing and escrow services provided by Alipay, Ant Financial Services also provides other financial services to participants in our ecosystem, including micro-finance services, through the SME loan business that we transferred to Ant Financial Services upon the completion of the restructuring of our relationship with Ant Financial Services in early February 2015,wealth management, insurance and credit referencing services, and may provide additional services in the future. Other conflicts of interest between us, on the one hand, and Alipay and Ant Financial Services, on the other hand, may arise relating to commercial or strategic opportunities or initiatives. Although we and Ant Financial Services have each agreed to certain non-competition undertakings, under the 2014 SAPA, we cannot assure you that Ant Financial Services would not pursue opportunities to provide services to our competitors or other opportunities that would conflict with our interests. Jack Ma may not resolve such conflicts in our favor. Furthermore, our ability to explore alternative payment services other than Alipay for our marketplaces may be constrained due to Jack's relationship with Ant Financial Services.
In addition, we have grantedgrant share-based awards to employees of Ant Financial Services, and Junhan has madegrants share-based awards tied to the value of Ant Financial Services to our employees. The provision of awards to our employees tied to the value of Ant Financial Services is expectedintended to enhance our strategic and financial relationship with Ant Financial Services. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Share-basedEquity-based Award Reimbursement Arrangements" and "— Equity-based Awards to Our Employees by a Related Party.Arrangements." The share-based awards granted by Junhan to our employees resultedresult in expenses that are recognized by our company. Subject to the approval of our audit committee, Jack, through his role with us and his control over Junhan, could be in a position to propose and promote further share-based grants that result
in additional, and potentially significant, expenses to our company. Accordingly, these and other potential conflicts of interest between us and Ant Financial Services or Alipay, and between us and Jack or Junhan, may not be resolved in our favor, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Moreover, because of our close association with Ant Financial Services and overlapping user base, events that negatively affect Ant Financial Services could also negatively affect customers', regulators' and other third parties' perception of us. In addition, any actual or perceived conflict of interest between us and Ant Financial Services or any other company integral to the functioning of our ecosystem could also materially harm our reputation as well as our business and prospects.
If we are not able to continue to innovate or if we fail to adapt to changes in our industry, our business, financial condition and results of operations would be materially and adversely affected.
The Internet industry is characterized by rapidly changing technology, evolving industry standards, new mobile apps, protocols and technologies, new service and product introductions, new media and entertainment content — including user-generated content — and changing customer demands. Furthermore, our competitors are constantly developing innovations in Internet search, online marketing, communications, social networking, entertainment and other services, on both mobile devices and personal computers, to enhance users' online experience. We continue to invest significant resources in our infrastructure, research and development and other areas in order to enhance our platform technology and our existing products, services and servicescontent as well as to introduce new high quality products, services and servicescontent that will attract more participants to our marketplaces.platforms. The changes and developments taking place in our industry may also require us to re-evaluate our business model and adopt significant changes to our long-term strategies and business plan. Our failure to innovate and adapt to these changes would have a material adverse effect on our business, financial condition and results of operations.
For example, the use of mobile devices to access content and transact on our platforms is developing rapidly, and we may fail to continue to offer superior user experience in order to increase or maintain the level of mobile engagement on our platforms, or to successfully develop the mobile community. The variety of technical and other configurations across different mobile devices and platforms increases the challenges associated with this environment. If we are unable to continue to attract significant numbers of new mobile consumers and increase or maintain levels of mobile engagement, our ability to maintain or grow our business would be materially and adversely affected.
Our business generates and processes a large amount of data, and the improper use or disclosure of such data could harm our reputation as well as have a material adverse effect on our business and prospects.
Our marketplacesbusiness, including our cloud computing business, generates and platform generate and processprocesses a large quantity of personal, transaction, demographic and behavioral data. We face risks inherent in handling and protecting large volumes of data and in protecting the security of such data. In particular, we face a number of challenges relating to data from transactions and other activities on our platform,platforms, including:
The PRC regulatory and enforcement regime with regard to data security and data protection is evolving. On July 1, 2015, the National People's Congress Standing Committee promulgated the National Security Law, or the New National Security Law, which took effect on the same date and replaced the former National Security Law promulgated in 1993. The New National Security Law covers various types of national security including technology security and information security. According to the New National Security Law, the state shall ensure that the information system and data in important areas are secure and controllable. In addition, according to the New National Security Law, the state shall establish national security review and supervision institutions and mechanisms, and conduct national security reviews of key technologies and IT products and services that affect or may affect national security. In particular, we are obligated under the New National Security Law to safeguard national security by, for example, providing evidence related to activities endangering national security, providing convenience and assistance for national security work, and providing necessary support and assistance for national security institutions, public security institutions as well as military institutions. As such, we may have to provide data to PRC government authorities and military institutions for compliance with the New National Security Law, which may result in additional expenses to us and subject us to negative publicity which could harm our reputation with users and negatively affect the trading price of our ADSs. There are uncertainties on how the New National Security Law will be implemented in practice. PRC regulators, including the MIIT and the Cyberspace Administration, have been increasingly focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater attention and focus from regulators, as well as attract public scrutiny and attention going forward. This greater attention, scrutiny and enforcement, including more frequent inspections, could increase our compliance costs and, subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, our reputation and results of operations could be materially and adversely affected.
In addition, pursuant to our data sharing agreement with AlipayAnt Financial Services and other participants in our ecosystem,Alipay, which sets forth data security and confidentiality protocols, and subject to relevant legal requirements and limitations, we share certainhave agreed to a broad sharing of data with AlipayAnt Financial Services through a data sharing platform that we own and operate. Cainiao Network, Koubei and Alibaba Pictures have also entered into agreements with us to participate in the data sharing platform. We also grant expressly limited access to specified data on our data platform to certain other participants in our ecosystem whothat provide services to sellers,merchants and consumers, such as marketing affiliates, retail operational operating
partners, logistics service providers, mobile app developers, independent software vendors, or ISVs, cloud developers, marketing affiliates and various professional service providers. These ecosystem participants face the same challenges inherent in handling and protecting large volumes of data and in protecting the security of such data. Any systems failure or security breach or lapse on our part or on the part of any of our ecosystem participants that results in the release of user data could harm our reputation and brand and, consequently, our business, in addition to exposing us to potential legal liability.
As we expand our operations, we will be subject to additional laws in other jurisdictions where our sellers, buyersmerchants, consumers, users, customers and other participants are located. The laws, rules and regulations of other jurisdictions, such as the United States and Europe, may be at a more mature stage of development, be more comprehensive and nuanced in their scope, and impose more stringent or conflicting requirements and penalties than those in China, compliance with which could require significant resources and costs. Our continued expansion into cloud computing services, both within China and overseas, will also increase the amount of data hosted on our system and increase the number of parties who host data on our system, which will present increased challenges and risks in relation to data protection and data privacy. Our privacy policies and practices concerning the collection, use and disclosure of user data are posted on our websites. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any regulatory requirements or privacy protection-related laws, rules and regulations could result in proceedings or actions against us by governmental entities or others. These proceedings or actions maycould subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and severely disrupt our business.
Our failure to manage the growth of our business and operations could harm us.
Our business has become increasingly complex as its scale, diversity and geographic coverage, as well as that of our workforce, continue to grow. We have also significantly expanded our headcount, office facilities and infrastructure, and we anticipate that further expansion in certain areas and geographies will be required. This expansion increases the complexity of our operations and places a significant strain on our management, operational and financial resources. We must continue to effectively hire, train and manage new employees. If our new hires perform poorly or if we are unsuccessful in hiring, training, managing and integrating new employees, our business, financial condition and results of operations may be materially harmed.
Moreover, our current and planned personnel, systems, procedures and controls may not be ableadequate to maintain or growsupport our revenue or our business.
We primarily derive our revenue from online marketing services, commissions based on transaction value derived from certainfuture operations. To effectively manage the expected growth of our marketplacesoperations and fees from the sale of memberships onpersonnel, we will need to continue to improve our wholesale marketplaces,transaction processing, operational and we have experienced significant growth in revenue in recent years. In particular, our revenue grew 52% from fiscal year 2013 to fiscal year 2014financial systems, procedures and 45% from fiscal year 2014 to fiscal year 2015. Our marketing customers are typically brand owners, distributors and merchants who are sellers on our marketplaces. Marketing customers do not have long-term marketing commitments with us. The price a merchant is willing to pay for online marketing services generally depends on its expected GMV, profit margins and lifetime value of customers derived from such marketing investment. If those services do not generate the rate of return the seller expects or rates that are competitive to alternatives, the seller may reduce its spending on the marketing services we offer. In addition,controls, which could be particularly challenging as we currently are monetizing mobile GMV at a lower rate than GMV generated through personal computer interfaces, our revenue growth rate may be affected by the increasing proportion of mobile GMVacquire new operations with different and incompatible systems, in our overall GMV. Furthermore, ournew industries or geographic areas. These efforts to improve user experience may also adversely affect our revenue growthwill require significant managerial, financial and financial results in the near term.
Sellers on Tmall and Juhuasuan are required to pay a commission typically ranging from 0.3% to 5% of GMV settled through Alipay depending on the product category. If less GMV is transacted through such marketplaces or more GMV is generated from product categories with lower commission rates, or if more transactions are settled directly between buyers and sellers without using Alipay's payment processing and escrow services, the commissions we receive from transactions would decrease.
For our wholesale marketplaces, we primarily derive revenues from membership fees. Potential changes in our strategy for monetizing our wholesale marketplaces could result in prolonged reductions in revenue from those marketplaces.
Our future revenue growth may also depend on our ability to grow our other businesses, including our cloud computing business and the businesses we have acquired or invested in and new business initiatives we may explore in the future. In particular, we face risks associated with expanding into industries in which we have limited or no experience. For example, as we expand our entertainment business, we may be unable to produce or license quality content on commercially reasonable terms or at all, fail to anticipate or keep up with changes in user preferences, user behavior and technological developments or fail to gain access to content distribution channels. In addition, our expansion into the entertainment industry will subject us to additional regulatory risks, such as permit requirements and regulations over content in the PRC. If we are unable to successfully monetize and expand these businesses, our future revenue growth may be adversely affected.
In addition, our revenue growth may slow or our revenues may decline for other reasons, including decreasing consumer spending, increasing competition, slowing growth of the China retail or China online retail industry and changes in government policies or general economic conditions. In addition, our revenue growth rate will likely decline as our revenue grows to higher levels.
Increased investments in our business may negatively affect our margins and our net income.
human resources. We have experienced significant growth in our profit margins and net income. For example, our operating profit and net income grew 132% and 171%, respectively, from fiscal year 2013 to fiscal year 2014. However, we cannot assure you that we will be able to maintaineffectively manage our growth ator to implement all these levels, or at all. For example,systems, procedures and control measures successfully. If we are not able to manage our operating profit declined by 7%growth effectively, our business and net income only grew 4% from fiscal year 2014prospects may be materially and adversely affected.
We face risks relating to fiscal year 2015.our acquisitions, investments and alliances.
Furthermore,We have acquired and invested in a large number and diverse range of businesses, technologies, services and products in recent years, including investments of varying sizes in equity investees and joint ventures, and we have made, and intend to continue to make, strategica number of pending investments and acquisitions that are subject to expand our user base, enhance our cloud computing business, add complementary productsclosing conditions. See "Item 5. Operating and technologiesFinancial Review and further strengthen our ecosystem. For example, weProspects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities." We expect to continue to makeevaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets, as well as strategic investments and acquisitions relating to mobile, entertainment, cloud computing and big data, logistics services, local commerce, category expansion, healthcare, as well as the Internet of things. Our strategic investments and acquisitions may affect our future financial results, including by decreasing our margins and net income. For example, our acquisitions,alliances. At any given time
including UCWeb, OneTouchwe may be engaged in discussing or negotiating a range of these types of transactions. These transactions involve significant challenges and AutoNavi, resultedrisks, including:
Our significant acquisition activity has occurred recently, and we expect tohave limited experience in integrating major acquisitions. As our acquisition and investment activity continues at a rapid pace, with a large number and diverse range of target companies, we and our management will continue to incur increasing costs, which may be greater than we anticipate. Increasesface significant challenges, including unanticipated ones, in integrating these businesses into our costs may materially and adversely affect our business and profitability and there can be no assurance that we will be able to sustain our net income growth rates or our margins.existing businesses.
Failure to maintain or improve our technology infrastructure could harm our business and prospects.
We are constantly upgrading our marketplaces and platformplatforms to provide increased scale, improved performance for both online and mobile use of our platform and additional built-in functionality and additional capacity for our cloud computing services.capacity. Adopting new products and upgrading our ecosystem infrastructure require significant investments of time and resources, including adding new hardware, updating software and recruiting and training new engineering personnel. Maintaining and improving our technology infrastructure require significant levels of investment. Adverse consequencesAny failure to maintain and improve our technology infrastructure could includeresult in unanticipated system disruptions, slower response times, impaired quality of buyers' and sellers'users' experiences and delays in reporting accurate operating and financial information. For example, on Singles Day, there is significantly higher than normal activity on our marketplaces that our systems must handle. In addition, much of the software and interfaces we use are internally developed and proprietary technology. If we experience problems with the functionality and effectiveness of our software or platforms, or are unable to maintain and constantly improve our technology infrastructure to handle our business needs, our business, financial condition, results of operation and prospects, as well as our reputation, could be materially and adversely affected.
The successful operation of our business depends upon the performance and reliability of the Internet infrastructure in China and other countries in which we operate.
Our business depends on the performance and reliability of the Internet infrastructure in China and other countries in which we operate. Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology of China. In addition, the national networks in China are connected to the Internet through state-owned international gateways, which are the only channels through which a domestic user can connect to the Internet outside of China. We may not have access to alternative networks in the event of disruptions, failures or other problems with the Internet infrastructure in China or elsewhere. In addition, the Internet infrastructure in the countries in which we operate may not support the demands associated with continued growth in Internet usage.
The failure of telecommunications network operators to provide us with the requisite bandwidth could also interfere with the speed and availability of our websites. We have no control over the costs of the services provided by the telecommunications operators. If the prices that we pay for telecommunications and Internet services rise significantly, our gross margins could be adversely affected. In addition, if Internet access fees or other charges to Internet users increase, our user traffic may decrease, which in turn may significantly decrease our revenues.
Our ecosystem could be disrupted by network interruptions.
Our ecosystem depends on the efficient and uninterrupted operation of our computer and communications systems. Substantially all of our computer hardware and our cloud computing services isare currently located in China. In addition, a large number of sellersmerchants maintain their enterprise resource planning, or ERP, and customer relationship management, or CRM, systems on our cloud computing platform, which contains substantial quantities of data relating to their accounts, transaction data, buyerconsumer information and other data that enables sellersmerchants to operate and manage their businesses. Increasing media and entertainment content on our marketplaces and website also require additional network capacity and infrastructures to process. Consumers expect our media and entertainment content to be readily available online, and any disruptions or delay to the delivery of content could affect the attractiveness and reputation of our media and entertainment content platform. Although we have prepared for contingencies through redundancy measures and disaster recovery plans such preparationand also carry business interruption insurance, these preparations and insurance coverage may not be sufficient and we do not carry business interruption insurance.sufficient. Despite any precautions we may take, the occurrence of a natural disaster, such as an earthquake, flood or fire, or other unanticipated problems at our facilities or the facilities of Alipay,Ant Financial Services, Cainiao LogisticsNetwork and other participants in our ecosystem, including power outages, system failures, telecommunications delays or failures, construction
accidents, break-ins to information technology systems or computer viruses, could result in delays or interruptions to our marketplaces and platforms, loss of our, consumers' and customers' data and business interruption for us and our customers. Any of these events could damage our reputation, significantly disrupt our operations and the operations of the sellersmerchants and other participants in our ecosystem and subject us to liability, which could materially and adversely affect our business, financial condition and results of operations.
Our sellers useIf third-party logistics and delivery companies to fulfill and deliver their orders. If these logistics and delivery companiesservice providers used by our merchants fail to provide reliable deliverylogistics services, or ourthe logistics informationdata platform operated by Cainiao Network were to malfunction, suffer an outage or otherwise fail, our business and prospects, as well as our financial condition and results of operations, may be materially and adversely affected.
We cooperateOur merchants use third-party logistics service providers to fulfill and deliver their orders. Cainiao Network cooperates with a number of third-party logistics and delivery companiesservice providers to help merchants on our sellersplatforms fulfill orders and deliver their products to buyers. We have establishedconsumers. Cainiao Network operates a logistics informationdata platform that is operated by Zhejiang Cainiao Supply Chain Management Co. Ltd., or Cainiao Logistics (formerly referred to as China Smart Logistics), our 48%-owned affiliate, that links our information system toand those of our logistics service partners.providers. Interruptions to or failures in these third-parties' logistics and delivery services, or in ourCainiao Network's logistics informationdata platform, could prevent the timely or proper delivery of products to buyers,consumers, which would harm the reputation of our marketplaces and our ecosystem. These interruptions may be due to events that are beyond our control or the control of Cainiao Network or these
logistics and delivery companies,service providers, such as inclement weather, natural disasters, transportation disruptions or labor unrest. These logistics and delivery services could also be affected or interrupted by industry consolidation, insolvency or government shut-downs. We do not have agreements with logistics and delivery companies that require them to offer services to our sellers. The sellersmerchants on our marketplaces may not be able to find alternative logistics and delivery companiesservice providers to provide logistics and delivery services in a timely and reliable manner, or at all. We do not have agreements with logistics service providers that require them to offer services to our merchants. If the logistics informationdata platform we useoperated by Cainiao Network were to fail for any reason, ourthe logistics service providers would be severely hindered from or unable to connect with our sellers,merchants, and their services and the functionality of our ecosystem could be severely affected. If the products sold on our marketplaces are not delivered in proper condition, on a timely basis or at shipping rates that marketplace participants are willing to bear, our business and prospects, as well as our financial condition and results of operations could be materially and adversely affected.
If other third-party service providers on our ecosystem fail to provide reliable or satisfactory services, our business, financial condition and results of operations may be materially and adversely affected.
In addition to the services provided to our ecosystem by AlipayAnt Financial Services, Cainiao Network and logistics service providers, a number of third partyother third-party participants, including retail operating partners, logistics service providers, mobile app developers, ISVs, cloud developers, marketing affiliates retail operational partners, ISVs, and various professional service providers, also provide services to sellers. We do not have any agreements that require these third-party participants to provide services to sellers.users on our platforms, including merchants, brands, consumers and users of our cloud computing services. To the extent these third-party service providers are unable to provide satisfactory services to sellersour users on commercially acceptable terms or at all or if we fail to retain existing or attract new quality service providers to our marketplaces,platforms, our ability to retain, attract or attract sellers and buyersengage our users may be severely limited, which may have a material and adverse effect on our business, financial condition and results of operations. In addition, certain of these third-party services providers on our ecosystem have access to our user data to a limited extent in order to provide their services. If such third-party participants engage in activities that are negligent, illegal or otherwise harm the trustworthiness and security of our ecosystem, including the leak or negligent use of data, or users are otherwise dissatisfied with their service quality, we could suffer reputational harm, even if these activities are not related to, attributable to or caused by us.
We depend on key management as well as experienced and capable personnel generally, and any failure to attract, motivate and retain our staff could severely hinder our ability to maintain and grow our business.
Our future success is significantly dependent upon the continued service of our key executives and other key employees. If we lose the services of any member of management or key personnel, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new staff, which could severely disrupt our business and growth. In particular, Jack Ma, our lead founder, executive chairman and one of our principal shareholders, has been crucial to the development of our culture and strategic direction.
In addition, we have a number of employees, including many members of management, whose equity ownership inAs our company gave them a substantial amount of personal wealth following our initial public offering.
As a result,business develops and evolves, it may bebecome difficult for us to continue to retain and motivate thesesuch employees. A number of our employees, and this wealth could affect their decisions about whether or not they continueincluding many members of management, may choose to remain with us.pursue other opportunities outside of our company. If we are unable to motivate or retain these employees, our business may be severely disrupted and our prospects could suffer.
The size and scope of our ecosystem also require us to hire and retain a wide range of effective and experienced personnel who can adapt to a dynamic, competitive and challenging business environment. We will need to continue to attract and retain experienced and capable personnel at all levels as we expand our business and operations. Competition for talent in the PRC Internet industry is intense, and the availability of suitable and qualified candidates in China is limited. Competition for these individuals could cause us to offer higher compensation and other benefits to attract and retain them. Even if we were to offer higher compensation and other benefits, there is no assurance that these individuals will choose to join or continue to work for us. Any failure to attract or retain key management and personnel could severely disrupt our business and growth.
Our revenue and net income may be materially and adversely affected by any economic slowdown in China as well as globally.
The success of our business ultimately depends on consumer spending. We currently derive substantially all of our revenue from China and are also expanding into the international market. As a result, our revenue and net income are impacted to a significant extent by economic conditions in China and globally, as well as economic conditions specific to online and mobile commerce. The global economy, markets and levels of consumer spending are influenced by many factors beyond our control, including consumer perception of current and future economic conditions, political uncertainty, levels of employment, inflation or deflation, real disposable income, interest rates, taxation and currency exchange rates.
The PRC government has in recent years implemented a number of measures to control the rate of economic growth, including by raising interest rates and adjusting deposit reserve ratios for commercial banks as well as by implementing other measures designed to tighten credit and liquidity. These measures have contributed to a slowdown of the PRC economy. While the PRC government started easing its monetary policy in 2015, there have been signs of continuing economic slowdown in China. According to the National Bureau of Statistics of China, China's GDP growth rate was 6.9% in 2015, down from 7.4% in 2014. Any continuing or worsening slowdown could significantly reduce domestic commerce in China, including through the Internet generally and within our ecosystem. Although our financial performance is mainly affected by consumer spending, which may not be as adversely affected as other sectors of the economy, an economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in China or any other market in which we may operate could have a material adverse effect on consumer spending and therefore adversely affect our business, financial condition and results of operations.
Security breaches and attacks against our systems and network, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely affect our financial condition and results of operations.
Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of user information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.
We have in the past and are likely again in the future to be subject to these types of attacks, although to date no such attack has resulted in any material damages or remediation costs. If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us, our sellers, buyersmerchants, consumers, users, customers or other participants, or the communication infrastructure on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income. We do not carry business interruption or cybersecurity insurance.
Our failure to manage the growth of our business and operations could harm us.
Our business has become increasingly complex, both in the types of businesses we operate and their scale. We have significantly expanded our headcount, office facilities and infrastructure, and anticipate that further expansion in certain areas and geographies will be required. This expansion increases the complexity of our operations and places a significant strain on our management, operational and financial resources. We must continue to effectively hire, train and manage new employees. If our new hires perform poorly or if we are unsuccessful in hiring, training, managing and integrating new employees, our business, financial condition and results of operations may be materially harmed.
Moreover, our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. To effectively manage the expected growth of our operations and personnel, we will need to continue to improve our transaction processing, operational and financial systems, procedures and controls, which could be particularly challenging as we acquire new operations with different and incompatible systems.
These efforts will require significant managerial, financial and human resources. We cannot assure you that we willmay not be able to effectively manage our growth or to implement all these systems, procedures and control measures successfully. If we are not able to manage our growth effectively, our business and prospects may be materially and adversely affected.
We face risks relating to our acquisitions, investments and alliances.
We have acquired and invested inacquire a significant number of businesses, technologies, services and products in recent years, including investments indirect equity investees and joint ventures in which we do not hold a controlling stake, and have a number of pending investments and acquisitions that are subject to closing conditions. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities." We expect to continue to evaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets, as well as strategic investments and alliances. At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. These transactions involve significant challenges and risks, including:
In August 2014, we entered into a share and asset purchase agreement, or the 2014 SAPA, to non-bank payment companies;
Our significant acquisition activity has occurred recently, and we do not have substantial experience in integrating major acquisitions. Any of these difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. In particular, the The 2014 SAPA provides for future potential acquisition by usequity issuances of anup to 33% of equity interest in Ant Financial Services subject to us in the event that Ant Financial Services applies for and receives certain PRC regulatory approvals. We
Tableapprovals in the future. In addition, in the event of Contents
cannot assure you thata qualified IPO of Ant Financial Services or Alipay, if our total ownership of equity interests in Ant Financial Services, if any, has not reached 33%, we would be entitled, at our election, to receive a one-time payment equal to 37.5% of the equity value, immediately prior to such qualified IPO of Ant Financial Services, as a whole and not just of its subsidiary Alipay. If we acquire equity interests in Ant Financial Services in an aggregate amount less than the full 33% equity interest, then the percentage of Ant Financial Services' equity value used to calculate the liquidity event payment will be reduced proportionately. If Ant Financial Services does not receive the required PRC regulatory approvals mentioned above, we will not be able to obtain the regulatory approvals necessary for us to acquire ana direct equity ownership interest in Ant Financial Services, and we would fail to benefit from any appreciation in its equity value beyond the date of a qualified IPO of Ant Financial Services or Alipay. Our inability to reap the benefits of any appreciation in equity value of Ant Financial Services, including in connection with a qualified IPO of Ant Financial Services or Alipay, could represent a significant missed opportunity that is beyond our control. In addition, if we elect to receive a one-time payment equal to 37.5% of the equity value, immediately prior to such qualified IPO of Ant Financial Services, it is possible that Ant Financial Services will be ablenot have sufficient funds to acquiremake the payment in a timely manner or on a schedule acceptable to us. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — 2014 Restructuring of Our Relationship with Ant Financial Services and Alipay."
Tightening of tax compliance efforts with respect to the revenue or profit generated by our merchants could materially and adversely affect our business, financial condition and results of operations.
E-commerce in China is still developing, and the PRC government may require operators of marketplaces, such equity interestas our company, to assist in the future.collection of taxes with respect to the revenue or profit generated by merchants from transactions conducted on their platforms. A significant number of small businesses and sole proprietors operating businesses through storefronts on Taobao Marketplace may not have completed the required tax registration. PRC tax authorities may enforce registration requirements that target small businesses or sole proprietors on Taobao Marketplace and may request our assistance in these efforts. As a result, these merchants may be subject to more stringent tax compliance requirements and liabilities and their business on our marketplaces could suffer or they could decide to remove their storefronts from our marketplace rather than comply, which could in turn negatively affect us. We may also be requested by tax authorities to supply information on our merchants, such as transaction records and bank account information, and assist in the enforcement of tax regulations, including the payment and withholding obligations against our merchants, in which case, we may lose existing merchants and potential merchants might not be willing to open storefronts on our marketplaces.
Potential heightened enforcement against participants in e-commerce transactions (including imposition of reporting or withholding obligations on operators of marketplaces with respect to value-added tax of merchants) could have a material adverse effect on our business, financial condition and results of operations.
We have been and may continue to be subject to allegations and lawsuits claiming that items listed and content available on our marketplaces and websites are pirated, counterfeit or illegal.
We have received in the past, and we anticipate we will receive in the future, communications alleging that items offered, sold or soldmade available through our online marketplaces and websites by third parties or that we make available through other services, such as our online music platform, infringe third-party copyrights, trademarks and patents or other intellectual property rights. Although we have adopted measures to verify the authenticity of products sold on our marketplaces and to minimize potential infringement of third-party intellectual property rights through our intellectual property infringement complaint and take-down procedures, these
measures may not always be successful. We have been and may continue to be subject to allegations of civil or criminal liability based on allegedly unlawful activities carried out by third parties through our online marketplaces. We also have been and may continue to be subject to allegations that we were participants in or facilitators of such allegedly unlawful activities. For example, in May 2015 we were named as a defendant in a lawsuit filed in the Southern District of New York by Kering S.A and other plaintiffs, which asserts various claims based on, among other things, the sales of allegedly counterfeit or otherwise trademark infringing merchandise by sellersmerchants on certain of our marketplaces. We have acquired certain companies, such as Youku Tudou and a controlling stake in Lazada, and may continue to acquire other companies that are or may be subject to allegations and lawsuits regarding infringement of third-party intellectual property or other rights.
When we receive complaints or allegations regarding infringement or counterfeit goods, we follow certain procedures we have developed to verify the nature of the complaint and the relevant facts. We believe these procedures are important for purposes of investigating the allegations in question so that we can ensure confidence in our marketplace among buyersconsumers and sellers;merchants; however, these procedures could result in delays in delistings of allegedly infringing product listings. In the event that alleged counterfeit or infringing products are listed or sold on our marketplaces or our other services, we could face claims relating to such listings or sales or for our alleged failure to act in a timely or effective manner in response to infringement or to otherwise restrict or limit such sales or infringement.
We may implement further measures in an effort to strengthen our protection against these potential liabilities that could require us to spend substantial additional resources and/or experience reduced revenues by discontinuing certain service offerings.revenues. In addition, these changes may reduce the attractiveness of our marketplaces and other services to buyers, sellers orconsumers, merchants and other users.participants. A customer whose content is removed or whose services are suspended or terminated by us, regardless of our compliance with the applicable laws, rules and regulations, may dispute our actions and commence action against us for damages based on breach of contract or other causes of action, or make public complaints or allegations.allegations or organize group protests and publicity campaigns against us. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or other infringement could harm our business. Moreover, we have received in the past, receivedand may continue to receive in the future, negative publicity regarding the sales of counterfeit and pirated items on our marketplaces. Each year, in its annual Special 301 Report or Special 301 Out-of-Cycle Review Report, the Office of the U.S. Trade Representative, or USTR, identifies "notorious markets" that reportedly engage in and facilitate substantial copyright piracy and trademark counterfeiting. In 2008, 2009 and 2010, Alibaba.com, and in 2008, 2009, 2010 and 2011, Taobao Marketplace, were named as "notorious markets" in the annual Special 301 Report or Special 301 Out-of-Cycle Review prepared by the Office of the U.S. Trade Representative.notorious markets. The U.S. Trade RepresentativeUSTR subsequently removed these marketplaces from its list. However, there is no assurance that the list.USTR will not identify these marketplaces or our other businesses as notorious markets in the future. In its December 2015 Out-of-Cycle Review, the USTR expressed concern about our procedures, citing complaints by rights holders. The USTR did not name any of our marketplaces as notorious markets, but encouraged us to continue to enhance cooperation with rights holders to address concerns.
In January 2015, the State Administration for Industry and Commerce in China, or SAIC, released a report stating that Taobao Marketplace had the highest percentage of counterfeit goods among the online marketplaces that it surveyed. Subsequently, in the same month, the SAIC released a self-described "white paper" discussing perceived failures of our platform,platforms, including an alleged failure to crack down on the sale of counterfeit goods and other alleged illegal activities on our China retail marketplaces. Although the SAIC withdrew the so-called "white paper" the same day it was released, and later clarified that the document carried no legal force, continued public perception that counterfeit or pirated items are commonplace on our marketplaces or that we delay the process of removing such items, even if factually incorrect, could damage our reputation result in lower list prices for goods sold through our marketplaces,with consumers, harm our business, result in litigation and regulatory pressure or action against us and diminish the value of our brand name.
Failure to deal effectively with any fraud perpetrated and fictitious transactions conducted on our marketplaces and other sources of customer dissatisfaction would harm our business.
We face risks with respect to fraudulent activities on our marketplaces and periodically receive complaints from buyersconsumers who may not have received the goods that they had purchased, as well as complaints from sellersmerchants who have not received payment for the goods that a buyerconsumer had contracted to purchase. Although we have implemented various measures to detect and reduce the occurrence of fraudulent activities on our marketplaces, there can be no assurance that such measures will be effective in combating fraudulent transactions or improving overall satisfaction among our sellers, buyersmerchants, consumers and other participants. Additional measures that we take to address fraud could also negatively affect the attractiveness of our marketplaces to buyersconsumers or sellers.merchants. In addition, sellersmerchants on our marketplaces contribute to a fund to provide consumer protection guarantees. If our sellersmerchants do not perform their obligations under these programs, then we may use funds that have been deposited by sellersmerchants in a consumer protection fund to compensate buyers.consumers. If the amounts in the fund are not sufficient, we may choose to compensate buyersconsumers for such losses although we are not legally obligated to do so. Although we have recourse against our sellersmerchants for any amounts we incur, there is no assurance that we would be able to collect from our sellers.merchants.
In addition to fraudulent transactions with legitimate buyers, sellersconsumers, merchants may also engage in fictitious or "phantom" transactions with themselves or collaborators in order to artificially inflate their own ratings on our marketplaces, reputation and search results rankings.rankings, an activity sometimes referred to as "brushing". This activity may harm other sellersmerchants by enabling the perpetrating sellermerchant to be favored over legitimate sellers,merchants, and may harm buyersconsumers by deceiving them into believing that a sellermerchant is more reliable or trusted than the sellermerchant actually is.
Moreover, illegal, fraudulent or collusive activities by our employees could also subject us to liability or negative publicity. For instance,In the past, we learned thathave discovered cases in early 2011 and 2012 in two separate incidents,which certain of our employees had accepted payments from sellersmerchants or other service providers in order to receive preferential treatment on Alibaba.com and Juhuasuan.our marketplaces. Although we dismisseddismiss the employees responsible for theany such incidents and have taken action to further strengthen ourimplemented internal controls and policies with regard to the review and approval of sellermerchant accounts, sales activities and other relevant matters, we cannot assure you that such controls and policies will prevent fraud or illegal activity by our employees or that similar incidents will not occur in the future. Any such illegal, fraudulent or collusive activity could severely damage our brand and reputation as an operator of trusted marketplaces, which could drive users and buyersconsumers away from our marketplaces, and materially and adversely affect GMV transacted on our marketplaces, our revenuesbusiness, financial condition and our net income.results of operations.
In January 2015, the SAIC discussed alleged fraudulent and fictitious transactions on our China retail marketplaces in its self-described "white paper." Although the SAIC withdrew the so-called "white paper" the same day it was released and later clarified that the document carried no legal force, the negative publicity and user sentiment generated as a result of this document or other allegations of fraudulent or deceptive conduct on our platform, whether allegedly engaged in by our employees or by third parties,platforms could severely diminish consumer confidence in and use of our services, reduce our ability to attract new or retain current sellers, buyersmerchants, consumers and other participants, damage our reputation, result in shareholder or other litigation and diminish the value of our brand names, and materially and adversely affect our business, financial condition and results of operations.
We may increasingly become a target for public scrutiny, including complaints to regulatory agencies, negative media coverage, including social media and malicious reports, all of which could severely damage our reputation and materially and adversely affect our business and prospects.
We process millionsan extremely large number of transactions on a daily basis on our marketplaces, and the high volume of transactions taking place on our marketplaces and publicity about our business creates the possibility of heightened attention from the public, regulators, the media and our participants. For example, we receive complaints fromHeightened regulatory and public concern over consumer protection and consumer safety issues may subject us to additional legal and social
responsibilities, and may also expose us to increased scrutiny and negative publicity over such issues, due to the large number of transactions that take place on our sellers, buyersplatforms and other participants aboutthe increasing scope of our marketplaces.overall business operations. In addition, changes in our services or policies have resulted and could result in objections by members of the public, the media, including social media, participants in our ecosystem or others. From time to time, these objections or allegations, regardless of their veracity, may result in public protests or negative publicity, which could result in government inquiry or harm our reputation. Corporate transactions we
or related parties undertake, such as our recent acquisition of the media business of SCMP Group Limited, which includes the South China Morning Post newspaper, may also subject us to increased media exposure and public scrutiny.scrutiny in Hong Kong, China and internationally. Moreover, as our business expands and grows, both organically and through acquisitions of and investments in other businesses, domestically and internationally, we will be exposed to heightened regulatory scrutiny in jurisdictions where we already operate as well as in new jurisdictions in areas including consumer safety, public health and public trust. There is no assurance that we would not become a target for regulatory or public scrutiny in the future or such scrutiny and public exposure would not severely damage our reputation as well as our business and prospects.
In addition, our directors and management have been, and continue to be, subject to scrutiny by the media and the public regarding their activities in and outside Alibaba Group, which may result in unverified, inaccurate or misleading information about them being reported by the press. Negative publicity about our executive chairman or other founders, directors or management, even if untrue or inaccurate, may harm our reputation.
We and Ant Financial Services are subject to variousa broad range of laws and regulations, and future laws and regulations may impose additional requirements and other obligations on our business or otherwise that could materially and adversely affect our business, financial condition and results of operations.
The industries in which we and Ant Financial Services operate in the PRC, including online and mobile commerce and payments, online content offerings, financial services, and cloud computing and entertainment, are highly regulated. The PRC government authorities are likely to continue to issue new laws, rules and regulations governing these industries, enhance enforcement of existing laws, rules and regulations and requireimpose requirements relating to, among other things, new and additional licenses, permits and approvals fromor governance or ownership structures on us, Ant Financial Services and our users. These laws, rules and regulations and their application to us could take a direction that is adverse to our or Ant Financial Services' business at any time. In addition, there is no assurance that any required licenses, permits and approvals could be obtained or such new requirements can be satisfied in a timely or cost-effective manner, and failure to obtain them could have a material adverse effect on our business, financial condition and results of operations. Changes in regulatory enforcement as well as tax policy in the PRC could also result in additional compliance obligations and increased costs or place restrictions upon our current or future operations. Any such legislation or regulation could also severely disrupt and constrain our business and the payment services used on our marketplaces.
Transactions conducted through our cross-border marketplaces may be subject to different customs and import/export rules and regulations. These rules and regulations are complex, and customs and tax authorities in the relevant jurisdictions may challenge our interpretation of applicable customs and import/export rules relating to product shipments under their respective customs and import/export laws and treaties. In addition, we will also face the challenge of complying concurrently with the compliance rules and regulations of multiple jurisdictions, and such rules or regulations could conflict or interact with each other in complex ways.
We have from time to time been subject to PRC and other foreign government inquiries and investigations, including those relating to website content and alleged third-party intellectual property infringement. We also face scrutiny, and have been subject to inquiries and investigations, from foreign governmental bodies that focus on cross-border trade, intellectual property protection, our investment activities, human rights, and user privacy matters.matters and fraudulent or other criminal transactions. None of these inquiries and investigations has resulted in significant restrictions on our business operations. However, as we continue to grow in scale and significance, we expect to face increased scrutiny, which will, at a minimum, result in our having to increase our investment in compliance and related capabilities and systems.
The increasing sophistication and development of our user base and our expansion into the mobile and entertainment business will also increase the need for higher standards of user protection, privacy protection and dispute management. Any increased involvement in inquiries or investigations could result in significantly higher legal and other costs, restraints on our ability to enforce the contracts we have entered into, loss of business and revenue, liability for breach of contracts with third parties, diversion of management and other resources, as well
as negative publicity, which could harm our business and reputation and materially reduce our revenue and net income.
Ant Financial Services, which through Alipay which provides the substantial majority of the payment processing services on our marketplaces as well as other financial services such as wealth management, insurance and credit referencing services, is subject to various laws, rules and regulations in the PRC and other countries where it operates, including those governing banking, privacy, cross-border and domestic money transmission, anti-money laundering, counter-terrorist financing and consumer protection laws, rules and regulations. For example, the laws, rules and regulations governing account verification are evolving rapidly. The Administrative Measures for the Online Payment Business of Non-bank Payment Institutions, or the Online Payment Measures, which will come into effect on July 1, 2016, include provisions relating to account management, security measures and other matters and require third-party payment providers to open real-name payment accounts for clients after verifying clients' valid identification documents. Different identification verification procedures are required for the opening of different types and tiers of payment accounts, which are subject to a range of purchasing and account transfer limits. After the effectiveness of the Online Payment Measures, the ability of consumers to pay for purchases on our marketplaces using deposits in their Alipay payment accounts may be materially limited, although the Online Payment Measures do not affect Alipay's escrow services. In April 2014, the China Banking Regulatory Commission, or the CBRC, and the PBOC issued Joint Circular 10, which requires commercial banks and other financial institutions in China to conduct additional customer verification procedures prior to establishing an automatic payment link between customers' bank accounts and their accounts with third-party payment services, such as Alipay. These laws, rules and regulations are highly complex and could change or be reinterpreted to make it difficult or impossible for AlipayAnt Financial Services to comply. In recent years, the PRC government has increasingly focused on regulation of the financial industry, including laws, rules and regulations relating to the provision of payment services. See "— We rely on Alipay to conduct substantially all of the payment processing and all of the escrow services on our marketplaces. Alipay's business is highly regulated, and it is also subject to a range of risks. If Alipay's services are limited, restricted, curtailed or degraded in any
way or become unavailable to us for any reason, our business may be materially and adversely affected." In addition, Alipay is required to maintain a payment business license in the PRC. In 2011, we divested our interest in and control over Alipay in response to PBOC regulations issued in June 2010 that required non-bank payment companies to obtain a payment business license before September 1, 2011. These regulations provided specific guidelines for license applications only for domestic PRC-owned entities but stated that specific guidelines applicable to license applications for foreign-invested payment entities would be issued separately (although no such guidelines have been issued as of the date of this annual report). Accordingly, our management restructured the ownership and control of Alipay into a company wholly-owned by PRC nationals in order to obtain a payment business license within the time period prescribed by the PBOC regulations. In August 2014, we entered into the 2014 SAPA to further restructure the economic terms of our relationship with Alipay and its parent company. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to
Ant Financial Services and its Subsidiaries — Share and Asset Purchase Agreement."
Alipay is also required to maintain other applicable money transmitter or other licenses and approvals from regulatory authorities in other jurisdictions outside China in which it operates, and the expansion by AlipayAnt Financial Services of its business may require additional licenses and approvals. Currently,In addition, in certain jurisdictions outside China where Alipay currently does not have the required money transmitter or other licenses, Alipay provides payment processing and escrow services through third-party service providers. If these providers were to terminate their relationship with Alipay or otherwise cease providing services to Alipay, cross-border transactions on our marketplaces would be negatively affected. If Alipay failsor its partners fail to obtain and maintain all required licenses and approvals or otherwise fails to comply with applicable laws, rules and regulations, if new laws, rules or regulations come into effect that impact Alipay's business,Alipay or its partners' businesses, its services could be suspended or severely disrupted, and our business, financial condition and results of operations would be materially and adversely affected.
We may be accused of infringing intellectual property rights of third parties and content restrictions of relevant laws.
Third parties may claim that the technology used in the operation of our platforms or our service offerings or the content on our platforms, including content available through our cloud computing services, infringessearch business, online reading platform and news feed features, infringe upon their intellectual property rights. Although we have not in the past faced material litigation involving direct claims of infringement by us, the possibility of intellectual property claims against us, whether in China or other jurisdictions, increases as we continue to grow, particularly internationally. We have also acquired businesses, such as Youku Tudou, that have been, and may continue to be, subject to liabilities for infringement of third-party intellectual property rights or other allegations based on the content available on their websites or the services they provide. In addition, we expect our ecosystem to involve more and more user-generated content, including the entertainment content on Youku Tudou, the interactive media content displayed on Tmall and Taobao Marketplace, as well as the data generated, uploaded and saved by users of our cloud computing services, over which we have limited control and we may be subject to claims for infringement of third-party intellectual property rights, or subject us to additional scrutiny by the relevant government authorities. Such claims or scrutiny, whether or not having merit, may result in our expenditure of significant financial and
management resources, injunctions against us or payment of damages. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in the number of third parties whose sole or primary business is to assert such claims.
China has enacted laws and regulations governing Internet access and the distribution of products, services, news, information, audio-video programs and other content through the Internet. The PRC government has prohibited the distribution of information through the Internet that it deems to be in violation of PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, fraudulent or defamatory. Users of certain of our websites and platforms, including Youku Tudou, can upload content, to such websites and platforms, which is generally referred to as "user-generated content." Due to the significant amount of content uploaded by our users, we may not be able to identify all the videos or other content that may violate relevant laws and regulations. If any of the information disseminated through our marketplaces and websites, including videos and other content (including user-generated content) displayed on Youku Tudou's or other of our websites or on our Tmall set-top-boxes and smart televisions powered by our YunOS that provide access to entertainment and e-commerce content, were deemed by the PRC government to violate any content restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business, financial condition and results of operations.
The outcome of any claims, investigations and proceedings is inherently uncertain, and in any event defending against these claims could be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. An adverse determination in any such litigation or proceedings could cause us to pay damages, as well as legal and other costs, limit our ability to conduct business or require us to change the manner in which we operate.
Table of Contentsoperate and harm our reputation.
We may become the target of anti-monopoly and unfair competition claims, which may result in our being subject to fines as well as constraints on our business.
Although the PRC Anti-Monopoly Law is relatively recent, having taken effect on August 1, 2008, two of the three PRC anti-monopoly enforcement agencies, namely the Ministry of Commerce, or the MOFCOM, the National Development and Reform Commission, or the NDRC, and the SAIC, have in recent years strengthened enforcement actions, including levying significant fines, with respect to concentration of undertakings and cartel activity, mergers and acquisitions, as well as abusive behavior of companies having market dominance. The PRC Anti-Monopoly Law also provides a private right of action for competitors or users to bring anti-monopoly claims against companies. In recent years, an increased number of companies have been exercising their right to seek relief under the PRC Anti-Monopoly Law. As public awareness of the rights under the PRC Anti-Monopoly Law increases, more companies, including our competitors, business partners and customers may resort to seeking the remedies available under the law, such as through complaints to regulators or as plaintiffs in private ligation, to improve their competition position, regardless of the merits of their claims.
From time to time, we may receive close scrutiny from government agencies under the PRC Anti-Monopoly Law in connection with our business practices, investments and acquisitions. Any anti-monopoly lawsuit or administrative proceeding initiated against us may result in our being subject to profit disgorgement, heavy fines and various constraints on our business, or result in negative publicity which could harm our reputation and negatively affect the trading price of our ADSs. These constraints could include forced termination of any agreements or arrangements that are determined to be in violation of anti-monopoly laws, required divestitures and limitations on certain business practices, which may limit our ability to continue to innovate, diminish the appeal of our services and increase our operating costs. These constraints could also enable our competitors to develop websites, products and services that mimic the functionality of our services, which could decrease the popularity of our marketplaces, products and services among sellers, buyersmerchants, consumers and other participants, and cause our revenue and net income to decrease materially.
We may face challenges in expanding our international and cross-border operations.
As we plan to continue expanding our existing cross-border operations into existing and other markets, we will face risks associated with expanding into markets in which we have limited or no experience and in which our company may be less well-known. We may be unable to attract a sufficient number of customers and other participants, fail to anticipate competitive conditions or face difficulties in operating effectively in these new markets. The expansion of our international and cross-border business will also expose us to risks inherent in transacting business globally, including:
As we expand further into new regions and markets, these risks could intensify. One or more of these factors could adversely impact our international and cross-border operations. Accordingly, any efforts we make to expand our international and cross-border operations may not be successful. Failure to expand our international and cross-border operations could materially and adversely affect our business, financial condition and results of operations.
Transactions conducted through our international and cross-border marketplaces may be subject to different customs, taxes and import/export rules and regulations. For example, the Notice on Tax Policies of Cross-Border E-Commerce Retail Importation effective as of April 8, 2016, or the New Cross-Border E-commerce Tax Notice, replaced the previous system for taxing imported consumer goods into the PRC and introduced a 17% VAT on most products sold through e-commerce platforms and a 30% consumption tax on cosmetics and perfumes, but no consumption taxes on skin care products, maternity and baby care products, in the event that the prescribed quotas are exceeded. See "Item 4. Information on the Company — B. Business Overview — Regulation — Tax Regulations." The change of regulation pattern regarding the import tax on consumer goods imported through cross-border e-commerce platforms, as well as limitation on the import categories, may substantially increase import tax imposed on buyers and thus raise the price of goods sold on our cross-border platforms, which may impair our competitive advantage and could adversely affect the growth of our cross-border e-commerce operation, our financial condition and results of operations.
These customs and import/export rules and regulations are complex, and customs and tax authorities in the relevant jurisdictions may challenge our interpretation of applicable customs and import/export rules relating to product shipments under their respective customs and import/export laws and treaties. In addition, we will also face the challenge of complying concurrently with the compliance rules and regulations of multiple jurisdictions,
and such rules or regulations could conflict or interact with each other in complex ways. Our globalization strategy may be adversely affected by the complexity and development of customs and import/export laws, rules and regulations, including the change of PRC regulation pattern regarding the import tax on consumer goods imported through cross-border e-commerce platforms.
Our brand name and our business may be harmed by aggressive marketing and communications strategies of our competitors.
Due to intense competition in our industry, we have been and may be the target of incomplete, inaccurate and false statements about our company and our products and services that could damage our and our management's reputation and our brand and materially deter consumers from making purchases on our marketplaces. Our ability to respond to our competitors' misleading marketing efforts may be limited during our self-imposed quiet periods around quarter ends or due to legal prohibitions on permissible public communications by us during certain other periods.
Our revenue and net income may be materially and adversely affected by any economic slowdown in China as well as globally.
The success of our business ultimately depends on consumer spending. We derive substantially all of our revenue from China. As a result, our revenue and net income are impacted to a significant extent by economic conditions in China and globally, as well as economic conditions specific to online and mobile commerce. The global economy, markets and levels of consumer spending are influenced by many factors beyond our control, including consumer perception of current and future economic conditions, political uncertainty, levels of employment, inflation or deflation, real disposable income, interest rates, taxation and currency exchange rates.
The PRC government has in recent years implemented a number of measures to control the rate of economic growth, including by raising interest rates and adjusting deposit reserve ratios for commercial banks as well as by implementing other measures designed to tighten credit and liquidity. These measures have contributed to a slowdown of the PRC economy. According to the National Bureau of Statistics of China, China's GDP growth rate was 7.4% in 2014. Any continuing or worsening slowdown could significantly reduce domestic commerce in China, including through the Internet generally and within our ecosystem. An economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in China or any other market in which we may operate could have a material adverse effect on our business, financial condition and results of operations.
Our results of operations fluctuate significantly from quarter to quarter which may make it difficult to predict our future performance.
Our results of operations fluctuate significantly from quarter to quarter. In addition, our business is characterized by seasonal fluctuations, which may cause further fluctuations. The fourth quarter of each calendar year generally contributes the largest portion of our annual revenues due to a number of factors, such as sellersmerchants allocating a significant portion of their online marketing budgets to the fourth calendar quarter, promotions, such as Singles Day on November 11 of each year and the impact of seasonal buying patterns in respect of certain categories such as apparel. The first quarter of each calendar year generally contributes the smallest portion of our annual revenues, primarily due to a lower level of allocation of online marketing budgets by sellersmerchants at the beginning of the calendar year and the Chinese New Year holiday, during which time consumers generally spend less and businesses in China are generally closed. We may also introduce new promotions or change the timing of our promotions in ways that further cause our quarterly results to fluctuate and differ from historical patterns. In addition, seasonal weather patterns may affect the timing of buying decisions. For example, unexpectedly long periods of warm weather could delay the purchase of heavier clothing items that have higher average selling prices, resulting in lower than expected GMV.prices. The performance of our equity investees and of businesses, including internally developed businesses in which we have made investments, may also result in fluctuations in our results of operations. Fluctuations in our results of operations related to our investments may also result from the accounting implication of re-measurement of fair values of certain financial instruments, share-based awards and previously held equity interests upon disposal or step acquisitions. Given that the fair value movements of the underlying equities of financial instruments, share-based awards or previously held equity interests are beyond the control of our management, the magnitude of the related accounting impact is unpredictable and may affect our results of operations significantly. Our results of operations will likely fluctuate due to these and other factors, some of which are beyond our control. In addition, our rapid growth hasin the past may have masked the seasonality that might otherwise be apparent
in our results of operations. IfAs the rate of growth of our growth slows,business declines in comparison to prior periods, we expect that the seasonality in our business may become more pronounced. Moreover, as our business grows, we expect that our fixed costs and expenses, such as payroll and benefits, bandwidth and co-location fees, will continue to increase, which will result in operating leverage in seasonally strong quarters but can significantly pressure operating margins in seasonally weak quarters.
Our quarterly and annual financial results will likely differ from our historical performance. To the extent our results of operations are below the expectations of public market analysts and investors in the future, or if there are significant fluctuations in our financial results, the market price of our ADSs could decline materially.
We may not be able to protect our intellectual property rights.
We rely on a combination of trademark, fair trade practice, patent, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our intellectual property rights. We also enter into confidentiality agreements with our employees and any third parties who may access our proprietary information, and we rigorously control access to our proprietary technology and information.
Intellectual property protection may not be sufficient in China or other countries in which we operate. Confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach.these breaches. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China or elsewhere. In addition, policing any unauthorized use of our intellectual property is difficult, time-consuming and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, suchthe litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, if property or people are harmed by the products and services sold on our marketplaces.
Due to several high-profile incidents involving food safety and consumer complaints that have occurred in China in recent years, the PRC government, media outlets and public advocacy groups are increasingly focused on consumer protection. Moreover, as part of our growth strategy, we expect to increase our focus on food, food supplements and beveragebeverages, mother care, baby care and healthcare products and services, and electronics products, and have also invested in companies involved in these sectors, which could expose us to increasing liability associated with consumer protection laws in those areas. Operators of commerce marketplaces and platforms are subject to certain provisions of consumer protection laws even where suchthe operator is not the sellermerchant of the product or service purchased by the consumer. For example, under applicable consumer protection laws in China, e-commerce platform operators may be held liable for consumer claims relating to damage if they are unable to provide consumers with the true name, address and contact details of sellersmerchants or service providers. In addition, if we do not take appropriate remedial action against sellersmerchants or service providers for actions they engage in that we know, or should have known, would infringe upon the rights and interests of consumers, we may be held jointly liable with the sellermerchant or service provider for such infringement. Moreover, applicable consumer protection laws in China hold that trading platforms will be held liable for failing to meet any undertakings suchthat the platforms make to consumers with regard to products listed on their websites. Furthermore, we are required to report to SAIC or its local branches any violation of applicable laws, regulations or SAIC rules by sellersmerchants or service providers, such as sales of goods without proper license or authorization, and to take appropriate remedial measures, including ceasing to provide services to such sellersthe relevant merchants or service providers. We may also be held jointly liable with merchants who do not possess the proper licenses or authorizations to sell goods or sell goods that do not meet product standards. In addition, we are facing increasing levels of activist litigation in China by plaintiffs claiming damages based on consumer protection laws. This type of activist litigation could increase in the future, and if it does, we could face increased costs defending such suits and damages should we not prevail, which could materially and adversely affect our reputation and brand and our results of operations. As our business expands outside of China, we may also face increasing scrutiny from consumer protection regulators in the United States, Europe and other jurisdictions. If claims are brought against us under any of these laws, we could be subject to damages and reputational damage as well as action by regulators, which could have a material adverse effect on our business, financial condition and results of operations. We do not maintain product liability insurance for products and services transacted on our marketplaces, and our rights of indemnity from the sellersmerchants on our marketplaces may not
adequately cover us for any liability we may incur. Even unsuccessful
claims could result in the expenditure of funds and management time and resources and could materially reduce our net income and profitability.
Tightening of tax compliance efforts with respect to the revenue or profit generated by our sellers could materially and adversely affect our business, financial condition and results of operations.
E-commerce in China is still developing, and the PRC government may require operators of marketplaces, such as our company, to assist in the collection of taxes with respect to the revenue or profit generated by sellers from transactions conducted on their platforms. A significant number of small businesses and sole proprietors operating businesses through storefronts on Taobao Marketplace may not have completed the required tax registration. PRC tax authorities may enforce registration requirements that target small businesses or sole proprietors on Taobao Marketplace and may request our assistance in these efforts. As a result, these sellers may be subject to more stringent tax compliance requirements and liabilities and their business on our marketplaces could suffer or they could decide to remove their storefronts from our marketplace rather than comply, which could in turn negatively affect us. We may also be requested by tax authorities to supply information on our sellers, such as transaction records and bank account information, and assist in the enforcement of tax regulations, including the payment and withholding obligations against our sellers, in which case, potential sellers might not be willing to open storefronts on our marketplaces.
Potential heightened enforcement against participants in e-commerce transactions (including imposition of reporting or withholding obligations on operators of marketplaces with respect to business tax or value-added tax of sellers) could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to material litigation and regulatory proceedings.
We have been involved in litigation relating principally to third-party and principal intellectual property infringement claims, contract disputes involving sellersmerchants and buyersconsumers on our platform, consumer protection claims, employment related cases and other matters in the ordinary course of our business. As our ecosystem expands, including across jurisdictions and through the addition of new businesses, and as litigation becomes more common in China, we may face an increasing number of such claims, including those involving higher amounts of alleged damages. We have acquired and may acquire companies, such as Youku Tudou, that are subject to or may become subject to litigation, including shareholder class action lawsuits in the case of companies we acquire that are or were publicly-listed companies.
As a publicly-listed company, we may face additional exposure to claims and lawsuits inside and outside China. We will need to defend against such lawsuits, including any appeals of such lawsuits should our initial defense be successful. The litigation process may utilize a material portion of our cash resources and divert management's attention from the day-to-day operations of our company, all of which could harm our business. There can be no assurance that we will prevail in any such cases, and any adverse outcome of these cases could have a material adverse effect on our reputation, business and results of operations. In particular, we have been named as a defendant in certain purported shareholder class action lawsuits described in "Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal and Administrative Proceedings." We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of these lawsuits. An unfavorable outcome from the lawsuits, including any plaintiff's appeal of the judgment in these lawsuits, could have a material adverse effect on our consolidated financial position, results of operations, or cash flows in the future. In addition, although we have obtained directors and officers liability insurance, the insurance coverage may not be adequate to cover our indemnification obligations.
In addition, on January 30, 2015,Earlier this year, the U.S. Securities and Exchange Commission, or SEC, initiated a non-public inquiryinformed us that it was initiating an investigation into whether there have been any violations of the federal securities laws have occurred. Please see "Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal and Administrative Proceedings — Regulatory Inquiry." As part of its inquiry, thelaws. The SEC has requested that we voluntarily provide certain information.it with documents and information relating to, among other things: our consolidation policies and practices (including our accounting for Cainiao Network as an equity method investee), our policies and practices applicable to related party transactions in general, and our reporting of operating data from Singles Day. We have agreed toare voluntarily cooperatedisclosing this SEC request for information and cooperating with the SEC and, through our legal counsel, have been cooperating with the SEC. We intend to continue to cooperate fully with the SEC's inquiry and to provideproviding the SEC with requested documents and information. The SEC advised us that the requested information. However, the inquiry has resulted and could continue to result in considerable legal expenses, the diversioninitiation of a significant amount of management's attention from other business concerns and could harm our business. There canrequest for information should not be no assurance thatconstrued as an indication by the SEC will not recommend action against us, or our directors or officers, which could include penalties, fines, injunctive relief,
a cease and desist order, limitations on the service of directors or officers, and other sanctions. We can provide no assurances as to the outcomeits staff that any violation of the SEC's inquiry.federal securities laws has occurred. This matter is ongoing, and, as with any regulatory proceeding, we cannot predict when it will be concluded.
The existence of litigation, claims, investigations and proceedings may harm our reputation and adversely affect the trading price of our ADSs. The outcome of any claims, investigations and proceedings is inherently uncertain, and in any event defending against these claims could be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. An adverse determination in any such litigation, investigation or proceedingsproceeding could cause us to pay damages as well as legal and other costs, limit our ability to conduct business or require us to change the manner in which we operate.
We may suffer reputational harm and the price of our ADSs may decrease significantly due to business dealings or connections of sellersmerchants or buyersconsumers on our marketplaces with sanctioned countries.countries or persons.
The U.S. government imposes broad economic and trade restrictions on certain countries and regions, or the Sanctioned Countries, including Cuba, Iran, North Korea, Sudan and Syria, and Sudan are identified bynumerous individuals and entities, including those designated as having engaged in activities relating to terrorism, drug trafficking, proliferation of weapons of mass destruction or human rights violations, or the U.S. State Department as state sponsorsSanctioned Persons. The United Nations, the European Union, or the EU, the United Kingdom, or the UK, and other countries also impose economic and trade restrictions, including on certain of terrorismthe Sanctioned Countries and are the target of comprehensive U.S. economic sanctions.Sanctioned Persons. We do not have physical staffemployees or operations in these sanctioned countries,the Sanctioned Countries, and, although our websites are open and available worldwide, we do not actively solicit business from users in these sanctioned countries.the Sanctioned Countries or Sanctioned Persons.
As a non-U.S. entity,Cayman Islands company, we are generally not generally required to comply with U.S., UK, and EU sanctions to the same extent as U.S. entities, with certain exceptions principally relating to, UK or EU entities. However, our U.S., UK, and EU subsidiaries, any of our employees who are U.S. persons or dealingsUK or EU nationals, activities in the U.S., UK, or EU, activities involving U.S.-origin goods or services.services, and certain Iran-related activities, may be subject to applicable sanctions requirements. In the case of Alibaba.com, our aggregate cash revenue from members in these sanctioned countriesSanctioned Countries in fiscal year 20152016 accounted for less than 0.02%0.04% of our international wholesale commerce cash revenue. In the case of AliExpress and Taobao Marketplace, an insignificant numberpercentage of orders have been placed by buyersconsumers from the sanctioned countries,Sanctioned Counties, with an aggregate GMV settled of approximately US$3.410.2 million in the twelve months ended March 31, 2015.2016. As all transaction fees on AliExpress and Taobao Marketplace are paid by sellers,merchants, primarily based in China, we do not earn any fees or commissionscommission from buyersconsumers in sanctioned countriesSanctioned Countries in respect of transactions conducted on these platforms.
We cannot assure you that current or future economic and trade sanctions regulations or developments will not have a negative impact on our business or reputation. International economic and trade sanctions are complex and subject to frequent change, including jurisdictional reach and the lists of countries, entities, and individuals subject to the sanctions. Hence, we may incur significant costs related to current, new, or changing sanctions programs, as well as investigations, fines, fees or settlements, which may be difficult to predict. We also could face increased sanctions-related compliance costs and risks as we expand globally and into additional businesses, such as cloud computing and data hosting. In addition, our expanding network of global business partners, joint venture partners or other parties that have collaborative relationships with us or our affiliates may engage in activities in or with Sanctioned Countries or Sanctioned Persons, which might result in negative publicity, governmental investigations and reputational harm. Any of the above may cause the price of our ADSs to decline significantly, and thus materially reduce the value of your investment in our ADSs.
Certain U.S.-based institutional investors, including state and municipal governments in the United States and universities, as well as financial institutions, have proposed or adopted divestment or similar initiatives regarding investments in companies that do business with sanctioned countries.Sanctioned Countries. Accordingly, as a result of activities on our marketplaces involving users based in the sanctioned countries,Sanctioned Countries, certain investors may not wish to invest, and certain financial institutions may not wish to lend or extend credit and may divest their investment in, or seek early repayment of loans to us. SuchThese divestment initiatives may negatively impact our reputation and investor sentiment with respect to our ADSs may be materially and adversely affected. In addition, as our business continues to expand, our business partners, joint venture partners or other parties that have collaborative relationship with us or our affiliates may engage in activities in or with sanctioned countries, which may also result in negative publicity and reputational harm against us. Any negative investor sentiment as a result of such reputational issues may cause the price of our ADSs to decline significantly and may materially reduce the value of our investment in our ADSs.
We may be subject to liability for content onavailable in our websites and mobile interfacesecosystem that is alleged to be socially destabilizing, obscene, defamatory, libelous or otherwise unlawful.
Under PRC law and the laws of certain other jurisdictions in which we operate, we are required to monitor our websites and the websites hosted on our servers and mobile interfaces for items or content deemed to be socially destabilizing, obscene, superstitious or defamatory, as well as for items, content or services that are illegal to sell online or otherwise in other jurisdictions in which we operate our marketplaces, and promptly take appropriate action with respect to suchthe relevant items, content or services. We may also be subject to potential liability in China or other jurisdictions for any unlawful actions of our customers or users of our websites or mobile
interfaces or for content we distribute or that is linked from our platforms that is deemed inappropriate. It may be difficult to determine the type of content that may result in liability to us, our websites and ifplatforms, such as Youku Tudou, which allow users to upload videos and other content to our websites, or our cloud computing services, which allow users to upload and save massive data on our cloud data centers, may make this even more difficult. If we are found to be liable, we may be subject to negative publicity, fines, have our relevant business operation licenses revoked, or be prevented from operating our websites or mobile interfaces in China or other jurisdictions.
In addition, claims may be brought against us for defamation, libel, negligence, copyright, patent or trademark infringement, tort (including personal injury), other unlawful activity or other theories and claims based on the
nature and content of information posted on our marketplaces,platforms, including user-generated content, product reviews and message boards, by our buyers, sellersconsumers, merchants and other marketplace participants.
Regardless of the outcome of such a dispute or lawsuit, we may suffer from negative publicity and reputational damage as a result of these actions.
Failure to comply with the terms of our indebtedness could result in acceleration of indebtedness, which could have an adverse effect on our cash flow and liquidity.
We have issued an aggregate of US$8.0 billion unsecured senior notes. We have also entered into a US$3.0 billion revolving credit facility which we have not yet drawn.and a five-year term loan facility of US$4.0 billion. Under the terms of our unsecured senior notes and credit facilityfacilities and under any debt financing arrangement that we may enter into in the future, we are, and may be in the future, subject to covenants that could, among other things, restrict our business and operations. If we breach any of these covenants, our lenders and holders of our unsecured senior notes will be entitled to accelerate our debt obligations. Any default under our credit facilityfacilities or unsecured senior notes could require that we repay these debts prior to maturity as well as limit our ability to obtain additional financing, which in turn may have a material adverse effect on our cash flow and liquidity.
We may need additional capital but may not be able to obtain it on favorable terms or at all.
We may require additional cash resources due to future growth and development of our business, including any investments or acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain new or expanded credit facilities. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including our future financial condition, results of operations, cash flows, trading price of our ADSs, liquidity of international capital and lending markets and PRC governmental regulations over foreign investment and the Internet industry in the PRC. In addition, incurring indebtedness would subject us to increased debt service obligations and could result in operating and financing covenants that would restrict our operations. There can be no assurance that financing will be available in a timely manner or in amounts or on terms acceptable to us, or at all. Any failure to raise needed funds on terms favorable to us, or at all, could severely restrict our liquidity as well as have a material adverse effect on our business, financial condition and results of operations. Moreover, any issuance of equity or equity-linked securities could result in significant dilution to our existing shareholders.
We are subject to interest rate risk in connection with our indebtedness.
We are exposed to interest rate risk related to our indebtedness. The interest rates under our credit facilityfacilities and one tranche of our unsecured senior notes with an aggregate principal amount of US$300 million are based on a spread over LIBOR. As a result, the interest expenses associated with suchour indebtedness will be subject to the potential impact of any fluctuation in LIBOR. Any increase in LIBOR could impact our financing costs if not effectively hedged. Our RMB denominated bank borrowings are also subject to interest rate risk. Although from time to time, we use hedging transactions in an effort to reduce our exposure to interest rate risk, these hedges may not be effective.
We may not have sufficient insurance coverage to cover our business risks.
We have obtained insurance to cover certain potential risks and liabilities, such as property damage.damage, business interruptions and public liabilities. However, insurance companies in China offer limited business insurance products. As a result, we may not be able to acquire any insurance for certainall types of risks such as business liability or service disruption insurance forwe face in our operations in China, and our coverage may not be adequate to compensate for all losses that may occur, particularly with respect to loss of business or operations. We do not maintain business interruption insurance or product liability insurance, nor do we maintain key-man life insurance. This could leave us exposed to potential claims and losses. Any business disruption, litigation, regulatory action, outbreak of epidemic disease or natural disaster could also expose us to substantial costs and diversion of resources. We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current
insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.
An occurrence of a natural disaster, widespread health epidemic or other outbreaks could have a material adverse effect on our business, financial condition and results of operations.
Our business could be materially and adversely affected by natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of a widespread health epidemic, such as swine flu, avian influenza, severe acute respiratory syndrome, or SARS, Ebola or other events, such as wars, acts of terrorism, environmental accidents, power shortage or communication interruptions. The occurrence of such a disaster or a prolonged outbreak of an epidemic illness or other adverse public health developments in China or elsewhere in the world could materially disrupt our business and operations. SuchThese events could also significantly impact our industry and cause a temporary closure of the facilities we use for our operations, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. Our operations could be disrupted if any of our employees or employees of our business partners were suspected of having the swine flu, avian influenza, SARS, Ebola, or other epidemical diseases, since this could require us or our business partners to quarantine some or all of suchthese employees or disinfect the facilities used for our operations. In addition, our revenue and profitability could be materially reduced to the extent that a natural disaster, health epidemic or other outbreak harms the global or PRC economy in general. Our operations could also be severely disrupted if our buyers, sellersconsumers, merchants or other participants were affected by such natural disasters, health epidemics or other outbreaks.
Risks Related to our Corporate Structure
The Alibaba Partnership and related voting agreements limit the ability of our shareholders to nominate and elect directors.
Our articles of association allow the Alibaba Partnership to nominate or, in limited situations, appoint a simple majority of our board of directors. If at any time our board of directors consists of less than a simple majority of directors nominated or appointed by the Alibaba Partnership for any reason, including because a director previously nominated by the Alibaba Partnership ceases to be a member of our board of directors or because the Alibaba Partnership had previously not exercised its right to nominate or appoint a simple majority of our board of directors, the Alibaba Partnership will be entitled (in its sole discretion) to nominate or appoint such number of additional directors to the board as necessary to ensure that the directors nominated or appointed by the Alibaba Partnership comprise a simple majority of our board of directors.
In addition, we have entered into a voting agreement pursuant to which SoftBank, Yahoo, Jack Ma and Joe Tsai have agreed to vote their shares in favor of the Alibaba Partnership director nominees at each annual general shareholders meeting for so long as SoftBank owns at least 15% of our outstanding ordinary shares. Furthermore, the voting agreement provides that SoftBank has the right to nominate one director to our board until SoftBank owns less than 15% of our outstanding ordinary shares, and that right is also reflected in our articles of association. In addition, pursuant to the voting agreement, Yahoo, Jack Ma and Joe Tsai have agreed to vote their
shares (including shares for which they have voting power) in favor of the election of the SoftBank director nominee at each annual general shareholders meeting in which the SoftBank nominee stands for election. Moreover, subject to certain exceptions, pursuant to the voting agreement SoftBank and Yahoo have agreed to give Jack and Joe a proxy over, with respect to SoftBank, any portion of its shareholdings exceeding 30% of our outstanding shares and, with respect to Yahoo, all of its shareholdings up to a maximum of 121.5 million of our ordinary shares. These proxies will remain in effect until Jack Ma owns less than 1% of our ordinary shares on a fully diluted basis or we materially breach the voting agreement.
This governance structure and contractual arrangement limit the ability of our shareholders to influence corporate matters, including any matters determined at the board level. In addition, the nomination right granted to the Alibaba Partnership will remain in place for the life of the Alibaba Partnership unless our articles of
association are amended to provide otherwise by a vote of shareholders representing at least 95% of shares that vote at a shareholders meeting. The nomination rights of the Alibaba Partnership will remain in place notwithstanding a change of control or merger of our company and, for so long as SoftBank and Yahoo remain substantial shareholders, we expect the Alibaba Partnership nominees will receive a majority of votes cast at any meeting for the election of directors and will be elected as directors. These provisions and agreements could have the effect of delaying, preventing or deterring a change in control, and could limit the opportunity of our shareholders to receive a premium for their ADSs, and could also materially decrease the price that some investors are willing to pay for our ADSs. As of the date of this annual report, the parties to the voting agreement and the partners of the Alibaba Partnership held in aggregate more than 50% of our outstanding ordinary shares (including unvested shares and shares underlying vested and unvested awards). See "Item 6. Directors, and Senior Management and Employees — A. Directors and Senior Management — Alibaba Partnership."
The interests of the Alibaba Partnership may conflict with the interests of our shareholders.
The nomination and appointment rights of the Alibaba Partnership limits the ability of our shareholders to influence corporate matters, including any matters to be determined by our board of directors. The interests of the Alibaba Partnership may not coincide with the interests of our shareholders, and the Alibaba Partnership or its director nominees may make decisions with which they disagree, including decisions on important topics such as compensation, management succession, acquisition strategy and our business and financial strategy. For example, because the Alibaba Partnership will continue to be largely comprised of members of our management team, the Alibaba Partnership and its director nominees, consistent with our operating philosophy, may focus on the long-term interests of our ecosystem participants at the expense of our short-term financial results, which may differ from the expectations and desires of shareholders unaffiliated with the Alibaba Partnership. To the extent that the interests of the Alibaba Partnership differ from the interests of any of our shareholders, such shareholder may be disadvantaged by any action that the Alibaba Partnership may seek to pursue.
Our articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and ADSs.
Our articles of association contain certain provisions that could limit the ability of third parties to acquire control of our company, including:
These provisions could have the effect of delaying, preventing or deterring a change in control, and could limit the opportunity for our shareholders to receive a premium for their ADSs, and could also materially decrease the price that some investors are willing to pay for our ADSs.
SoftBank owns more than 30% of our outstanding ordinary shares and its interests may differ from those of our other shareholders.
As of March 31, 2015,2016, SoftBank owned approximately 32%32.2% of our outstanding ordinary shares. Subject to certain exceptions, SoftBank has agreed to grant the voting power of any portion of its shareholding exceeding 30% of our outstanding ordinary shares to Jack Ma and Joe Tsai by proxy. Under the terms of the voting agreement we entered into with SoftBank, SoftBank also has the right to nominate one member of our board of directors, and Yahoo, Jack and Joe have agreed to vote their shares (including shares for which they have voting
power) in favor of the SoftBank director nominees at each annual general shareholders meeting in which the SoftBank nominee stands for election until such time as SoftBank holds less than 15% of our outstanding ordinary shares. SoftBank's director nomination right is also reflected in our articles of association. Except with regard to shareholder votes relating to the Alibaba Partnership director nominees, SoftBank will have significant influence over the outcome of matters that require shareholder votes and accordingly over our business and corporate matters. SoftBank may exercise its shareholder rights in a way that it believes is in its own best interest, which may conflict with the interest of our other shareholders. These actions may be taken even if SoftBank is opposed by our other shareholders.
For more information, see "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transaction — Transactions and Agreements with SoftBank and Yahoo — Voting Agreement."
If the PRC government deems that the contractual arrangements in relation to our variable interest entities do not comply with PRC governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations changes in the future, we could be subject to penalties or be forced to relinquish our interests in those operations.
Foreign ownership of certain types of Internet businesses, such as Internet information services, is subject to restrictions under applicable PRC laws, rules and regulations. For example, foreign investors are generally not permitted to own more than 50% of the equity interests in a value-added telecommunication service provider. Any such foreign investor must also have experience and a good track record in providing value-added telecommunications services overseas. Although according to the Notice on Lifting the Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce) promulgated by the MIIT on June 19, 2015, foreign investors are allowed to hold up to 100% of all equity interests in the online data processing and transaction processing business (operational e-commerce) in China, other requirements provided by the Foreign Investment Telecommunications Rules (such as the track record and experience requirement for a major foreign investor) still apply. It is unclear how this notice will be implemented and there exist high uncertainties with respect to its interpretation and implementation by authorities.
While the significant majority of our revenue was generated by our wholly-foreign owned enterprises in fiscal year 2014,2016, we provide Internet information services in China, which are critical to our business, through a number of PRC incorporated variable interest entities. The variable interest entities are owned by PRC citizens who are our founders or senior employees or by PRC entities owned by such PRC citizens, or the variable interest entity equity holders, with whom we have contractual arrangements, or the contractual arrangements. The contractual arrangements give us effective control over each of the variable interest entities and enable us to obtain substantially all of the economic benefits arising from the variable interest entities as well as consolidate the financial results of the variable interest entities in our results of operations. Although the structure we have adopted is consistent with longstanding industry practice, and is commonly adopted by comparable companies in China, the PRC government may not agree that these arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.
In the opinion of Fangda Partners, our PRC counsel, the ownership structures of our material wholly-foreign owned enterprises and our material variable interest entities in China do not and will not violate any applicable PRC law, regulation or rule currently in effect; and the contractual arrangements between our material wholly-foreign owned enterprises, our material variable interest entities and their respective equity holders governed by PRC law are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect and will not violate any applicable PRC law, rule or regulation currently in effect. However, Fangda Partners has also advised us that there are substantial uncertainties regarding the interpretation and application of current PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary to the opinion of our PRC legal counsel.
It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. Please also see "— Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law."
If we or any of our variable interest entities are found to be in violation of any existing or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including revoking the business and operating licenses of our PRC subsidiaries or the variable interest entities,
requiring us to discontinue or restrict our operations, restricting our right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or taking other regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of any of our variable interest entities in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws, rules and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of any of our material variable interest entities or otherwise separate from any of these entities and if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our variable interest entities in our consolidated financial statements. Any of these events would have a material adverse effect on our business, financial condition and results of operations.
Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law.
The Ministry of Commerce, or the MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the major existing laws and regulations governing foreign investment in ChinaChina. While the MOFCOM solicitedcompleted the solicitation of the comments on this draft earlier this year,in February 2015, there are still substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the entire legal framework regulating foreign investments in China.timetable.
Among other things, the draft Foreign Investment Law purports to introduce the principle of "actual control" in determining whether a company is considered a foreign invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but "controlled" by foreign investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction, but cleared by the MOFCOM as "controlled" by PRC entities and/or citizens, would nonetheless be treated as a PRC domestic entity for investment in the "restriction category" on the "negative list." In this connection, "control" is broadly defined in the draft law to cover any of the following summarized categories:
Once an entity is determined to be an FIE, and its investment amount exceeds certain thresholds or its business operation falls within a "negative list" purported to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts would be required.
The "variable interest entity" structure, or VIE structure, has been adopted by many PRC-based companies, including us and certain of our equity investees such as Weibo, and Youku Tudou, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangements would also be deemed as FIEs, if they are ultimately "controlled" by foreign investors. For any companies with a VIE structure in an industry category that is in the "restriction category" on the "negative list," the existing VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state owned enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign
nationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the "negative list" without market entry clearance may be considered as illegal.
Based on the definition of "control" in the draft Foreign Investment Law as currently proposed, we believe that there are strong basis for a determination that we and our variable interest entities are ultimately controlled by PRC citizens for the following reasons:
See "Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management — Alibaba Partnership."
However, there are significant uncertainties as to how the control status of our company, our variable interest entities and our equity investees with a VIE structure would be determined under the enacted version of the Foreign Investment Law. In addition, it is uncertain whether any of the businesses that we currently operate or plan to operate in the future through our consolidated entities and the businesses operated by our equity investees with a VIE structure would be on the to-be-issued "negative list" and therefore be subject to any foreign investment restrictions or prohibitions. We also face uncertainties as to whether the enacted version of the Foreign Investment Law and the final "negative list" would mandate further actions, such as MOFCOM market entry clearance, to be completed by companies with existing VIE structure and whether such clearance can be timely obtained, or at all. If we or our equity investees with a VIE structure were not considered as ultimately controlled by PRC domestic investors under the enacted version of the Foreign Investment Law, further actions required to be taken by us or such equity investees under the enacted Foreign Investment Law may materially and adversely affect our business and financial condition.
In addition, our corporate governance practice may be materially impacted and our compliance costs could increase if we were not considered as ultimately controlled by PRC domestic investors under the enacted version of the Foreign Investment Law. For instance, the draft Foreign Investment Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that would be required for each investment and alteration of investment specifics, an annual report would be mandatory, and large foreign investors meeting certain criteria would be required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations could potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible could be subject to criminal liabilities.
Our contractual arrangements may not be as effective in providing control over the variable interest entities as direct ownership.
We rely on contractual arrangements with our variable interest entities to operate part of our Internet businesses in China and other businesses in which foreign investment is restricted or prohibited. For a description of these contractual arrangements, see "Item 4. Information on the Company — C. Organizational Structure — Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders." These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entities.
If we had direct ownership of the variable interest entities, we would be able to exercise our rights as an equity holder directly to effect changes in the boards of directors of those entities, which could effect changes at the management and operational level. Under our contractual arrangements, we may not be able to directly change the members of the boards of directors of these entities and would have to rely on the variable interest entities
and the variable interest entity equity holders to perform their obligations in order to exercise our control over the variable interest entities. The variable interest entity equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests of our company or may not perform their obligations under these contracts. For example, our variable interest entities and their respective equity holders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our websites and using our domain names and trademarks which the relevant variable interest entities have exclusive rights to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the call option, we may replace the equity holders of the variable interest entities at any time pursuant to the contractual arrangements. However, if any equity holder is uncooperative and any dispute relating to these contracts or the replacement of the equity holders remains unresolved, we will have to enforce our rights under the contractual arrangements through the operations of PRC law and arbitral or judicial agencies, which may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. See "— Any failure by our variable interest entities or their equity holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations." Consequently, the contractual arrangements may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership.
Any failure by our variable interest entities or their equity holders to perform their obligations under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.
If our variable interest entities or their equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. Although we have entered into call option agreements in relation to each variable interest entity, which provide that we may exercise an option to acquire, or nominate a person to acquire, ownership of the equity in that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws, rules and regulations, the exercise of these call options is subject to the review and approval of the relevant PRC governmental authorities. We have also entered into equity pledge agreements with respect to each variable interest entity to secure certain obligations of such variable interest entity or its equity holders to us under the contractual arrangements. However, the enforcement of such agreements through arbitral or judicial agencies may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. Moreover, our remedies under the equity pledge agreements are primarily intended to help us collect debts owed to us by the variable interest entities or the variable interest entity equity holders under the contractual arrangements and may not help us in acquiring the assets or equity of the variable interest entities.
In addition, although the terms of the contractual arrangements provide that they will be binding on the successors of the variable interest entity equity holders, as those successors are not a party to the agreements, it is uncertain whether the successors in case of the death, bankruptcy or divorce of a variable interest entity equity holder will be subject to or will be willing to honor the obligations of such variable interest entity equity holder under the contractual arrangements. If the relevant variable interest entity or its equity holder (or its successor), as
applicable, fails to transfer the shares of the variable interest entity according to the respective call option agreement or equity pledge agreement, we would need to enforce our rights under the call option agreement or equity pledge agreement, which may be costly and time-consuming and may not be successful.
The contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. Moreover, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court judgments within a prescribed time limit, the prevailing parties may only
enforce the arbitration awards or court judgments in PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements, we may not be able to exert effective control over the variable interest entities, and our ability to conduct our business, as well as our financial condition and results of operations, may be materially and adversely affected.
We may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our variable interest entities, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our growth.
Although the significant majority of our revenues are generated, and the significant majority of our operational assets are held, by our wholly-foreign owned enterprises, which are our subsidiaries, our variable interest entities hold licenses and approvals and assets that are necessary for our business operations, as well as equity interests in a series of our portfolio companies, to which foreign investments are typically restricted or prohibited under applicable PRC law. The contractual arrangements contain terms that specifically obligate variable interest entity equity holders to ensure the valid existence of the variable interest entities and restrict the disposal of material assets of the variable interest entities. However, in the event the variable interest entity equity holders breach the terms of these contractual arrangements and voluntarily liquidate our variable interest entities, or any of our variable interest entities declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by the variable interest entities, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if any of our variable interest entities undergoes a voluntary or involuntary liquidation proceeding, its equity holders or unrelated third-party creditors may claim rights to some or all of the assets of such variable interest entity, thereby hindering our ability to operate our business as well as constrain our growth.
The equity holders, directors and executive officers of the variable interest entities as well as our employees who execute other strategic initiatives may have potential conflicts of interest with our company.
PRC laws provide that a director and an executive officer owes a fiduciary duty to the company he or she directs or manages. The directors and executive officers of the variable interest entities, including Jack Ma, our lead founder and executive chairman, must act in good faith and in the best interests of the variable interest entities and must not use their respective positions for personal gain. On the other hand, as a director of our company, Jack has a duty of care and loyalty to our company and to our shareholders as a whole under Cayman Islands law. We control our variable interest entities through contractual arrangements and the business and operations of our variable interest entities are closely integrated with the business and operations of our subsidiaries. Nonetheless, conflicts of interests for these individuals may arise due to dual roles both as directors and executive officers of the variable interest entities and as directors or employees of our company, and may also arise due to dual roles both as variable interest entity equity holders and as directors or employees of our company.
We cannot assure you that these individuals will always act in the best interests of our company should any conflicts of interest arise, or that any conflicts of interest will always be resolved in our favor. We also cannot assure you that these individuals will ensure that the variable interest entities will not breach the existing contractual arrangements. If we cannot resolve any such conflicts of interest or any related disputes, we would have to rely on legal proceedings to resolve these disputes and/or take enforcement action under the contractual arrangements. There is substantial uncertainty as to the outcome of any such legal proceedings. See "— Any failure by our variable interest entities or their equity holders to perform their obligations under the contractual arrangements would have a material and adverse effect on our business, financial condition and results of operations."
In April 2015, Simon Xie, who is one of our founders and an equity holder in certain of our variable interest entities, was grantedFurthermore, a financing with an aggregate principal of up to RMB6.9 billion by a major financial institution in the PRC, which was used to fund a minority investment in Wasu via a PRC limited partnership. A
company controlled by Jack Ma serves as one of the general partners of thisa PRC limited partnership.partnership that made a minority investment in Wasu. Yuzhu Shi, the founder, chairman and a principal shareholder of Giant Interactive, a China-based online game company that was previously listed on the New York Stock Exchange, and an entrepreneur with significant experience in and knowledge of the media industry in China, serves as the other general partner. Jack, through his control of one of the general partners, and Mr. Shi, as the other general partner and the executive partner, jointly control this PRC limited partnership.partner. The interest of the general partner controlled by Jack in the limited partnership is limited to a return of its RMB10,000 capital contribution. In addition, Simon Xie, a former employee who is one of our founders and an equity holder in certain of our variable interest entities, is a limited partner in this PRC limited partnership. To fund this investment, in April 2015 Simon was granted a financing with an aggregate principal of up to RMB6.9 billion by a major financial institution in the PRC. The financing is secured by a pledge of the Wasu shares acquired by the PRC limited partnership, and a pledge of certain wealth management products we purchased. In addition, we entered into a loan agreement for a principal amount of up to RMB2.0 billion with Simon Xie in April 2015 to finance the repayment by Simon of the interest under the above financing. We expect that these arrangements will facilitatestrengthen our entering into and strengthen strategic business arrangements with Wasu to pursue our strategy of expanding entertainment offerings to our customers.consumers. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities — Digital Entertainment — Wasu" and "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Pledge for the Benefit of and Loan Arrangement with a Related Party."
We cannot assure you that Jack Ma or Simon Xie will act in our interest given Jack'shis ability to control one of the general partners of the PRC limited partnership and Simon's economic interests as a limited partner of the PRC limited partnership that invested in Wasu, respectively, nor can we assure you that theyhe will not breach their respectivehis obligations to us as our director, and executive officer, in the case of Jack, or as our employee, in the case of Simon, including their respective obligations not to compete with us pursuant to the terms of their employment agreements.us. In addition, the interests of Mr. Shi, as an independent third party,third-party, may not coincide with those of Jack as the other general partner in the PRC limited partnership, that made the investment, or with our interests in pursuing our entertainment strategy. If any such conflicts arise between Jack and Mr. Shi in conducting the business of the PRC limited partnership, it could potentially have a material adverse effect on our relationship with the shareholder of Wasu and, consequently, on our ability to achieve the strategic objectives of our alliance with Wasu. Furthermore, there is no assurance that Simon will have sufficient resources to repay the loans in a timely manner or at all. The loan that we provided to Simon is secured by a pledge of Simon's limited partnership interest in the PRC limited partnership. However, if Simon fails to repay the loan, our enforcement of such secured interests could be costly and time-consuming and would be subject to the uncertainties in the PRC legal system.
The contractual arrangements with our variable interest entities may be subject to scrutiny by the PRC tax authorities. Any adjustment of related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
The tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or the variable interest entities or their equity holders are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our variable interest entities, may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities determine that any contractual arrangements were not entered into on an arm's length basis and therefore constitute a favorable transfer pricing, the PRC tax liabilities of the relevant subsidiaries and/or variable interest entities and/or variable interest entity
equity holders could be increased, which could increase our overall tax liabilities. In addition, the PRC tax authorities may impose late payment interest. Our net income may be materially reduced if our tax liabilities increase.
Risks Related to Doing Business in the People's Republic of China
Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.
Most of our operations are conducted in the PRC and substantially all of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.
The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China's economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.
While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, whichactivity. While the PRC government started easing its monetary policy in turn2015, there have been signs of continuing economic slowdown in China. Any prolonged slowdown in the Chinese economy could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Most of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the non-precedential nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. Therefore, it is possible that our existing operations may be found not to be
in full compliance with relevant laws and regulations in the future. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more
developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations.
PRC regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us to pursue growth through acquisitions.
Under the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify MOFCOM, in advance of any transaction where the parties' revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the target.other party. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review. Due to the level of our revenues, our proposed acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million in the year prior to any proposed acquisition would be subject to MOFCOM merger control review. As a result of our size, many of the transactions we may undertake could be subject to MOFCOM merger review. Complying with the requirements of the relevant regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. In addition, MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest entity structure. If MOFCOM's practice remains unchanged, our ability to carry out our investment and acquisition strategy may be materially and adversely affected and there may be significant uncertainty as to whether transactions that we may undertake would subject us to fines or other administrative penalties and negative publicity and whether we will be able to complete large acquisitions in the future in a timely manner or at all.
PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries' ability to increase their registered capital or distribute profits.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as "SAFE Circular 75" promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a "special purpose vehicle." SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share
transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and we have periodically filed SAFE Circular 75 reports prior to the promulgation of SAFE
Circular 37 on behalf of certain employee shareholders who we know are PRC residents. However, we may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and cannot assure you that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. On February 28,13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Pursuant to SAFE Notice 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under the SAFE Circular 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, will directly review the applications and conduct the registration.
Furthermore, since it is unclear how those new SAFE regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries' ability to distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.
Any failure to comply with PRC regulations regarding our employee equity incentive plans may subject the PRC plan participants in the plans, us or usour overseas subsidiaries to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. OurIn the meantime, our directors, executive officers and other employees who are PRC citizens or who have residedare non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who have been granted restricted shares, RSUs or options by us or our overseas listed subsidiaries may follow SAFE Circular 37 to apply for the foreign exchange registration. We and our directors, executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who have been granted restricted shares, RSUs or options are subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, according to which,apply for the foreign exchange registration. According to those regulations, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publicly listed company who are PRC citizens or who are non-PRC citizens residing in China for a continuous period of not less than one year, subject to limited exceptions, are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make payment under ourthe relevant equity incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises' ability to distribute dividends to us. We also face regulatory uncertainties under PRC law that could restrict our ability or the ability of our overseas listed subsidiaries to adopt additional equity incentive plans for our directors and employees underwho are PRC law.citizens or who are non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions.
In addition, the State Administration for Taxation has issued circulars concerning employee share options, restricted shares or RSUs. Under these circulars, employees working in the PRC who exercise share options, or whose restricted shares or RSUs vest, will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees related to their share options, restricted shares or RSUs. Although we and our overseas listed subsidiaries currently withhold income tax from our PRC employees in connection with their exercise of options and the vesting of their restricted shares and RSUs, if the employees fail to pay, or the PRC subsidiaries fail to withhold, their income taxes according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities.
We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries in China and on remittances, including loans, from the variable interest entities in China to fund offshore cash and financing requirements.
We are a holding company and rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries and on remittances, including loans, from the variable interest entities, for our offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, fund inter-company loans, service any debt we may incur outside of China and pay our expenses. When our principal operating subsidiaries or the variable interest entities incur additional debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions or remittances, including loans, to us. Furthermore, the laws, rules and regulations applicable to our PRC subsidiaries and certain other subsidiaries permit payments of dividends only out of their retained earnings, if any, determined in accordance with applicable accounting standards and regulations.
Under PRC laws, rules and regulations, each of our subsidiaries incorporated in China is required to set aside a portion of its net income each year to fund certain statutory reserves. These reserves, together with the registered equity, are not distributable as cash dividends. As a result of these laws, rules and regulations, our subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. As of March 31, 2015,2016, these restricted assets totaled RMB26,902RMB39,116 million (US$4,3406,066 million).
Limitations on the ability of the variable interest entities to make remittance to the wholly-foreign owned enterprises to pay dividends to us could limit our ability to access cash generated by the operations of those entities, including to make investments or acquisitions that could be beneficial to our businesses, pay dividends to our shareholders or otherwise fund and conduct our business.
The services conducted by our wholly-foreign owned enterprises might be regarded as a form of online advertising or as part of services requiring an Internet content provider license or other licenses and subjecting us to other laws, rules and regulations as well as increased taxes.
Our pay-for-performance, or P4P, services and other related services are currently not classified as a form of online advertising in China or as part of services requiring an ICP license or other licenses. We conduct our P4P and other related business through our wholly-foreign owned enterprises in the PRC, which are not qualified to operate an online advertising business and do not hold an ICP license. However, we cannot assure you that the PRC government will not classify our P4P and other related services as a form of online advertising or as part of services requiring an ICP license or other licenses in the future. On July 1, 2015, the SAIC published a discussion draft of the Interim Administrative Measures on Internet Advertising, or the Draft Internet Advertising Measures, to solicit public comments. The Draft Internet Advertising Measures defines Internet advertisement as commercial display, link, email as well as paid-for search results published in the forms of words, pictures, audio and video, and related media, through Internet media resources. If new regulations characterizethe Draft Internet Advertising Measures are promulgated as proposed, our P4P services and other related services may be characterized as Internet advertisement.
If our P4P and other related services are characterized as a form of online advertising or as part of ICP services requiringwhich may require an ICP license or other licenses, we may have to conduct our P4P business through the variable interest entities, which are qualified to operate online advertising business and hold ICP or other licenses.
If we conducted our P4P business through the variable interest entities,licenses, and we may face increased scrutiny from the tax authorities and may incur additional taxes on any servicesservice fees paid by theour variable interest entities to theour wholly-foreign owned enterprises. In addition, advertising services are subject to a cultural construction fee under PRC law, which is a 3% surcharge in addition to the applicable value-added tax. If our P4P and other related services were to be considered a form of online advertising, our revenue from those services would be subject to the 3% surcharge. If that were to occur, our margins would decline and our net income could be reduced. In addition, the substantial revenue streams attributable to our P4P services would then be collected from variable interest entities and subject to the risks associated with the variable interest entities. If the change in classification of our P4P and other related services were to be retroactively applied, we might be subject to sanctions, including payment of delinquent taxes and late payment interest.
Moreover, PRC advertising laws, rules and regulations require advertisers, advertising operators and advertising distributors to ensure that the content of the advertisements they prepare or distribute is fair and accurate and is in full compliance with applicable law. Violation of these laws, rules or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and
orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may revoke a violator's license for operating an advertising business. In addition, the Draft Internet Advertising Measures requires paid-for search results to be obviously distinguished from natural search results so that consumers will not misunderstand the nature of such search results. If the Draft Internet Advertising Measures are promulgated as proposed, we will be obligated to distinguish from others the merchants who purchase P4P and related services or the relevant listings by such merchants. Complying with such requirements, including any penalties or fines for any failure to comply, may significantly reduce the attractiveness of our platforms and increase our costs and could have a material adverse effect on our business, financial condition and results of operations.
In addition, for advertising content related to specific types of products and services, advertisers, advertising operators and advertising distributors must confirm that the advertisers have obtained requisite government approvals, including the advertiser's operating qualifications, proof of quality inspection of the advertised products, government pre-approval of the contents of the advertisement and filing with the local authorities. If we become subject to PRC advertising laws, we would need to take steps to monitor, and to ensure that our third-party marketing affiliates monitor, the content of any advertisements displayed on our platforms. This could require considerable resources and time, and could significantly affect the operation of our business, while also subjecting us to increased liability under the relevant laws, rules and regulations. The costs associated with complying with such laws, rules and regulations, including any penalties or fines for our failure to so comply if required, could have a material adverse effect on our business, financial condition and results of operations. Any change in the classification of our P4P and other related services by the PRC government may also significantly disrupt our operations and materially and adversely affect our business and prospects.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.
Under the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under the laws of jurisdictions outside of China with "de facto management bodies" located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. "De facto management body" refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the "de facto management body" of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to
offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation's general position on how the "de facto management body" test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we generate only a small portion of our revenues offshore. However, if this proportion were to increase and if we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body."
Dividends payable to our foreign investors and gains on the sale of our ADSs or ordinary shares by our foreign investors may become subject to PRC taxation.
Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable by a resident enterprise to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC.PRC, subject to any reduction set forth in applicable tax treaties. Similarly, any gain realized on the transfer of ADSs or ordinary shares of a resident enterprise by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ordinary shares or ADSs, and any gain realized by the investors from the transfer of our ordinary shares or ADSs, would be treated as income
derived from sources within the PRC and would as a result be subject to PRC taxation. See "Item 4. Information on the Company — B. Business Overview — Regulation — Tax Regulations." Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or ordinary shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties. It is unclear whether if we or any of our subsidiaries established outside China are considered a PRC resident enterprise, holders of our ADSs or ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas and to claim foreign tax credit if applicable. If dividends payable to our non-PRC investors, or gains from the transfer of our ADSs or ordinary shares by such investors are subject to PRC tax, the value of your investment in our ADSs or ordinary shares may decline significantly.
Discontinuation of preferential tax treatments we currently enjoy or other unfavorable changes in tax law could result in additional compliance obligations and costs.
OperatingChinese companies operating in the high-technology and software industry a number of our China operating entities enjoy various types of preferential tax treatment according to the prevailing PRC tax laws. Our PRC subsidiaries may, if theythat meet the relevant requirements may qualify for three main types of preferential treatment, which are high and new technology enterprises, software enterprises and key software enterprises within the scope of the PRC national plan.
For a qualified high and new technology enterprise, the applicable enterprise income tax rate is 15%. The high and new technology enterprise qualification is re-assessed by the relevant authorities every three years. Moreover, a qualified software enterprise is entitled to a tax holiday consisting of a two-year tax exemption beginning from the first profit-making calendar year and a 50% tax reduction for the subsequent three calendar years. The software enterprise qualification is subject to an annual assessment. For a qualified key software enterprise within the scope of the PRC national plan, the applicable enterprise income tax rate for a calendar year is 10%. The key software enterprise qualification is subject to an assessment every two years.
A number of our China operating entities enjoy such preferential tax treatment. Our effective tax rate in fiscal year 20152016 was 19.8%10%. The discontinuation of any of the various types of preferential tax treatment we enjoy could
materially and adversely affect our results of operations. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Taxation — PRC Income Tax."
We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company.
On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax andon Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented certain previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin, an "indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be recharacterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax.
According to Bulletin 7, "PRC taxable assets" include assets attributed to an establishment or a place of business in China, immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a "reasonable commercial purpose" of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise directly or indirectly derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China;China, directly or indirectly; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business
model and organizational structure; the foreign income tax liabilities arising from the indirect transfer of PRC taxable assets; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment or place of business, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.
There are uncertainties as to the application of Bulletin 7. As Bulletin 7 was promulgated recently, it is not clear how it will be implemented. Bulletin 7 may be determined by the tax authorities to be applicable to some of our offshore restructuring transactions or sale of the shares of our offshore subsidiaries or investments where PRC taxable assets are involved. The transferors and transferees may be subject to the tax filing and withholding or tax payment obligation, while our PRC subsidiaries may be requested to assist in the filing. Furthermore, we, our non-resident enterprises and PRC subsidiaries may be required to spend valuable resources to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion under Circular 698/Bulletin 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. If the PRC tax authorities make adjustments to the taxable income of the transactions under
Circular 698/Bulletin 7, our income tax costs associated with such potential acquisitions or disposals will increase, which may have an adverse effect on our financial condition and results of operations.
Restrictions on currency exchange may limit our ability to utilize our revenue effectively.
Substantially all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the "current account," which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account," which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises, may purchase foreign currency for settlement of "current account transactions," including payment of dividends to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC, service any debt we may incur outside of China or pay dividends in foreign currencies to our shareholders, including holders of our ADSs. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest entities.
Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against
the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. SinceIn June 2010, the PRC government has allowedPeople's Bank of China increased the RMB to appreciate slowlyflexibility of the exchange rate and between June 30, 2010 and December 31, 2013, the value of the Renminbi appreciated approximately 12.0% against the U.S. dollar, again,although the value of the Renminbi depreciated approximately 2.5% against the U.S. dollar in 2014. In August 2015, the People's Bank of China changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous day's closing spot rate, foreign-exchange demand and it has appreciated more than 10% since June 2010. In April 2012,supply as well as changes in major currency rates. As a result, in 2015, the PRC government announced that it would allow more RMB exchange rate fluctuation. However, it remains unclear how this announcement might be implemented.value of the Renminbi depreciated approximately 5.8% against the U.S. dollar, and from December 31, 2015 through May 20, 2016, the value of the Renminbi further depreciated approximately 1.1% against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the Renminbi against the U.S. dollar. Substantially all of our revenues and costs are denominated in Renminbi, and a significant portion of our financial assets are also denominated in Renminbi while a significant portion of our debt is denominated in U.S. dollars. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of the Renminbi may materially reduce any dividends payable onand adversely affect our ADSs in U.S. dollars.liquidity and cash flows. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount we would receive. From time to time we enter into hedging activities with regard to exchange rate risk. We cannot assure you that such hedging activities will successfully mitigate such risks adequately or at all, and in addition hedging activities may result in greater volatility in our results of operations.
The audit report included in this annual report is prepared by auditors who are not inspected fully by the Public Company Accounting Oversight Board and, as such, our shareholders are deprived of the benefits of such inspection.
As an auditor of companies that are publicly traded in the United States and a firm registered with the Public Company Accounting Oversight Board, or PCAOB, PricewaterhouseCoopers is required under the laws of the United States to undergo regular inspections by the PCAOB. However, because we have substantial operations within the People's Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese government authorities, our auditor and its audit work is not currently inspected fully by the PCAOB.
Inspections of other auditors conducted by the PCAOB outside of China have at times identified deficiencies in those auditors' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, shareholders may be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported financial information and procedures and the quality of our financial statements.
Proceedings instituted byRestrictions on the SEC against five PRC-based accounting firms, including the affiliatedirect production of our independent registered public accounting firm,audit work papers to foreign regulators could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.
In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the mainland Chinese affiliates of the "big four" accounting firms, including the affiliate of our auditor, and also against Dahua, the former BDO affiliate in China. The Rule 102(e) proceedings initiated by the SEC relaterelated to the failure of these firms to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in China are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the CSRC. The issues raised by the proceedings are not specific to the Chinese affiliate of our auditor or to us, but potentially affect equally all PCAOB-registered audit firms based in China and all businesses based in China (or with substantial operations in China) with securities listed in the United States. In addition, auditors based outside of China are subject to similar restrictions under PRC law and CSRC directives in respect of audit work that is carried out in China which supports the audit opinions issued on financial statements of entities with substantial China operations.
In January 2014, the administrative judge reached an initial decision that the China-based affiliates of the "big four" accounting firms should be barred from practicing before the SEC for a period of six months. In February 2014, the accounting firms filed a petition for review of the initial decision. In February 2015, each of the "big four" accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute with the SEC. The settlement stays the current proceeding for four years, during which time the firms are required to follow detailed procedures to seek to provide the SEC with access to Chinese firms' audit documents via the CSRC. If a firm does not follow the procedures, the SEC would impose penalties such as suspensions, or commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the administrative proceeding against all four firms. In addition, the limitations imposed by the PRC on the production of workpapers reflecting audit work performed in the PRC could likewise result in penalties, such as suspensions of our audit firm's ability to practice before the SEC.
If our independent registered public accounting firm, or the affiliate of our independent registered public accounting firm, were denied, even temporarily, the ability to practice before the SEC, we would need to consider with our Hong Kong based auditor the alternate support arrangements they would need in theirfor the audit of our operations in China. If our auditor, were unable to have alternate support or otherwisean affiliate of that firm, were unable to address issues related to the production of documents, pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, and we were unable to timely find another independent registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to delisting of our ADSs from the New York Stock Exchange or deregistration from the SEC, or both. Moreover, any negative news about the proceedings against these audit firms may adversely affect investor confidence in companies with substantial mainland China based operations listed in the U.S. All theseThis would materially and adversely affect the market price of our ADSs and substantially reduce or effectively terminate the trading of our ADSs in the United States.
Risks Related to our ADS
The trading pricesprice of our ADSs has been and is likely to continue to be volatile, which could result in substantial losses to our shareholders.
The trading price of our ADSs has been and is likely to continue to be volatile and could fluctuate widely in response to a variety of factors, many of which are beyond our control. For example, the high and low sale prices of our ADSs in fiscal year 2016 were US$95.06 and US$57.20, respectively. In addition, the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. Some of these companies have experienced significant volatility, including significant price declines after their initial public offerings. The trading performances of these PRC companies' securities at the time of or after their offerings may affect the overall investor sentiment towards other PRC companies listed in the United States and consequently may impact the trading performance of our ADSs. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for specific business reasons, including:
Any of these factors may result in large and sudden changes in the volume and trading price of our ADSs. In addition, the stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies and industries. These fluctuations may include a so-called "bubble market" in which investors temporarily raise the price of the stocks of companies in certain industries, such as the e-commerce industry, to unsustainable levels. These market fluctuations may significantly affect the trading price of our ADSs. In the past, following periods of volatility in the market price of a company's securities, shareholders have often instituted securities class action litigation against that company. We have been
named as a defendant in certain purported shareholder class action lawsuits described in "Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal and Administrative Proceedings." The litigation process may utilize a material portion of our cash resources and divert management's attention from the day-to-day operations of our company, all of which could harm our business. If adversely determined, the class action suits may have a material adverse effect on our financial condition and results of operations.
Substantial future sales or perceived potential sales of our ADSs, ordinary shares or other equity or equity-linked securities in the public market could cause the price of our ADSs to decline significantly.
Sales of our ADSs, ordinary shares or other equity or equity-linked securities in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline significantly. As of March 31, 2015,2016, we had 2,495,499,0362,473,927,859 ordinary shares outstanding, including 831,246,794and 1,183,920,615 of our ordinary shares were represented by ADSs. All of our ordinary shares represented by ADSs. A substantial majority ofADSs were freely transferable by persons other than our then-outstandingaffiliates without restriction or additional registration under the Securities Act. The ordinary shares that have not been converted to ADSsheld by our affiliates are subject to lock-up agreements with various release dates. By September 2015, all these ordinary shares will no longer be subject to any lock-up arrangementarrangements and may be freely converted into ADSs from time to time. The remaining ordinary shares will be available for sale upon the expiration of the applicable lock-up periods, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. AnyAct, under sales plans adopted pursuant to Rule 10b5-1 or all of these shares may be released prior tootherwise. Concurrent with the expiration of the applicable lock-up period at the discretion of one of the designated representatives. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market pricecompletion of our ADSs could decline significantly.investment in Suning Commerce Group Co., Limited, or Suning, Suning will subscribe for approximately 26.3 million of our newly issued ordinary shares, which will be subject to lock-up arrangements.
Certain major holders of our ordinary shares will have the right to cause us to register under the Securities Act the sale of their shares, subject to the applicable lock-up periods.shares. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline significantly.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline.
It is our policy not to offer guidance on earnings. The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs
would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline significantly.
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain New York Stock Exchange corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our ordinary shares and the ADSs.
We are exempted from certain corporate governance requirements of the New York Stock Exchange by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on the New York Stock Exchange. The standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:
We have relied on and intend to continue to rely on some of these exemptions. As a result, our shareholders may not be provided with the benefits of certain corporate governance requirements of the New York Stock Exchange.
As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which may afford less protection to our shareholders than they would enjoy if we were a domestic U.S. company.
As a foreign private issuer, we are exempt from, among other things, the rules prescribing the furnishing and content of proxy statements under the Exchange Act.Act and the rules relating to selective disclosure of material nonpublic information under Regulation FD. In addition, our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit and recovery provisions contained in Section 16 of the Exchange Act. We are also not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act. As a result, our shareholders may be afforded less protection than they would under the Exchange Act rules applicable to domestic U.S. companies.
If and when permitted by law, we may conduct a public offering and listing of our shares in China, which may result in increased regulatory scrutiny and compliance costs as well as increased fluctuations in the prices of our ordinary shares and ADSs listed in overseas markets.
Although not currently allowed under PRC law, if and when permitted by law, we may conduct a public offering and/or listing of our shares on a stock exchange in China in the future. We have not set a specific timetable or decided on any specific form for an offering in China. The precise timing of the offering and/or listing of our shares in China would depend on a number of factors, including relevant regulatory developments and market conditions. If we complete a public offering or listing in China, we would become subject to the applicable laws, rules and regulations governing public companies listed in China, in addition to the various laws, rules and regulations that we are subject to in the United States as a reporting company. The listing and trading of our securities in multiple jurisdictions and multiple markets may lead to increased compliance costs for us, and we may face the risk of significant intervention by regulatory authorities in these jurisdictions and markets.
In addition, under current PRC laws, rules and regulations, our ordinary shares will not be interchangeable or fungible with any shares we may decide to list on a PRC stock exchange, and there is no trading or settlement between these markets in the United States and mainland China. Furthermore, these two markets have different trading characteristics and investor bases, including different levels of retail and institutional participation. As a
result of these differences, the trading prices of our ADSs, accounting for the share-to-ADS ratio, may not be the same as the trading prices of any shares we may decide to list on a PRC stock exchange. The issuance of a separate class of shares and fluctuations in its trading price may also lead to increased volatility in, and may otherwise materially decrease, the prices of our ordinary shares and ADSs.
Our shareholders may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and most of our directors and substantially all of our executive officers reside outside the United States.
We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our wholly-foreign owned enterprises and the variable interest entities. Most of our directors and substantially all of our executive officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible for our shareholders to bring an action against us or against these individuals in the Cayman Islands or in China in the event that they believe that their rights have been infringed under the securities laws of the United States or otherwise. Even if shareholders are successful in bringing an action of this kind, the laws of the Cayman Islands and China may render them unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States or China, although the courts of the Cayman
Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2013 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilitiesduties of our directors are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which provides persuasive, but not binding, authority in a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilitiesduties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.
In addition, our articles of association provide that in the event that any shareholder initiates or asserts any claim or counterclaim against us, or joins, offers substantial assistance to or has a direct financial interest in any claim or counterclaim against us, and does not obtain a judgment on the merits in which the initiating or asserting party prevails, then the shareholder will be obligated to reimburse us for all fees, costs and expenses (including, but not limited to, all reasonable attorneys' fees and other litigation expenses) that we may incur in connection with such claim or counterclaim. These fees, costs and expenses that may be shifted to a shareholder under this provision are potentially significant and this fee-shifting provision is not limited to specific types of actions, but is rather potentially applicable to the fullest extent permitted by law.
Our fee-shifting provision may dissuade or discourage our shareholders (and their attorneys) from initiating lawsuits or claims against us or may impact the fees, contingency or otherwise, required by attorneys to represent our shareholders. Fee-shifting provisions such as ours are relatively new and untested. We cannot assure you that we will or will not invoke our fee-shifting provision in any particular dispute, or that we will be successful in obtaining fees if we choose to invoke the provision.
As a result of the foregoing, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
The voting rights of holders of our ADSs are limited by the terms of the deposit agreement.
Holders of our ADSs may exercise their voting rights with respect to the ordinary shares underlying their ADSs only in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from them in the manner set forth in the deposit agreement, the depositary for our ADSs will endeavor to vote their underlying ordinary shares in accordance with these instructions. Under our articles of association, the minimum notice period required for convening a general meeting is ten days. When a general meeting is convened, holders of our ADSs may not receive sufficient notice of a shareholders' meeting to permit them to withdraw their ordinary shares to allow them to cast their votes with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to holders of our ADSs or carry out their voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to holders of our ADSs in a timely manner, but they may not receive the voting materials in time to ensure that they can instruct the depositary to vote the ordinary shares underlying their ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of our ADSs may not be able to exercise their rights to vote and they may lack recourse if the ordinary shares underlying their ADSs are not voted as they requested.
The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying the ADSs if holders of such ADSs do not vote at shareholders' meetings, except in limited circumstances, which could adversely affect the interests of holders of our ADSs.
Under the deposit agreement for our ADSs, the depositary will give us a discretionary proxy to vote the ordinary shares underlying the ADSs at shareholders' meetings if holders of such ADSs do not give voting instructions to the depositary, unless:
The effect of this discretionary proxy is that, if holders of our ADSs fail to give voting instructions to the depositary, they cannot prevent our ordinary shares underlying their ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence our management. Holders of our ordinary shares are not subject to this discretionary proxy.
Holders of our ADSs may be subject to limitations on transfer of their ADSs.
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Holders of our ADSs may not receive distributions on our ordinary shares or any value for them if it is illegal or impractical to make them available to them.
The depositary of our ADSs has agreed to pay holders of our ADSs the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. Holders of our ADSs will receive these distributions in proportion to the number of our ordinary shares that their ADSs represent. However, the depositary is not responsible for making such payments or
distributions if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that holders of our ADSs may not receive the distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available. These restrictions may materially reduce the value of the ADSs.
The requirements of being a public company may strain our resources and distract our management.
As a public company, we are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements is time-consuming and costly to us, either or both of which could have a negative effect on our business, financial condition and results of operations.
As a public company, we are subject to the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial performance. The Sarbanes-Oxley Act requires that we maintain disclosure controls and procedures and internal control over financial reporting. These requirements and our efforts to comply with these requirements may divert management's attention from other business concerns and we will incur significant legal, accounting and other expenses, which could have a material adverse effect on our business, financial condition and results of operations.
There could be adverse United States federal income tax consequences to United States investors if we were or were to become a passive foreign investment company.
While we do not believe we are or will become a passive foreign investment company, or PFIC, there can be no assurance that we were not a PFIC in the past and will not become a PFIC in the future. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and
assets from time to time. Specifically, we will be classified as a PFIC for United States federal income tax purposes if either: (1) 75% or more of our gross income in a taxable year is passive income, or (2) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which includes cash) is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of our ADSs, which is subject to change. See "Item 10. Additional Information — E. Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company."
Although we do not believe we were or will become a PFIC, it is not entirely clear how the contractual arrangements between us and our variable interest entities will be treated for purposes of the PFIC rules. If it were determined that we do not own the stock of our variable interest entities for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC. See "Item 10. Additional Information — E. Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company."
If we were or were to become a PFIC, such characterization could result in adverse United States federal income tax consequences to our shareholders that are United States investors. For example, if we are a PFIC, our United States investors will become subject to increased tax liabilities under United States federal income tax laws and regulations and will become subject to burdensome reporting requirements. We cannot assure you that we were not or will not become a PFIC for any taxable year. You are urged to consult your own tax advisors concerning United States federal income tax consequence on the application of the PFIC rules. See "Item 10. Additional Information — E. Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company."
ITEM 4.4 INFORMATION ON THE COMPANY
A. History and Development of the Company
Alibaba Group Holding Limited is a Cayman Islands holding company established on June 28, 1999, and we conduct our business in China through our subsidiaries and variable interest entities.
Our significant subsidiaries, as that term is defined under Section 1-02 of Regulation S-X under the Securities Act, consist ofinclude the following entities:
The principal executive offices of our main operations are located at 969 West Wen Yi Road, Yu Hang District, Hangzhou 311121, People's Republic of China. Our telephone number at this address is +86-571-8502-2077. Our registered office in the Cayman Islands is located at the offices of Trident Trust Company (Cayman) Limited, Fourth Floor, One Capital Place, P.O. Box 847, George Town, Grand Cayman, Cayman Islands. Our agent for service of process in the United States is Corporation Service Company located at 1180 Avenue of the Americas, Suite 210, New York, New York 10036. Our corporate website iswww.alibabagroup.com.
We have a demonstrated track record of successful organic business creation. In addition to organic growth, we have made, or have entered into agreements to make strategic investments, acquisitions and alliances that are intended to increase our service offerings and expand our capabilities. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities" for more information.
Initial Public Offering
In September 2014, we completed our initial public offering, in which we and certain selling shareholders offered and sold an aggregate of 368,122,000 ordinary shares in the form of ADSs. We received approximately US$10 billion in proceeds before expenses. Our ADSs are listed on the NYSE under the symbol "BABA."
On August 12, 2015, we announced the implementation of Contentsa share repurchase program in an aggregate amount of up to US$4 billion over a period of two years, or the Share Repurchase Program. We have repurchased ADSs representing our ordinary shares on the open market under purchase plans adopted to implement the Share Repurchase Program. In addition, Jack Ma, our executive chairman, and Joe Tsai, our executive vice chairman, have jointly entered into our plans as affiliated purchasers. See "Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers."
B. Business Overview
Our Mission
Our mission is to make it easy to do business anywhere.
Our founders started our company to champion small businesses, in the belief that the Internet would level the playing field by enabling small enterprises to leverage innovation and technology to grow and compete more effectively in the domestic and global economies. We believe that concentrating on customers'customer needs and solving their problems — whether those customers are buyersconsumers or sellersmerchants — ultimately will lead to the best outcome for our business. We have developed a large ecosystem for online and mobile commerce that enables participants to create and share value on our platform. Our decisions are guided by how they serve our mission over the long-term, not by the pursuit of short-term gains.
Our Vision
We aim to build the future infrastructure of commerce. We envision that our customers will meet, work and live at Alibaba, and that we will be a company that lasts at least 102 years.
Meet @ Alibaba. We enable hundreds of millions of commercial and social interactions among our users, between consumers and merchants, and among businesses every day.
Work @ Alibaba. We empower our customers with the fundamental infrastructure for commerce and data technology, so that they can build businesses and create value that can be shared among our ecosystem participants.
Live @ Alibaba. We strive to expand our products and services to become central to the everyday lives of our customers.
102 Years. For a company that was founded in 1999, lasting at least 102 years means we will have spanned three centuries, an achievement that few companies can claim. Our culture, business models and systems are built to last, so that we can achieve sustainability in the long run.
Our Values
Our values are fundamental to the way we operate and how we recruit, evaluate and compensate our people.
Our six values are:
Company Overview
To fulfill our mission "to make it easy to do business anywhere," we enable businesses to transform the way they market, sell and operate. We provide the fundamental technology infrastructure and marketing reach to help merchants, brands and other businesses that provide products, services and digital content to leverage the power of the Internet to engage with their users and customers.
Our businesses are comprised of core commerce, cloud computing, mobile media and entertainment, and other innovation initiatives. Through investee affiliates, Cainiao Network and Koubei (), respectively, we participate in the logistics and local services sectors. In addition, we have a profit sharing interest in Ant Financial Services, the financial services group that operates through Alipay, the leading third-party online payment platform in China.
Core Commerce
Retail Commerce in China
We are the largest online and mobileretail commerce company in the world in terms of gross merchandise volumeGMV in 2014.the twelve months ended March 31, 2016, compared with others on the basis of publicly available comparable transaction value data for the most recent fiscal year.
We operate Taobao Marketplace, China's largest online shoppingmobile commerce destination, in terms of gross merchandise volume,and Tmall, China's largest third-party platform for brands and retailers, in terms of gross merchandise volume, and Juhuasuan, China's most popular group buying marketplaceeach case by its monthly active users in 2015, according to iResearch.
in each case in 2014 according to iResearch. These three marketplaces,We also operate Juhuasuan, which is our sales and marketing platform for flash sales where merchants can acquire new customers and raise brand awareness through special discounts and promotional events. Taobao, Tmall and Juhuasuan, which comprise our China retail marketplaces, generated a combined GMV of RMB2,444RMB3,092 billion (US$394485 billion) in the twelve months ended March 31, 2015.2016. There were 350423 million active buyers on these marketplaces and over 10 million active sellers in the twelve months ended March 31, 2015. A significant portion of our customers have already transacted on our mobile platform, and we are focused on continuing to capture this opportunity.2016. In the three months ended March 31, 2015,2016, mobile GMV accounted for 51%73% of our GMV, up from 42% inGMV. In March 2016, the preceding three months and up from 27% in the same period in 2014. The number ofvarious mobile MAUs increased from 163 million in the month ended March 31, 2014,apps that consumers use to 265 million in the month ended December 31, 2014 and to 289 million in the month ended March 31, 2015.
In addition toaccess our three China retail marketplaces we operate Alibaba.com, China's largest global online wholesale marketplace in 2014 by revenue, according to iResearch, 1688.com, our China wholesale marketplace, and AliExpress, our global consumer marketplace.
We provide the fundamental technology infrastructure and marketing reach to help businesses leverage the power of the Internet to establish an online presence and conduct commerce with consumers and businesses. We have been a leader in developing online marketplace standards in China, including consumer protection programs, marketplace rules, qualification standards for merchants and buyer and seller rating systems. Given the scale we have been able to achieve, an ecosystem has developed around our platform that consists of buyers, sellers, third party service providers, strategic alliance partners, and investee companies. Our platform and the role we play in connecting buyers and sellers and making it possible for them to do business anytime and anywhere is at the nexus of this ecosystem. Much of our effort, our time and our energy is spent on initiatives that are for the greater good of the ecosystem and the various participants in it. We feel a strong responsibility for the continued development of the ecosystem and we take ownership for this development. Accordingly, we refer to this as "our ecosystem."
Our ecosystem has strong self-reinforcing network effects that benefit our marketplace participants, who are invested in our ecosystem's growth and success. Through this ecosystem, we have transformed how commerce is conducted in China and built a reputation as a trusted partner for the participants in our ecosystem. For more discussion of our ecosystem, see "— Our Ecosystem and Its Participants."
We have made significant investments in proprietary technologies and infrastructure in order to support our growing ecosystem. Our technology and infrastructure allow us to harness the substantial volume of data generated from our marketplaces and to further develop and optimize the products and services offered on our platform.
Through Alipay, we offer payment and escrow services for buyers and sellers, providing security, trust and convenience to our users. We take a platform approach to shipping and delivery by working with third-party logistics service providers through a central logistics information system operated by Cainiao Logistics, our 48%-owned affiliate.had 410 million mobile MAUs.
In fiscal year 2015,2016, we generated 78%79% of our revenue from our China retail marketplaces, where Chinese consumers have access to millions of merchants offering a broad spectrum of physical goods, virtual items and services. As of May 31, 2015, there were over 1 billion product and service listings offered by sellers on our China retail marketplaces. Our revenue on these marketplaces is generated from merchants through online marketing services, commissions on transactions and fees for other online services.
In addition2014, we launched our Rural Taobao program, which is one of our key strategic initiatives to address the consumption needs and promote economic development in China's rural areas.
Wholesale Commerce in China
We operate a China wholesale marketplace, 1688.com, which matches wholesale buyers and sellers in categories such as general merchandise, apparels, electronics, raw materials, industrial components and agricultural and chemical products. A significant number of merchants on our China retail marketplaces source their inventory on 1688.com.
International and Cross-border Commerce
We operate AliExpress, our global marketplace targeting consumers from around the world to buy directly from manufacturers and distributors in China. Tmall Global is our platform within Tmall for overseas brands and retailers to reach Chinese consumers without the need for physical operations in China. We also operate Alibaba.com, China's largest global online wholesale marketplaces, our major business units include our Alimama marketing technology platform,marketplace in 2015 by revenue, according to iResearch. In April 2016, we acquired a controlling stake in Lazada, which provides usoperates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and our sellers with marketing services including valuable data insights,Vietnam. According to Internet Live Stats' estimates, these six countries have a combined population of approximately 560 million and an Internet user base of approximately 200 million in 2016.
Cloud Computing
We operate Alibaba Cloud Computing, or Alibaba Cloud, China's largest provider of public cloud services in 2015 by revenue, according to IDC. The technologies that power Alibaba Cloud grew out of our own need to operate the massive scale and complexity of our core commerce business. In 2009, we founded Alibaba Cloud to make these technologies available to third-party customers. Alibaba Cloud offers a complete suite of cloud services, including: elastic computing, database, storage and content delivery network (CDN), large scale computing, security, and management and application services. As of March 31, 2016, Alibaba Cloud had over 2.3 million customers, including over 500,000 paying customers.
Mobile Media and Entertainment
Based on the strength of our relationship with consumers and our capability in leveraging commerce data that can be applied to serving the broader interests of consumers, we have established an emerging business in mobile media and entertainment, mainly through acquisitions. In 2014, we acquired UCWeb, which supports our ecosystem and alsooperates UC Browser, the second largest mobile browser in the world after Chrome by page view market share as of April 2016, according to StatCounter (data available at: http://gs.statcounter.com). UCWeb provides computingmobile value-added services to third parties. Through ourusers including news feeds, mobile Internet group, which includes UCWebweb navigation and AutoNavi,mobile search. Its mobile search business, Shenma (), was the second largest mobile search engine in China in the three months ended March 31, 2016, according to BigData-Research. In April 2016, we provideacquired Youku Tudou, a variety of mobile value-added services.leading multi-screen entertainment and media company in China, enabling users to search, view and share high-quality video content quickly and
easily across multiple devices. These businesses and our other media and entertainment-related businesses, including over-the-top TV services, music, sports and games, provide a comprehensive platform on which users may discover and consume content and engage and interact with each other.
An ecosystem has developed around our platforms and businesses that consists of consumers, merchants, brands, other enterprises, third-party service providers and strategic alliance partners. At the nexus of this ecosystem are our technology platform, our marketplace rules and the role we play in connecting these participants to make it possible for them to discover, engage and transact with each other and manage their businesses anytime and anywhere. Much of our effort, time and energy is spent on initiatives that are for the greater good of the ecosystem and on balancing the interests of its participants. We feel a strong responsibility for the continued development of the ecosystem and we take ownership in this development. Accordingly, we refer to this as "our ecosystem." Our ecosystem has strong self-reinforcing network effects benefitting its various participants, who are in turn invested in our ecosystem's growth and success.
The following chart sets forth our key businesses, selected major investee companies and cooperative partners:
Our Strategies
We aim to continually growstrengthen and enhanceexpand our ecosystem in order to achieve long-term growth by:
Our long-term strategic goal is to serve two billion consumers around the world and support ten million businesses to operate profitably. We have embarked on three key initiatives to achieve this strategic goal: globalization, rural expansion and big data/cloud computing.
Globalization
Cross-border commerce is conducted in China and around the world. In the next ten years, we plan to build an ecosystem that allows consumers to buy globally and merchants to sell globally. The key elementsfocus of our strategyglobalization initiative. We aim to grow our business include:address each of the three-pillars of cross-border commerce as follows:
There were 350 million active buyers on our Our China retail marketplaces provide the gateway for international brands, retailers and small businesses to gain access to Chinese consumers. Through Tmall Global, overseas brands and retailers can reach Chinese consumers without the need for physical operations in China. Taobao Global further facilitates cross-border commerce by helping Taobao merchants to engage Chinese consumers with a rich variety of global products that they have sourced from suppliers outside of China.
Rural Expansion
Over 600 million people in China reside in rural areas, according to the National Bureau of Statistics of China as of December 31, 2015. Their access to goods and services is highly constrained by geographic and infrastructural limitations. We aim to give rural residents greater access to a broader variety of higher quality goods and services through our Rural Taobao program. At the same time, we help farmers earn more by selling agricultural products directly to urban consumers. To achieve our goals for the initiative, we had established service centers in over 14,000 rural villages as of March 31, 2015. In the twelve months ended March 31, 2015, the average active buyer on our China retail marketplaces placed 582016, where service center operators facilitate purchase orders up from 50 orders in the same period in 2014 and 42 orders in the same period in 2013. We will continue to develop and market the value proposition of our retail marketplaces to attract new buyers as well as increase the wallet share of existing buyers through more frequent buying and buying across more product categories. We intend to achieve growth through customer loyalty programs, high quality customer service, marketplace security upgrades, marketing and promoting our China retail marketplaces, especially in lower tier cities and rural areas, as well as by promoting the usage of our various mobile commerce apps such as our Mobile Taobao App.delivery logistics.
Expand CategoriesBig Data and OfferingsCloud Computing
We believe that growth inour world is rapidly transitioning from an information technology, or IT, economy to a data technology, or DT, economy. Traditionally unstructured, undiscovered and underutilized data can now be activated and leveraged as a new fundamental energy source. From the numberdevelopment of product and service categories and products and services purchased within each category contributespersonal computer, or PC, to higher average spending per customer and therefore increases GMV. We aimmobile, to enhance the shopping experience for consumers, increase consumer engagement and create additional opportunities for merchants by developing and promoting additional categories and offerings. For example, we have taken initiatives to launch or expand offerings in specialty categories such as groceries, offline commerce, foreclosure sales, healthcare and entertainment. In addition, we have started to offer our Tmall set-top-boxes and smart televisions powered by our YunOS that provide access to entertainment and e-commerce content. We will continue to explore ways to improve consumer satisfaction on our marketplaces so that consumers will buy across more product categories. We intend to complement organic product category expansion with strategic alliances, investments and acquisitions.
Extend Our Mobile Leadership
The numberInternet of mobile MAUs increased by 24 million to 289 million inThings, the month ended March 31, 2015, from 265 million in the month ended December 31, 2014, which representsexplosion of data is bringing about a 77% increase from 163 million in the month ended March 31, 2014. In addition, mobile GMV transacted on our China retail marketplaces accounted for 84%new era of total mobile retail GMV in China in the three months ended March 31, 2015, according to iResearch.opportunity. In the quarter ended March 31, 2015, our mobile GMV exceeded 50% of our total GMV for the first time. We intend to extend our leadership in mobile commerce through mobile product improvements that enhance consumer experience. We intend to build upon our strength in mobile commerce to develop a broader spectrum of consumer offerings, such as location-based services, offline commerce and entertainment, in order to fulfill our vision of becoming central to the everyday lives of our customers. In addition, we have launched mobile apps for sellers to set up and manage their online storefronts and maintain relationships with their customers, thereby enhancing the loyalty among merchants toward our platform. We expect UCWeb and AutoNavi will further extend our mobile leadership. In addition to UCWeb's mobile browser, we will provide various mobile value-added services, including mobile search, app distribution and a mobile games platform. We intend to continue to invest in our mobile operating system, YunOS, to provide an integrated user experience on our mobile apps. We will also continue to look for ways to increase our mobile user base and engagement through strategic alliances, investments and acquisitions.
By pursuing this "user first" strategy to focus on user experience enhancement and user base expansion,future, we believe that wethe Internet will be able to drive more GMV that will provide economic benefits to our sellersplay a fundamental role in social and create additional monetization opportunities in the future. We will continue to gather data insights and explore ways to monetize user traffic on our mobile platform without disrupting user experience.commercial human interactions, with cloud
Enhance the Success of Sellers oncomputing as a Broad Basis
We aim to increase the success of a broad base of sellers on our marketplaces by increasing their exposure to relevant buyer demand and providing them with more tools such as mobile toolscost-saving public service, and data science applications to manage their relationships with customers, in order to enableas a more personalized shopping experience. We offer Qianniu, an integrated platform for communication and productivity tools that allows sellers on Taobao Marketplace and Tmall to manage their operations more efficiently. Sellers also use Weitao, our mobile social media platform that enables sellers to provide information regarding their brands, promotions and other topics to buyers. Potential sellers can also use Xiaopu, a feature embedded in our mobile Taobao App, to set up and manage their new storefront on Taobao Marketplace directly via their mobile phones. We use data analytics to help sellers target consumers and increase the rate of conversion from visits to transactions. In addition, we intend to expand our marketing affiliate network to enable our sellers to reach out to a broader range of customers. Through Cainiao Logistics, we enable our logistics service partners with data and technology to help them provide quality and comprehensive logistics services to our sellers. In addition, through our Taobao University program, we offer sellers training and education to help them improve the operation of their online storefronts and marketing and sales activities.
Enhance Data and Cloud Computing Technologies
We believe data generated on our marketplaces can provide significant value to our customers and other ecosystem participants.value-enhancing resource. We will continue to implement our data strategy through the application of data intelligence, machine learning and deep learning technologies to several fields, including marketplace design, user interface, search, targeted marketing, logistics, platform security, location-based services and financial services, among others.
We believe cloud computing will become an essential component of the infrastructure of e-commerce. In the past six years we have invested in and developed our proprietary cloud infrastructure to support our own businesses and those of third parties, including our sellers, start-up companies and enterprises. We will continue to invest heavily in our cloud computing platform to support our own businesses and those of third parties.
Develop Cross-border Commerce Opportunities
Our international strategy is focused on leveraging cross-border linkages to our ecosystem that enable foreign brands and merchants to access the Chinese consumer market without significant capital investments while providing Chinese manufacturers and merchants a platform to reach businesses and consumers across the world.
Tmall Global — Chinese consumers buying goods shipped from overseas. Through Tmall Global, an extension of the Tmall platform, we address the increasing demand for foreign brands by Chinese consumers. While major foreign brands that have physical operations in China are well-represented on Tmall, we also aim to establish Tmall Global as the premier platform for overseas brands and retailers to reach Chinese consumers without the need for physical operations in China. We will continue to develop Tmall Global as the destination for Chinese consumers to gain access to foreign brands by attracting additional brands and developing more efficient cross-border payment and logistics solutions.
AliExpress — worldwide consumers buying Chinese products. Through AliExpress, consumers worldwide can buy directly from manufacturers and exporters in China at attractive prices. We will continue to develop and market AliExpress globally, especially to consumers in emerging economies such as Russia, Eastern Europe and South America, where quality products from China at direct-to-consumer prices offer significant value.
Alibaba.com — Chinese wholesale exports to the world. Alibaba.com is a global online wholesale marketplace. We seek to expand our import/export marketplace by growing the number of paying members, as well as offering additional value-added services such as customs clearance, VAT rebate services for our exporters and cross-border logistics solutions.
Develop Our People
We have a strong and deep bench of talented executives who will lead us for years to come. At the same time, we are committed to continuing to develop strong leadership from within. In addition to investing in various business initiatives, including cloud computing, logistics, big data technology and cross-border trade capabilities, and our ecosystem partners, we plan to invest in and strengthen our talent. We believe that this is needed for us to embrace the challenges of high growth, scale and complexity in executing our vision for consumers and businesses around the world to meet, work and live at Alibaba.
Our Ecosystem and Its Participants
Overview
Buyers and sellers are at the heart of our ecosystem. Buyers and sellers discover, select and transact with each other on our platform. Third-party service providers add value to our platform through service offerings that make it easier for buyers and sellers to do business. The third-party participants in our ecosystem include a payment services provider, logistics providers, retail operational partners, marketing affiliates, independent software vendors and various professional service providers.
We have developed key policies and procedures that maintain the health and sustainability of our marketplaces, including consumer protection programs, marketplace rules, qualification standards for merchants and buyer and seller rating systems. We have agreements, arrangements and relationships with our ecosystem participants — buyers, sellers and third-party service providers. We also have strategic alliances with and or investments in leading China Internet companies such as Weibo and Youku Tudou.
We are invested in the success of every participant in our ecosystem and we strive to ensure that our ecosystem partners capture their fair share of the economics.
As our ecosystem expands, new jobs are created. According to a research report authored by AliResearch, our internal research division, as of December 2014, our China retail marketplaces supported over 13 million direct and indirect job opportunities, including people working directly for online storefronts and service providers to sellers.
Value Proposition to Consumers
The large and growing number of the consumers we serve and the increasing frequency with which they shop on our marketplaces reflect our value proposition to consumers. In the twelve months ended March 31, 2015, we had 350 million annual active buyers who placed an average of 58 orders during this period.
Anything you want, anytime, anywhere. With over 1 billion product and service listings offered by sellers on our China retail marketplaces as of May 31, 2015, consumers have access to a wide selection of products ranging from high volume items to more niche, tailored and personalized products, or so-called "long-tail" products, all through our websites and mobile apps on a 24-hour a day, 7-day a week basis.
Delightful shopping experience. We believe that our marketplaces deliver a delightful shopping experience to consumers. We believe that the following factors drive the consumer experience on our platform:
Selection and value for money. With more than 10 million annual active sellers on our China retail marketplaces in the twelve months ended March 31, 2015 and over 140,000 brands on Tmall as of March 31, 2015, our marketplaces offer consumers competitive pricing across a broad range of categories.
Personalization. Our data analytic and data management capabilities allow us to anticipate buyer needs and tailor product offering displays, matching buyers with the most relevant merchants.
Reliability. Consumers rely on feedback on the sellers, product reviews and seller rating systems to give them the transparency and comfort they need in choosing from whom to buy.
Product quality and consumer protection. Our marketplace rules encourage sellers to make product quality their priority. Sellers on Tmall are required to offer consumer protection programs, such as guaranteed returns and product warranties. Sellers on Taobao Marketplace are required to offer certain consumer protection measures and may also choose to participate in additional return and warranty programs. The sellers who participate in additional consumer protection programs generally do more business on our marketplace.
Convenient payment. The escrow services provided by Alipay on our China and International retail marketplaces are designed to make payment safe, fast and easy for consumers who use that service whether they shop on a computer or a mobile device.
Reliable and timely delivery. The central logistics information system we provide through Cainiao Logistics enables sellers to fulfill and deliver orders in timely and reliable ways, with real-time information being provided to buyers on delivery status. Logistics service providers, such as express delivery companies, relied on this information system to fulfill and deliver an average of 24 million packages per day to consumers in the twelve months ended March 31, 2015.
Value Proposition to Sellers
Cost-effective customer acquisition with scale. We believe our marketplaces are the top choices for sellers, whether they are wholesalers or retailers, to establish a presence to gain access to buyer traffic. In March 2015, an average of over 100 million unique daily visitors visited our Taobao Marketplace.
Taobao and Tmall have become synonymous with online and mobile shopping in China. Consumers come to our online or mobile platform with strong commercial intent, which drives high conversion rates for merchants. In addition, we provide sellers with data analytics that enable them to more effectively target their offerings and marketing efforts to increase the rate they convert shoppers to buyers. Accordingly, we believe our marketplaces to be an effective and cost-efficient way to acquire online customers in China.
In addition, sellers can extend their consumer reach through our ecosystem of marketing affiliates. Taobao Affiliate Network, one of the leading marketing affiliate networks in China, enables merchants to generate incremental traffic from third-party affiliates to their storefronts and product listings. For example, Weibo, a leading social media platform in China in which we have an equity investment, offers merchants a marketing medium for messages and alerts such as new products and special promotions with a reach of 198 million monthly active users during March 2015, according to Weibo's public announcement.
Brand building and promotions. Many retailers have successfully built brand awareness and run brand promotions on our retail marketplaces. Because we do not compete with merchants who sell on our marketplaces, brands and retailers embrace Tmall as a platform to distinguish their own brand identities and build brand awareness and image. Through real-time interactions with consumers who have commercial intent, Tmall enables retailers to run special promotions and targeted marketing campaigns utilizing data and interactive media in ways that cannot be achieved through traditional media or social networking platforms.
Infrastructure support for sellers. Sellers not only build their storefronts and product catalogues on our marketplaces; they also rely on our platform for a range of essential support services to operate their businesses. These include Web-based and mobile interfaces to manage listings, orders and customer relationships, as well as cloud computing services for their enterprise resource planning, or ERP, and client relationship management, or CRM, systems. Through Cainiao Logistics, we provide sellers with performance analytics on their logistics service providers, including delivery performance, customer satisfaction ratings and complaint statistics. Sellers can place shipment orders with our partner logistics providers directly through the Cainiao Logistics platform. Through the shipment ordering systems, we aim to enable sellers to improve the buyer shopping experience by providing performance analytics and tools such as shipment fee calculators.
Direct sourcing for merchants. We enable merchants to source products through 1688.com, our domestic wholesale marketplace. Retail merchants have access to a transaction system developed by us to efficiently connect and transact with sellers on 1688.com. By connecting wholesalers and manufacturers with merchants on our retail
marketplaces, we make it possible for producers to shorten the distribution chain and for retail merchants to have access to a more cost-effective direct sourcing channel.
Financing for sellers. We offer Ant Financial Services' financing products to certain sellers on our marketplaces. We believe that these financing products can be structured and distributed in a more cost-effective way because through our data sharing agreement with Ant Financial Services, Ant Financial Services is able to use data from our marketplaces to make informed marketing, credit and risk management decisions.
Value Proposition to Third-party Service Providers
Marketing affiliates. We believe Taobao Affiliate Network is one of the largest affiliate marketing networks in China based on revenue shared with affiliates. Taobao Affiliate Network is powered by Alimama, our proprietary online marketing technology platform. Through this platform, sellers place marketing displays on our marketing affiliates' websites and mobile apps, and sellers pay us a performance-based marketing fee primarily based on cost-per-click, or CPC, and cost-per-sale, or CPS, models. A significant portion of the marketing fees is shared with the participating affiliates.
Logistics service providers. Our scale and the data generated from transactions on our marketplaces enable us to work closely with our logistics service providers — including warehouse operators, line haul services providers and express delivery services — to improve the quality of their services. Through Cainiao Logistics, we provide real-time information to our logistics service providers, including key operating metrics such as distribution center utilization rates, route planning data and order volume forecasts. This information allows our logistics service providers to operate more efficiently by optimizing their warehouse, transport and people resources to effectively meet consumer demand.
We collaborate with logistics service providers to develop solutions that are tailored for product categories that require special handling, such as perishables, frozen items, large appliances, home improvement products and furniture. This creates additional business opportunities for our logistics service providers.
Retail operational partners. As more brands and retailers expand into e-commerce, they look to outsource certain functions to third parties who have experience conducting business on online and mobile commerce platforms. These functions include product planning, supply chain management, inventory storage and fulfillment, marketing and storefront management, customer relationship management and customer service.
Independent software vendors, or ISVs. ISVs provide software tools as well as systems integration services to sellers. Our China retail marketplaces provide open application programming interfaces, or APIs, for ISVs to develop and distribute services for merchants to customize their storefronts. In addition, ISVs that provide systems integration services help merchants manage their ERP and CRM systems that are hosted on our cloud computing platform.
Professional services. The large scale of economic activity on our marketplaces has spawned a number of specialized professional services being offered to merchants. These include, among others, photography specialists, models for clothing and accessories, customer service agents, Internet marketing consultants and professional buying agents.
Our Businesses
Our MarketplacesCore Commerce
The following table summarizes the keyOur core commerce business is comprised of marketplaces we operate:operating in three areas: retail commerce in China; wholesale commerce in China; and international and cross-border commerce.
Retail Commerce in China
| Our retail commerce business in China |
We believe consumers appreciate the shopping experience on our China retail marketplaces because of the following value propositions:
Because our China retail marketplaces are the most popular online shopping platform for Chinese consumers, we deliver the following value proposition to merchants and brands:
A description of the various aspects of our China commerce retail business follows.
Taobao Marketplace
We launched Taobao Marketplace in 2003 as a free platform for buyers to explore and discover products and sellers to establish a low-cost online presence. Taobao means "search for treasure" in ChineseChinese. Through the website at www.taobao.com and has become synonymous with online shopping. According to iResearch,the Taobao was the number one C2C marketplace in terms of gross merchandise volume in China in 2014. Users may accessApp, Taobao Marketplace anytime, anywhere throughis positioned as the Taobao website, our Mobile Taobao Appstarting point and our mobile-optimized website. Our Mobile Taobao App has beendestination portal for the most popular mobile commerce app in China from August 2012 to April 2015 (the most recent month for which such data is available) in terms of mobile MAUs, according to iResearch.shopping journey. In addition, consumers use Taobao Marketplace had an average of over 100 million unique daily visitors in March 2015. With the large number of daily visitors, Taobao Marketplace acts as a starting point for buyers to explore, discovercommerce-oriented social and community platform where they can acquire product knowledge, converse with other consumers, receive real-time updates from merchants, and use our marketplacesinteractive media to connect with each other and services. For example, Taobao Marketplace drives significant organic traffic to Tmall, lowering customer acquisition costs across our marketplaces.with their favorite brands and retailers.
Taobao Marketplace is openprovides a top-level traffic funnel that directs users to everyone. Sellersthe various marketplaces, channels and features within our China retail marketplaces. For example, a search result on Taobao Marketplace are primarily individuals and small businesses. Anyone selling ondisplay listings not only from Taobao Marketplace must verify their identity, pass an online examination onmerchants but also from Tmall merchants, thereby generating traffic for Tmall.
Taobao Marketplace rulesreaches a vast consumer base, including and execute an honor code pledge. Through individual online storefronts, sellers list their products and services and complete transactions with buyers.beyond consumers from large cities. In addition to serving buyers and sellers in large cities, Taobao Marketplace also benefits buyers and sellers from lower tier cities. During the twelve months ended March 31, 2015, 219 million active buyers, or2016, approximately 63%65% of all active buyers on our China retail marketplaces were located outside of tier 1 and tier 2 cities.
The substantial majority of users access Taobao Marketplace through a mobile device. Below is a visual presentation of various components of the Taobao App:
Taobao App — Homepage
Starting point and destination portal for mobile commerce
Taobao App — Search
Search results are personalized and customized for different users
Taobao App — Good Find
Shopping recommendations based on consumer actions on our platforms and user profile
Taobao App — Taobao Headlines
Personalized third-party news feed for consumers to look for new trends and browse for ideas
Taobao App — Weitao ( )
Social media platform for merchants to engage and interact with consumers
Taobao App — Communities
Interest-based interactive communities for consumers to share shopping experiences and interact with one another
Taobao Marketplace is also the entry point to verticals such as online travel booking, operated under the Alitrip name, and second-hand auctions, operated under the Xianyu () name, both of which can also be accessed through their own independent mobile app. Alitrip offers a comprehensive selection of domestic and international airline tickets, train and bus tickets, hotel bookings, vacation packages and tourist attractions through online travel agencies and direct travel service providers such as airlines and hotels. Xianyu users trade second-hand items using the Xianyu mobile app which offers location-based information about products and merchant rating reviews.
Merchants on Taobao Marketplace are primarily individuals and small businesses. The creation of storefronts and listings areby a merchant on Taobao Marketplace is free of charge to sellers.charge. The escrow payment services provided by Alipay are free of charge to buyersconsumers and sellersmerchants unless payment is funded through a credit card, in which case Alipay charges a fee to the sellermerchant based on the related bank fees charged to Alipay. We generate revenue on Taobao Marketplace from sellers whomerchants can purchase P4P and display marketing services to direct traffic to their storefronts either on Taobao Marketplace, Tmall or Juhuasuan.storefronts. In addition, we alsomerchants can acquire additional traffic for our marketplaces from third-party marketing affiliate websites. Weaffiliates. Taobao Marketplace merchants can also generate subscription fee revenue from
sellers who pay for ouradvanced storefront software including a suite of toolsthat help to upgrade, decorate and manage their online storefronts.
Tmall
We launched Tmall in 2008 as an online platform featuring brands and retailers with each seller having a uniquely identifiable online storefront. Users may access Tmall anytime, anywhere through the Tmall website and the mobile apps and mobile-optimized websites provided by Taobao Marketplace and Tmall. According to iResearch, Tmall is the largest brands and retail platform in China in terms of GMV in 2014, including direct sales companies and platform operators.
Tmall caters to online and mobile consumers looking for branded products and a premium shopping experience. A large number of international and Chinese brands and retailers have established storefronts on Tmall. According to iResearch, Tmall is the largest B2C platform in China in terms of monthly active users in 2015. It is positioned as a trusted platform for consumers to buy both homegrown and international branded products andas well as products that are not available in traditional retail outlets.
In 2009, Tmall pioneered November 11, known as "Singles Day" in China, as an annual promotional shopping day. Singles Day has become the most important shopping event in China and we believe it generated the highest one-day retail sales volume in the world: on November 11, 2015, our China and international retail marketplaces generated GMV of RMB91 billion (US$14 billion) settled through Alipay within a 24-hour period.
Brands and retailers operate their own stores on the Tmall platform with unique brand identities and look and feel, enabling sellers toaccompanied by full control over their own branding and merchandising. Merchants on our China retail marketplces can customize their storefronts right down to the software code, without much constraint. As of March 31, 2015,2016, there were over 140,000100,000 brands on Tmall. Because of the presence of a large number of global brands and the stringent requirements for merchants to operate on Tmall, a presence on Tmall has become a validation of quality, allowing merchants to take advantage of our significant traffic to extend and build brand awareness.
In 2009, Tmall pioneered November 11, known as "Singles Day"awareness and customer engagement. Major international brands that have physical operations in China, such as Apple, Zara, Bose, Estée Lauder, P&G and Unilever, are well represented on Tmall. And Tmall Global, an annual promotionalextension of Tmall, addresses the increasing demand from Chinese consumers for international products and brands that don't have presences in China. Brands and retailers turn to Tmall not only for its broad user base, but also for its merchant services and tools for customer acquisition, retention and engagement and to enhance the efficiency of their operations.
We also seek to build our mind-share among consumers to position Tmall as the premier shopping day.destination for everyday items, highlighting value and convenience. For example, through Tmall Supermarket, we offer consumers frequently purchased products, such as groceries and fast-moving consumer goods, or FMCG, in densely populated top-tier cities, where consumers enjoy same-day delivery or next-day delivery coordinated through the warehouse and delivery network partners of Cainiao Network. In consumer electronics, we have leveraged Singles Day was establishedto strengthen consumer recognition of Tmall's value proposition through exclusive promotions of high value items such as an annual promotional eventmobile phones, as well as high quality delivery, installation and after-sale services on Tmall to reward consumershome appliances, such as television sets, kitchen appliances, refrigerators and washing machines, through discounts. On November 11, 2014, our Chinapartners Ri Ri Shun (), or RRS, and international retail marketplaces generated GMV of RMB57 billion (US$9 billion) settled through Alipay within a 24-hour period. 43% of total GMV settled through Alipay on that day was attributable to mobile.Suning.
In 2014, we launched Tmall Global, which is a platform for international brands to offer products directly to consumers in China. Tmall Global offers Chinese consumers access to branded products sourced and fulfilled directly from overseas. In addition, consumers may directly settle payments with the international merchant in Renminbi through Alipay's international settlement services.
International brands that set up storefrontsMerchants on Tmall Global benefit from the exposure to the hundreds of millions of visitors on Taobao Marketplace and Tmall, enabling them to establish their brand awareness in China without the need for a physical presence in China. International merchants can register and set up a storefront with Tmall Global with, among other things, registered trademarks from jurisdictions of their home countries. Foreign brands on Tmall Global primarily consist of brands from the United States, Germany, the United Kingdoms, France, Italy, Australia, New Zealand, Korea, Japan, Taiwan and Hong Kong. For example, we are cooperating with major hypermarkets around the world, including Costco from the U.S., Countdown from New Zealand, Lottemart and e-Mart from South Korea, RT-Mart from Taiwan, Fresta from Japan and King Power from Thailand, to bring even more imported goods to Chinese consumers.
Sellers on Tmall and Tmall Global pay commissions based on a pre-determined percentage of GMV for transactions settled through Alipaytransaction value that varies by product category, and typically rangesranging from 0.3%0.4% to 5%5.0%. Tmall sellersmerchants also pay an annual upfront service fee, up to 100% of which may be refunded depending on sales volume achieved by the sellermerchant within each year. Sellers also pay a security depositLike Taobao Marketplace merchants, Tmall merchants have access to back-stop potential claims under our consumer protection programs.online marketing services, third-party marketing affiliates and storefront software.
Juhuasuan Group Buying Marketplace
Launched in 2010, Juhuasuan was the most popular online group buying marketplace in China based on its monthly active users in 2014, according to iResearch. Juhuasuan is a standalone marketplace that operates a distinct website with its ownsales and marketing platform for flash sales where Tmall and Taobao Marketplace merchants can acquire new customers and raise brand identity among consumers.awareness through special discounts and promotional events. Juhuasuan offers selected branded and private label products, products made to custom specifications, as well as services such as group travel packages. Juhuasuan is anotheran additional avenue for sellers' marketing spending to help them generate more sales and acquire additional traffic. All merchants that purchase promotional slots on Juhuasuan are Taobao Marketplace andor Tmall merchants to feature their trendiest products and transactionsto generate sales. Transactions from traffic originated on Juhuasuan are completed on the merchants' storefronts on Taobao Marketplace or Tmall. Accordingly, GMVMerchants primarily pay a commission based on a pre-determined percentage of transaction value generated from Juhuasuan, which varies by product category, and, under certain circumstances, a placement fee for promotional slots for a specified period.
Rural Taobao
As of December 31, 2015, over 600 million people in China resided in rural areas, according to the National Bureau of Statistics of China. Consumption in the rural areas is highly constrained by geographic and infrastructural limitations, as the cost of distribution to geographically dispersed and remote locations is prohibitively high. We aim to increase the level of consumption and commerce in rural China through our Rural Taobao program. We have established service centers in villages to give rural residents greater access to goods and services and the ability to sell what they make to the cities. Villagers can shop at these service centers, with the
generatedhelp of service center operators whom we call Rural Taobao Partners. Goods ordered online are delivered to county-level stations and then distributed by local couriers to service centers in the villages for pick up. As of March 31, 2016, we had service centers in over 14,000 rural villages. Coordinated by Cainiao Network, almost all packages can be delivered from traffic through Juhuasuan is recordedthe county-level station to a village service center the next day.
Our Rural Taobao program also helps Chinese rural villages to create a production economy by enabling village residents to sell items, such as eitheragricultural products, directly to urban consumers. For example, the program facilitated farmers in the southern part of Jiangxi province, to sell more than 250 tonnes of oranges during the 16-day Ali Chinese New Year Shopping Festival in 2016, helping the region establish its reputation for quality oranges. The program also assisted rice farmers in Zhaoyuan, a small city in Heilongjiang province, with an innovative pre-order campaign where consumers placed their orders six months ahead of harvest and delivery. Despite the lack of e-commerce experience among the Zhaoyuan rice farmers, Zhaoyuan has since become a top-selling region for rice on our China retail marketplaces in 2016, attracting large orders from corporations, such as national airlines and state-owned enterprises.
Through our Rural Taobao Marketplace GMV or Tmall GMV depending on whichprogram, we are pioneering a two-way distribution infrastructure to connect commerce between cities and rural areas in China. We believe Rural Taobao brings significant benefits to rural residents by improving their quality of these two marketplaces the transaction is completed on.
Juhuasuan offers quality productslife, and to brands and manufacturers who wish to extend their reach by aggregating demand from numerous consumers. Juhuasuan offers distinct group buying channels featuring branded and private label products, products made to custom specifications and offline commerce.
Sellers on Juhuasuan pay a placement fee for promotional slots for a specified period and a commission based on a pre-determined percentage of GMV settled through Alipay, which varies by product category.accessing China's vast rural population.
Emerging Offline Consumption OpportunitiesMerchant services
In 2010While most users experience our China retail marketplaces as a consumer, we startedhave also invested substantially in our relationship with merchants and brands through development of merchant services, including online software tools. These services enable merchants and brands to manage engagement with their customers and operate more efficiently. We believe offering reliable and useful services to merchants and brands helps to enhance their loyalty to our platform. These merchant services include:
Wholesale Commerce in China
1688.com China domestic wholesale marketplace
1688.com is a leadingour online wholesale marketplace that connects buyers and sellers in China. 1688.com offers membership packages for sellers to establish an online presence to market relevant product information to wholesale buyers involved in domesticChina who trade in China. We have extended our business model to create a transaction platform on 1688.com to help wholesalers transact with buyersgeneral merchandise, apparel, electronics, raw materials, industrial components, and the majorityagricultural and chemical products, among others. A significant number of buyers are merchants on our retail marketplaces. The majority of sellersmarketplaces source their inventory on 1688.com. Listing items on 1688.com are Chinese wholesalers, suppliers or distributors. 1688.com also acts as a wholesale channel for merchants doing business on our retail marketplaces to source products from domestic wholesalers.
Sellers may join 1688.com and list their products foris free. Sellers may purchase a China TrustPass membership that allows wholesalersfor an annual subscription fee to host premium storefronts with access to basic data-analyticdata-analytics applications and upgraded storefront management tools. SellersPaying members may also pay for additional services, such as premium data analytics and online marketing services such as P4P marketing servicesservices. As of March 31, 2016, 1688.com had over 930,000 paying members.
International and keyword bidding.Cross-border Commerce
AliExpress
We launched AliExpress in 2010. Thisis a global consumer marketplace enablestargeting consumers from around the world to buy directly from wholesalersmanufacturers and manufacturersdistributors in China. On AliExpress, consumers have access to a wide variety of products.
In addition to the global English-language site, AliExpress operates fifteen local language sites, in countries likeincluding Russian, Spanish and French. Consumers can access the marketplace through its websites or the AliExpress App. Top consumer markets where AliExpress is popular are Russia, the United States, Spain, Brazil, Indonesia, SpainFrance and France. Sellers primarily consist of small and medium-sized businesses located in China.the United Kingdom.
SellersMerchants on AliExpress pay a transaction commission, at a fixed rate, which is typically 5% of GMV for transactions settled through Alipay.transaction value. We also generate revenue on AliExpress from sellersmerchants who participate in the third-party marketing affiliate program for this marketplace.and those who purchase P4P marketing services. In the twelve months ended March 31, 2015,2016, AliExpress generated US$6.68.4 billion in GMV, US$4.35.4 billion of which was settled through Alipay.
Through Tmall Global, an extension of ContentsTmall, we address the increasing Chinese consumer demand for international products and brands. Tmall Global is the premier platform for overseas brands and retailers to reach Chinese consumers and build brand awareness in China without the need for physical operations in China. Tmall Global also enables brands to cater to niche demands, reduce time to market to test new products with consumers, and gain valuable consumer insights in forming their overall China strategy. For example, Costco, Macy's, Chemist Warehouse, LG Household & Health Care and Matsumoto Kiyoshi have storefronts on Tmall Global.
Alibaba.com global trade marketplace
Alibaba.com was our first online commerce platform, launched in 1999. Alibaba.com is a leading English language wholesale platform focused on supportingmarketplace for global trade, which was China's largest global online wholesale marketplace by revenue in 2014, according to iResearch.
trade. Sellers on Alibaba.com may pay for an annual Gold Supplier membership to host a premium storefront with product listings on the marketplace. Sellers may also purchase an upgraded membership package to receive value addedvalue-added services such as upgraded storefront management tools and P4P marketing services, higher rankings from keyword search, custom clearance, VAT refund and other import/export business solutions.services. Buyers on Alibaba.com are located in numerous countries all over the world. Buyers are typically SMEs engaged in the import and export business, trade agents, and wholesalers, retailers and manufacturing companies.
Marketing Services on Our Marketplaces
Our marketing technology platform, Alimama, offers sellers on our marketplaces P4P marketing service and display marketing for both personal computer and mobile devices. Using our auction or bidding system, sellers place P4P and display marketing services on our websites and the websites of third parties that are part of our Taobao Affiliate Network. The ultimate placement of the online marketing services on our websites or those of third-party marketing affiliates is based upon the results of our proprietary algorithms that incorporate specific attributes or information, such as demographic and geographic information, to place the services for the sellers in a way that will enhance their return on marketing expenditure. Merchants may choose to opt out of online marketing services offered by third-party marketing affiliates so that any services they bid for on our systems will be for services that appear only on our websites. In addition, under our current bidding system, merchants may set a different bidding price for mobile if merchants choose to opt in to using our online marketing services on mobile devices.
Through the Taobao Affiliate Network, which we believe is one of the largest online marketing affiliate networks in China in terms of revenue shared with third-party marketing affiliates, we also offer the Taobaoke Program, which connects sellers to our affiliate marketing partners for marketing displays on the affiliate partners' websites. Under the Taobaoke Program, sellers on Taobao Marketplace and Tmall pay us commissions based on a percentage of GMV for transactions settled through Alipay from users sourced from third-party marketing affiliates. A significant portion of that commission is shared with our third-party affiliate partners.
In addition, sellers may pay placement fees to purchase promotional slots on our Juhuasuan marketplace for a specified period.
P4P marketing, display marketing and Juhuasuan placement services on our websites are generally available only to merchants on Taobao Marketplace and Tmall. P4P marketing and display marketing on third-party marketing affiliates' websites are available to both merchants on Taobao Marketplace and Tmall as well as to other third parties.
TANX. We operate the Taobao Ad Network and Exchange, or TANX, one of the earliest and is one of the largest, real-time online advertising exchanges in China. Powered by Alibaba Cloud Computing, TANX automates the buying and selling of billions of advertising impressions on a daily basis by third parties. TANX enables more transparent pricing of advertising inventory, which improves online marketers' return on investment. Participants on TANX include publishers, merchants and demand side platforms.
TANX is an open marketplace and is not limited solely to merchants on Taobao Marketplace and Tmall. It is also available to other third parties wishing to purchase online advertising services available in the TANX inventory.
Data Management Platform. We also offer a data management platform, or DMP, connected to TANX. Our DMP allows participants on TANX to evaluate and select online advertising inventory using both behavioral data they provide us as well as data from browsing behavior and shopping history. By customizing and tagging attributes
200 countries all over the world. Buyers are typically trade agents, wholesalers, retailers, manufacturers and SMEs engaged in the import and export business.
Through OneTouch, an Internet-based integrated services platform, we offer members of consumers, participantsAlibaba.com and other SMEs services relating to import/export transactions, including customs clearance, VAT refund, trade financing and logistics. In the twelve months ended March 31, 2016, OneTouch processed over US$15 billion in import/export transaction volume. In 2015, Alibaba.com began offering Trade Assurance, a service through which we will compensate a buyer for damages arising from a seller's breach of contract terms. The amount of coverage is based on TANX are able to evaluate online advertising inventory more precisely and reach their targeted audiences more efficiently.the seller's credit profile generated from data on our platforms. As of March 31, 2016, Alibaba.com had over 137,000 paying members.
Tools and EnablersLazada
Tools We acquired a controlling stake in Lazada, a leading e-commerce platform across Southeast Asia, in April 2016. Lazada operates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Enablers for Buyers on Our Marketplaces. Our tools for buyers enable them to navigateVietnam, with local language websites and search our marketplaces, complete transactions efficiently and provide input on their buying experience. Through our proprietary algorithm, we offer search functions on all of our web pages, mobile apps and many of our marketing affiliates' websites and apps to provide a highly relevant search experience, making it easy for buyers to find products and services within our marketplaces. We also use our proprietary algorithm that takes into account the contextin each of the searchsix markets. Lazada offers third-party brands and merchants a marketplace solution with simple and direct access to provideconsumers in these six countries through one retail channel. Lazada also sells products owned by its retail operations. It has developed its own logistics infrastructure with warehouses and a highly relevant search experience. When a buyer conducts a search on Taobao Marketplace, the results include storefront and product listings across both Taobao Marketplace and Tmall to better meet the buyer's needs and provide the most relevant results. We also offer a feedback system on our marketplaces. After a transaction is completed, a buyer can rate a seller based on various criteria, including whether the received product matches its description, a seller's service level andlast-mile delivery timeliness. These criteria form the basis of the detailed service rating, or DSR. Aggregate DSR scores for each seller over the past six months are displayed prominently on a storefront. DSR scores also affect a seller's ranking on search results pages.
Tools and Enablers for Sellers on Our Marketplaces. Our tools for sellers help them improve their online storefronts, manage their businesses and make their operations more efficient. These tools include:
application which is available for a subscription fee. For smaller sellers, we provide Wangpu for free. We also offer a free feature called Xiaopu
in our mobile Taobao App that allows sellers to set up and manage their storefronts directly using their mobile phones.
and Wangxin
, instant messengers that support text, audio and video communication on personal computers and mobile phones that facilitate open communication between buyers and sellers.
, an integrated platform for communication and productivity tools, which allows sellers on Taobao Marketplace and Tmall to access a number of our tools such as Wangpu, Aliwangwang and Alimama through a unified interface.
Cloud Computing and Internet Infrastructure
Alibaba Cloud Computing supports our e-commerce ecosystemis China's largest provider of public cloud services in 2015 by providing a distributed computing infrastructurerevenue, according to handle the large volumeIDC. The technologies that power Alibaba Cloud grew out of traffic and data generated on our online marketplaces. Our cloud computing infrastructure serves our own platform,need to operate the massive scale and complexity of our affiliated companies and Alipay, and provides cloud computing servicescore commerce business. In 2009, we founded Alibaba Cloud to our sellers and other third parties. Our cloud computing platformmake these technologies available for third-party customers.
Alibaba Cloud offers a complete suite of service offerings,cloud services, including elastic computing, database, servicesstorage and storage andcontent delivery network (CDN), large scale computing, security and management and application services. We are developingProducts that differentiate Alibaba Cloud from our domestic peers include proprietary security and enhancing a mobile operating system, YunOS, for mobile devices, the Internet of thingsmiddleware products, large scale computing services and set-top boxes, which will be integrated intoanalytic capabilities provided by our cloud computing offerings.big data platform. These products enable customers to build IT infrastructure quickly on-line without having to work on-premise.
We offer our cloud computing services to merchants doing business on our sellers,marketplaces, start-ups, enterprisescorporations and other third parties for a feegovernment organizations. We charges fees that are primarily based on time and usage. As of March 31, 2016, Alibaba Cloud had over 2.3 million customers, including over 500,000 paying customers. Customers, including China Railway, Weibo and Beijing Genomics Institute, use our elastic computing services, security and artificial intelligence capabilities for data storage, transmission and analysis. Customers, such as Sinopec and BYD, also use our middleware services to upgrade their application infrastructures. Entertainment platforms, including CCTV and Mango TV, use our content delivery networks for live and on-demand video business. China Customs and China Meteorological Administration use our big data solutions to improve efficiency.
Our cloud computing platform supported our annual Singles Day promotion when record traffic and transactions occur. On Singles Day in 2015, Alibaba Cloud Computing services had oversuccessfully processed peak transactions of 140,000 orders per second, demonstrating the platform's reliability and scalability. Alibaba Cloud's distributed computation framework, FuxiSort, set new world records in the Sort Benchmark contest in 2015, a further demonstration of our leadership in general-purpose computing systems.
240,000 paying direct customers. In addition to these paying direct customers, Alibaba Cloud Computing services also have non-paying direct customers, web-hosting services customers, as well as sellers who use Alibaba Cloud Computing services indirectly through Jushita, our dedicated cloud solution platform for sellersMobile Media and Entertainment
Based on our China retail marketplaces. In the aggregate, Alibaba Cloud Computing services had over 1,800,000 customers as of March 31, 2015. The reliability and scalabilitystrength of our cloud computing platform is evidenced, for example, byrelationship with consumers and our successful processingcapability to leverage commerce data that can be applied to serve the broader interests of a peak orderconsumers, we have developed an emerging business in mobile media and entertainment through three distribution platforms, UCWeb mobile media, game publishing and multi-screen entertainment, and content creation volume of 80,000 orders per second during our Singles Day promotion on November 11, 2014, when record amounts of traffic and transactions occurred.production companies in film, music and sports.
OthersDistribution Platforms
Mobile Internet ServicesUCWeb mobile media
UCWeb our wholly-owned subsidiary, is China'soperates UC Browser, the second largest mobile browser company in terms of monthly mobile active users, according to iResearch. As of May 2015, it operated the largest third-party mobile browser in India and Indonesia in terms ofworld after Chrome by page view market share as of April 2016, according to StatCounter (data available at: http://gs.statcounter.com). UCWeb also provides various mobile value-added services to users including news feeds, mobile web navigation and mobile search. Its mobile search app distribution and abusiness, Shenma (), was the second largest mobile games platform.
EntertainmentGame publishing
We are establishingoperate a game publishing platform for Android-based mobile games that also serves as an Internet-basedonline community and media platform for gamers. We cooperate with upstream and downstream players across the game industry value chain, as a partner, exclusive licensee and developer of mobile games.
Multi-screen entertainment ecosystem for domestic households through three businesses:
Youku Tudou, a leading multi-screen entertainment and media company in China, enables users to search, view and share high-quality video content quickly and easily across multiple devices. The Youku Tudou brand is among the most recognized online video brands in China. In March 2016, monthly active users on Youku Tudou PC platforms reached 344 million and monthly active users of Youku App and Tudou App combined reached over 167 million, according to iResearch. The total user time spent on Youku Tudou PC platforms, and the two mobile apps combined reached over 2.9 billion hours in March 2016, according to iResearch. Through licensed operators, we also offer over-the-top TV services, such as the delivery of a variety of video content over the Internet through set-top boxes developed by us and set-top boxes and smart televisions developed by third parties, of which some are powered by YunOS.YunOS, our proprietary operating system.
Content Creation and Production
Film
Alibaba Pictures is our equity method investee company that produces and invests in movies and television programs. It has built a pipeline of upcoming releases including Ferry Man (
Music.Music
We operate online music platforms, Xiami (
and Tiantiandongting
), that offerwhich offers music streaming services through websites and mobile apps. We also operate online music platform Alibaba Planet () that connects fans, artists and other music industry participants.
Sports
Alibaba Pictures. Alibaba Pictures, oneSports Group, established in September 2015, is engaged in the development and operation of sports IP, sporting events, e-sports contests, sporting venues, sports merchandise and acquisition of selected media rights, leveraging our affiliates,expertise in e-commerce and our various entertainment distribution platforms.
Other Innovation Initiatives
YunOS Operating System
YunOS is a filmcloud-based mobile operating system for smartphones, Internet of Things devices, set-top boxes, smart televisions and television program producersmart cars, among others. Using YunOS, users can conveniently and distributor. It is our movie business flagship which is an important partsecurely synchronize data, such as call data, text messages and photos, across their devices through the cloud. YunOS provides the connectivity between cloud-based applications and hardware devices, with a focus on the data needs of our entertainment ecosystem.
HealthAutoNavi
AutoNavi is a leading operatorprovider of product identification, authenticationdigital map, navigation and tracking system principally for the pharmaceutical industrylocation-based services in China. We intend for Alibaba Health, as an integrated information and content service provider that seeks to provide technology enabled solutions to healthcare industry participants, to be our healthcare flagship.
Other Major Elements of Our Ecosystem
LogisticsDingTalk
In order to meet our current and future logistics demands, we established a distributed and scalable logistics operation model that links a network of logistics service providers, sellers and buyers toDingTalk is our proprietary information platform, which is operated by Cainiao Logistics. We do not own the physical infrastructure but insteadenterprise communications app that provides support for text, voice and video communication, work withflow management and collaboration among team members and enterprises of various sizes. With a variety of logistics service partners to ensure webuilt-in enterprise directory, users can connect buyersinitiate text chats or voice and sellers throughout China and around the world. Our logistics platform provides real-time access to information and data for sellers to help them better manage their businesses, and for logistics service providers to help them improve the efficiency and effectiveness of their services and enhance consumer experiences.
Cainiao Logistics is the wholly-owned subsidiary of a joint venture we formed in 2013 with five major express delivery companies in China that provide services on our China retail marketplaces,video conference calls as well as firms specializingsecured group chats with members of their organization. DingTalk unifies the tasks of critical communication and collaboration in the work place.
Alibaba Health
Alibaba Health is our flagship vehicle to bring innovative solutions to the healthcare industry.
Monetization Platforms and Systems
Alimama
Alimama is our marketing technology platform that provides the publisher-side serving and demand-side functionalities for merchants and brands to place various marketing display formats on our marketplaces and other third-party properties. The platform supports P4P marketing based on keyword search rankings or display marketing in fixed positions that are bid through auctions, as well as cost-per-thousand impression-based (CPM) marketing formats via the display of photos and graphics.
The ranking of P4P search results on our core commerce marketplaces is based upon proprietary algorithms that take into account the bid price of keywords, the popularity of an item or merchant, customer feedback ranking of merchants and quality of product displays. For display marketing, the Alimama platform serves marketing messages based on data from our ecosystem, including transactions on our core commerce platforms, payment data from Ant Financial Services, logistics data from Cainiao Network, user navigation and behavioral data from our core commerce and media entertainment properties, as well as demographic and location-based data. The relevance and comprehensiveness of data based on commercial activities and user activities around our ecosystem provide a powerful and unique advantage for Alimama to target the most relevant information to the most relevant users.
We have developed a system that we call Super ID to track users across different properties and devices. For example, we are able to identify a user watching a Youku Tudou video on a PC as the same user shopping on our Taobao App. Our Super ID system takes disparate data and attributes the data to a single user, and in this we can provide marketers with valuable insights into user behavior and preferences.
real estate development. The Alimama technology platform supports marketing delivered through personal computers and mobile devices. Under Alimama's bidding system, marketers may set a higher or lower bid price for mobile marketing than the bid price for marketing on personal computers. Alimama also has an affiliate marketing program to place marketing displays on third-party websites and mobile apps, thereby enabling marketers, if they so choose, to extend their marketing and promotional reach to properties and users beyond our own marketplaces.
We ownbelieve we have one of the largest online marketing affiliate networks in China in terms of revenue shared with third-party website properties and mobile apps. Our affiliate marketing program not only provides additional traffic to our core commerce marketplaces, but also generates revenue to us. Under the Taobaoke program, merchants on Taobao Marketplace and Tmall can generate additional traffic and transactions from third-party websites and mobile apps, and the marketer pays commissions based on a 48% equity interestpercentage of transaction value sourced from such third-party affiliates. We share a significant portion of that commission with our third-party affiliate partners.
Alimama operates the Taobao Ad Network and Exchange, or TANX, one of the largest real-time bidding online marketing exchanges in China. TANX helps publishers to monetize their media inventories both on web properties and mobile apps. TANX automates the joint venture. Together with these partners, we will continue to look for ways to developbuying and expand the reachselling of our logistics platform.
Logistics process
When a customer orders a product from a seller on our marketplaces, in most cases, the seller selects a delivery company to fulfill the order. The selected delivery company is responsible for end-to-end delivery. Larger sellers that process large order volumesbillions of marketing impressions on a daily basis. Participants on TANX include publishers, marketers and demand side platforms operated by agencies.
Alimama also offers a data management platform through TANX, or DMP, for marketers that wish to execute their campaigns with proprietary and tailored data. DMP helps the marketer to identify targeted audience groups by mapping their own proprietary data set to the data captured in our ecosystem. By customizing and tagging the attributes of consumers, the marketer is able to reach and expand its targeted audiences.
UCWeb Mobile Marketing System
Our mobile search engine, Shenma (), monetizes through a keyword bidding system that enables marketers to reach users who search for information related to their products or services. We engage third-party distributors to sell some of our mobile marketing services to marketers. UC Browser monetizes primarily through time-based display marketing where marketers place icons that link to their webpage or apps in UC Browser. Its news feed feature UC Headline enables marketers to place marketing messages in news feed on cost-per-click (CPC) basis or impressions on time basis. Our mobile marketing platform enables marketers to launch targeted marketing for apps, games, web pages and services on mobile media including UC Browser, UC Headline and third-party media partners, leveraging our deep consumer insights.
Youku Tudou Advertising System
Youku Tudou monetizes primarily through brand advertising. Its online advertising services include in-video, display, sponsorship and other forms of advertisements. In-video advertisements appear at certain times during the playback of a video. These video advertisements can be pre-roll, post-roll, mid-roll or pause advertisements. Display advertisements can be delivered alongside a video and may take the form of graphical banners or text hyperlinks. Other forms of advertisements include product placements in the web video series produced in-house, sponsored live events or viral videos produced in-house. Youku Tudou's advertising solutions present brand advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia formats with the interactivity and precise targeting capabilities of the Internet.
Other Major Elements of our Ecosystem
Logistics
Cainiao Network is a joint venture that we formed in May 2013 with other shareholders who are engaged in logistics, retail, and real estate, including four major express courier companies in China. Cainiao Network does not deliver packages itself. It operates a logistics data platform that leverages the capacity and capabilities of logistics partners to fulfill transactions between merchants and consumers at a large scale. Cainiao Network uses
data insights and technology to improve efficiency across the logistics value chain. The proprietary data platform provides real-time access to data for merchants to better manage their inventory and warehousing and for consumers to track their orders. In addition, Cainiao Network's data platform helps logistics service providers to improve the efficiency and effectiveness of their services, such as leveraging data to optimize the delivery routes used by express courier companies.
Cainiao Network provides two major types of services — assisted-delivery services and end-to-end logistics solutions.
Through the platform approach, Cainiao Network integrates the resources of logistics service providers to perform pick-up, warehousing, line-haul and last mile delivery. Both buyers and sellers can access tracking information online untilbuild out the package is delivered. Buyers can provide feedback on the delivery companies which is then accessible to both sellers and delivery companies. In the twelve months endedlogistics ecosystem. As of March 31, 2015, approximately 2.1 billion packages from transactions on our2016, Cainiao Network's fifteen strategic express courier partners employed over 1,700,000 delivery personnel in more than 600 cities and 31 provinces in China, retail marketplaces were delivered within 48 hours from shipmentaccording to the end customer. Customers can choose longer delivery times at lower cost,data provided by them. Collectively they operated more than 150,000 hubs and we estimate that the average delivery time of packages tracked by us from shipment to the end consumer was approximately 3 days.
Network of logistics service providers
We have established a network of logistics service providers through Cainiao Logistics. Cainiao Logistics has agreements with logistics service providers covering several areas, including data sharing, delivery commitments, pricing and services for specific product categories. This network allows sellers to select one of many different logistics service providers depending on their needs.sorting stations. The 14 strategic delivery partners working with our logistics platform have a national network and the top six of these deliveryexpress courier partners handled the delivery of the majority of packages generated onfrom our China retail marketplaces in the twelve months ended March 31, 2015.2016. We believe that orders from transactions generated on our marketplaces represented a significant portion of our deliverythese express courier partners' total delivery volumes in the twelve months ended March 31, 2015. According2016. Cainiao Network is still in an early stage of development. It has yet to monetize the majority of the value-added services it provides under the assisted-delivery model.
In addition to enabling the fulfillment and delivery of orders that fit in standard size packages, we and Cainiao Network also partner with specialized logistics service providers for category-specific solutions where items require special handling and services. The following are examples of category-specific solutions that we and Cainiao Network have organized to enhance the consumer experience:
In order to enhance consumer experience and improve efficiency in last-mile delivery in both rural and urban areas, Cainiao Network is also engaged in initiatives including arranging delivery from county-level Rural Taobao stations to villages, and setting up pick-up stations around urban communities.
During the twelve months ended March 31, 2015, our top 14 strategic delivery2016, Cainiao Network and its logistics partners employed over 1,400,000 delivery personnel in more than 600 cities and 31 provinces, directly controlled municipalities and autonomous regions in China. Collectively they operated more than 100,000 delivery stations. This network managedenabled the delivery of over 8.612.2 billion packages from our China retail marketplacesmarketplaces. Currently, Cainiao Network primarily derives its revenue from end-to-end logistics solutions and generates a significant portion of its revenue from providing these services to consumers in the twelve months ended March 31, 2015.Tmall Supermarket.
Proprietary logistics information platformLogistics Data Platform
We have developedCainiao Network operates a proprietary logistics informationdata platform. This platform operated by Cainiao Logistics, which links buyers, sellersconsumers, merchants and logistics service partnersproviders and allows them to share information on order specifics,relating to orders, delivery statusroutes and time, and user feedback. Ourfeedbacks. The logistics information systemdata platform can interface with a broad range of systems including our marketplace transaction systems, in addition to third party systems such as theAlipay's payment system, third-party transportation management systems, of the delivery companies, and the CRM, ERP and warehouse management systems of sellers. This informationmerchants. Information generated from the data platform serves many purposes for sellers, logistics service providers and buyers. For example, sellerspurposes: merchants can review the performance of delivery service providers on different routes. Logisticsroutes; logistics service providers can compare their performance against their peers. Buyerspeers; and consumers can track their purchases on their personal computers and mobile devices, which we believe is an important feature for consumers in China.
Our logistics platform provides the following services and benefits to consumers:
Recent Equity Financing of parcels shipped by participating sellers based on our data, allowing them to provide enhanced delivery certainty for buyers;
Future Expansion Plans
Our logistics strategy, which employs our proprietary information platform andCainiao Network completed a networkround of logistics service providers, has proven to be a scalable, effective approach to meet the current and medium-term needsequity financing of buyers and sellers. Over the longer term, we plan to further investapproximately RMB10 billion in logistics capabilities through Cainiao Logistics, with the objectives of significantly increasing capacity, supporting the evolving needs of currentMarch 2016. Existing shareholders and new merchantsinvestors, including major sovereign wealth funds and private equity funds, participated in a broader setthe financing. We subscribed for Cainiao Network's shares on an approximately pro rata basis. As of categories, increasing cost efficiency and shortening average delivery times.
In the twelve months ended March 31, 2015, the logistics system ensured the successful delivery of2016, we own an average of 24 million packages per day. To support the expected growth of our ecosystem over the longer term, Cainiao Logistics has started offering end-to-end delivery solutions for larger sellers in certain product categories and developing technology and data enabled tools to improve the accuracy and efficiency of delivery such as electronic parcel forms and address database. Cainiao Logistics plans to build a network of key logistics hubs across China, including distribution centers, warehouses and other supply chain facilities. Its goal is to enable China's logistics and supply chain management industries to support the delivery of over 100 million packages per day to consumers' doorsteps anywhere in China within 24 hours of an order being placed.
To complete this nationwide network, Cainiao Logistics has prioritized a list of key cities where key hubs will be located based on proprietary data we provide on patterns of deliveries and anticipated consumer demand, after considering a variety of factors, including macro data, such as population and GDP, e-commerce penetration rates and existing logistics infrastructure. Cainiao Logistics had acquired and intends to continue to acquire land use rights in key locations. Cainiao Logistics has also started building cross border logistics capabilities by working with logistics service providers in China and abroad.
As the build-out of the logistics network is capital intensive, Cainiao Logistics will invest in logistics developments together with third parties who may provide passiveapproximately 47% equity and debt financing on a holding company and project-by-project basis. This capital structure for project development by Cainiao Logistics is expected to result in significant financial leverage for the 48% of equity capital that we have investedinterest in Cainiao Logistics.Network. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities — Logistics — Cainiao Smart Logistics has a registered capital of RMB5,000 million, out of which our 48% share is RMB2,400 million.Network Limited."
Payments
Alipay, a wholly-owned subsidiary of Ant Financial Services, provides payment and escrow services for transactions on Taobao Marketplace, Tmall, 1688.com, AliExpress and certain of our other sites through contractual arrangements with us.platforms. Alipay also provides payment and escrow services to third parties in China.China and overseas. Alipay is the principal means by which buyers and sellers settle transactionsconsumers pay for their purchases on our China retail marketplaces. WeExcept for credit card transactions where Alipay charges the merchant to cover processing costs with banks, neither we nor Alipay charge any payment fees to merchants doing business on our platform. Instead, we pay Alipay a fee for theto cover its cost of operating payment and escrow services it provides on our marketplaces pursuant to a commercial agreement with Ant Financial Services and Alipay. For additional details on our commercial relationship with Ant Financial Services and Alipay, see "Item 7. Major Shareholders and Related Party Transactions —
B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries."
In a typical transaction on our China retail marketplaces, the buyer would have various options to pay for purchases, including with the buyer's fund balance in his or her personal Alipay account, credit card or transfers from an online bank account. Personal Alipay accounts may be funded by electronic fund transfer or pre-paid cards, as well as linked directly to the buyer's credit card or bank debit card under Alipay's "express payment" function. Whether the buyer chooses to pay with the buyer's fund balance in his or her Alipay account, credit card or bank transfer, the transaction is settled through Alipay's escrow and payment processing service — funds are transferred from the buyer to Alipay's escrow account, and Alipay releases the funds from escrow to the seller only after the buyer has confirmed receiptTable of goods in satisfactory condition or failed to object to the release of funds within a specified time period. Buyers and sellers may also choose to settle transactions outside of Alipay through other mutually agreed upon payment method, such as cash on delivery.Contents
InAlipay also offers a mobile app, Alipay Wallet, which further facilitates mobile commerce and other consumer services and digital transactions by making payment accessible and convenient through a mobile device. During the twelve months ended March 31, 2016, there were over 450 million Alipay annual active users.
Local Services
Through investee companies, we are engaged in the online-to-offline, or O2O, local services business involving restaurants, food delivery, movie ticketing and retail stores, among others.
Koubei Restaurant and Local Services Guide
In 2015, 75%we and Ant Financial Services set up the joint venture Koubei (), one of GMVthe leading restaurant and local services guide businesses in China. Koubei operates O2O services in conjunction with Alipay and AutoNavi's map navigation by generating demand to local establishments such as restaurants, supermarkets and convenient stores by offering consumers a "closed loop" experience, from acquiring information on our China retail marketplaces wasmobile to finding the store to claiming discounts to payment. For the three months ended March 31, 2016, Koubei generated RMB21 billion (US$3 billion) in GMV settled through Alipay's escrowAlipay with merchants.
Ele.Me Food Delivery
In March 2016, we jointly invested with Ant Financial Services in Ele.me (), a leading food delivery company in China. Consumers using the company's food delivery app can order meals, snacks and payment processing services. On Tmallbeverages on a mobile device. Through a delivery network of employed and Juhuasuan, we earn commissions only on transactions thatoutsourced personnel, the company's service covered over 300 cities in China as of March 31, 2016. Under a cooperation agreement with the company, food orders generated from the Taobao App and Alipay Wallet are settled through Alipay.fulfilled by Ele.me.
Movie Ticketing
Alibaba Pictures, our equity investee and the flagship unit of our movie business, operates an online movie ticketing platform. In May 2016, the platform raised RMB1.7 billion Series A financing from a group of investors led by CDH Investments, Ant Financial Services and Sina.com.
Customer Service
Scalable customer service platform for China Retail Marketplaces
We trust thatMerchants on our customers canplatforms serve their customers better thanwith tools we do, andprovide. In addition, our job is to empower them to do their job better. Our business size necessitates a highly scalable approach to customer service, and we achieve this by leveraging our ecosystem through the following methods:
Return Our dispute resolution system's adjudication panel of experienced consumers and exchange policymerchants provides an easy way for consumers and merchants to resolve their disputes, while other more complicated disputes are referred to our customer service representatives. In the twelve months ended March 31, 2016, we received dispute cases representing approximately 0.04% of annual orders placed on our China retail marketplaces.
With certain exceptions, consumers on our China retail marketplaces may return the purchased goods within seven days from the receipt of goods.their receipt. Alipay's payment escrow services ensure efficient refunds. In cases where the goods have already been delivered,addition, for qualified buyers with good credit history, we require our sellers to respond within 72 hours upon the receipt of a return request and the buyer is required to return the purchased goods within seven days from the purchase if the seller agrees to the return request. If the seller does not makemay accelerate refund procedure by making the refund payment within ten days fromdirectly to the date whenbuyer upon the buyer's refund application and providing of proof of shipment for the return request is made, the refund will be transferred to the buyer's Alipay account automatically out of the escrow account for the transaction after the buyer has submitted a valid package tracking number to our system. In cases where the buyer requests a return before the goods are delivered, the refund amount will be automatically transferred to the buyer's Alipay account if the seller does not respond in five days (or three days for virtual items).goods.
Dispute resolution
In the case of disputes with a seller, a buyer can submit evidence through our dispute resolution system and seek compensation from the seller. In the twelve months ended March 31, 2015, we received dispute cases representing approximately 0.05% of annual orders placed on our China retail marketplaces. Our dispute resolution system leverages the collective experience of volunteers who have been buyers and sellers on our China retail marketplaces for at least one year to serve on an adjudication panel, which reviews cases and make
deliberations through an online forum. The determination of the panel is final and provides an easy way for buyers and sellers to resolve their disputes. More significant disputes are referred to our customer service representatives.
Consumer Protection and Transaction Platform Safety Programs
Consumer Protection Program
Consumer protection fund. Preserving the integrity of our marketplaces is a top priority for us. We believe every consumer has the rightare committed to safetyprotecting intellectual property rights and protection from falseeradicating counterfeit merchandise and misleading claims. We encourage our sellers to make product quality a priority and have set up various programs to this end such as the following:
This requirement is in addition to the significant annual upfront service fees sellers are required to pay us to open storefronts on Tmall, which function as one of the entry barriers to low quality sellers. In order to open a storefront on Tmall, a seller must either be on our pre-approved list of brands or authorized resellers or must pass evaluation by our product category team. The prospective seller must also present a business license, tax registration certificate and trademark registration information or evidence of its authorization to sell branded products, among other evidence of legitimacy and quality. To stay on Tmall for a subsequent year, sellers are required to have met certain customer service and operating capability benchmarks in the previous year.
Many sellers on both Tmall and Taobao Marketplace deposit beyond the platform minimum requirement to demonstrate their confidence in the quality of their services and products. To offer better services to consumers, some sellers make additional service commitments such as expedited shipment, free maintenance for electronics and installation services for furniture purchases. We incentivize sellers to set up customer protection funds by programming our search results to prioritize the rankings of product listings for sellers who have established these funds. In addition, the consumer protection fund amounts are displayed on the seller's information page.
As of March 31, 2015, our China retail marketplace sellers' consumer protection funds deposited in their respective Alipay accounts in aggregate totaled over RMB15 billion.
If the amounts in the sellers' consumer protection funds are not sufficient, we may choose to compensate buyers for such losses, although we are not legally obligated to do so.
Measures against counterfeit products.fictitious activities. Counterfeiting and infringement of intellectual property, both online and offline, are problems common to China's emerging economy as a whole.industry-wide issues affecting brands and merchants globally. We are committed towork with rights holders, trade associations and governments around the protectionworld.
Anti-Counterfeiting
To protect consumers, brand ownersmerchants and legitimate sellersbrands and to maintain the integrity of our marketplaces, we usehave taken the following measures through our platforms, with other industry participants and will continue to enhance a broad range of measures to prevent counterfeit and pirated goods from being offered and sold on our marketplaces. Our current measures include:
Table of Contentswith governmental authorities:
With other industry participants. We have also established cooperative relationships with over 1,0001,900 major brand owners and a large number of leading industry associations in connection with intellectual property rights protection to enhance the effectiveness of our takedown proceduresanti-counterfeiting measures.
We continue to refine and harness technology and data at our disposal to track and trace counterfeiters who sell on our marketplaces, in order to assistlaw enforcement authorities to conduct offline anti-counterfeiting investigations, and work with local governments in tackling the problem at its source. We are dedicatedChina to continually refiningsupport original brands. With insights drawn from our data analytics, our team works closely with brands and upgrading the anti-counterfeiting measures on our marketplaces. For example, in January 2015, we further tightened our standards on Taobao Marketplacelaw enforcement authorities, to target seller accounts engaged in repeat infringement activities.identify manufacturers and large-scale distributors of counterfeit goods and bring them to justice.
Combatting Fictitious Transactions
We are firmly committedWith respect to combating counterfeit and fictitious activities, that may occur on our marketplaces despite our best efforts because the health and integrity of our marketplaces depend on consumer trust. However, because many sellers doing business on our marketplaces depend on us for their livelihood, we have generally eschewed a "shoot-first, ask questions later" approach to handling complaints on Taobao Marketplace. When we receive complaints or allegations regarding infringement or counterfeit goods, we follow well-developed procedures to verify the nature of the complaint and the relevant facts before de-listing the items. Generally, we give sellers who have been accused of posting or selling counterfeit products up to three days to refute the allegations and provide evidence of the authenticity of the product. In April 2015, we implemented a good-faith takedown program on Taobao Marketplace that we offer to qualified rights holders. For these rights holders, we process suspected infringement takedown requests on a "good-faith" basis without requiring them to substantiate their infringement claims in advance. Currently, hundreds of brands from around the world are already part of the good-faith takedown program.
These measures represent our evolving response to the problem of counterfeiting by sellers on our platforms, which we expect, despite our best efforts, will continue to present a challenge in the years ahead.
Measures against fictitious transactions. We have and will continue to invest significant resources in protecting the trust and credit system we have built on our marketplaces. We have implemented measuresMeasures to prevent, detect and reduce the occurrence of fictitious transactions on Taobao Marketplace and Tmall including:we have implemented include:
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Penalties. If allegations of posting or selling We aim to protect consumers from being affected by excluding counterfeit products have not been refuted ormerchandise and fictitious transactions from the ranking system, credit system and transaction volume statistics. When such activities have beenare confirmed, we penalize the parties involved through a number of means including:
the relevant merchant's product listings at the bottom in search ranking results, closing down storefronts;storefronts and permanently banning the merchant from opening any accounts on our platforms.
Consumer Protection
We believe every consumer has the right to safety and protection from false and misleading claims. We encourage our merchants to make product quality a priority and have set up various programs to this end. In addition, all Tmall merchants are required to contribute to and maintain a consumer protection fund for the benefit of consumers. Consumer protection fund deposit requirements vary by product category and typically range from RMB50,000 to RMB150,000 per storefront. For Tmall sellers, confiscatingGlobal merchants, the consumer protection security deposits paid.fund deposit requirement is typically RMB150,000 for standard storefronts. The seller is banned permanentlymajority of Taobao Marketplace merchants maintain individual consumer protection funds whose minimum amounts range from establishing another storefrontRMB1,000 to RMB10,000. All Tmall and Taobao Marketplace merchants are required to sign agreements with us authorizing us to make deductions from their Alipay accounts in the event of confirmed consumer claims. Many merchants on both Tmall and Taobao Marketplace fulfill more than our basic requirements to demonstrate their confidence in the quality of their services and products. They provide a larger deposit than required and make additional service commitments, such as expedited shipment, free maintenance for electronics and installation services for furniture purchases. We incentivize merchants to set up customer protection funds by programming our search results to prioritize the rankings of product listings for merchants who have established these funds. In addition, the consumer protection fund amounts are displayed on the merchant's information page. As of March 31, 2016, consumer protection funds deposited in the Alipay accounts of merchants on our marketplaces.
In appropriate circumstancesChina retail marketplaces in aggregate totaled over RMB17 billion. If the amount in a merchant's consumer protection fund is insufficient, we also notify the relevant law enforcement and other authoritiesmay still choose to take legal action against the offending party, including in extreme cases criminal proceedings.compensate consumers ourself for any losses, although we are not legally obligated to do so.
Our Technology
Technology is key to our success in achieving efficiency for our business, improving the user experience, and enabling innovation. As of March 31, 2015,2016, we employed a team of over 12,000 engineering18,000 research and data analyticdevelopment personnel engaged in building our technology platform and developing new online and mobile products. Key components of our technology include:include those described below:
Cloud Computing
Our cloud computing platform, called Apsara, is a general purpose distributed computing platform built with proprietary technology that enable server clusters to perform with enhanced computing power. Apsara offers a suite of cloud services including elastic computing, database storage and services, and large-scale data processing services through web-based API.
Content Delivery Network
The technology underlying AliCDN, our content delivery network, accelerates the loading of product photographs on web pages delivered to users and offers them a fast and smooth experience.
Data Science
Our data science technology serves various types of data-intensive computational needs, including deep learning, high-volume batch processing and multi-variable and multi-dimensional real-time analytics. The data mining and transaction, payment and behavioral data science capabilities are used extensively in numerous applications such as search and online marketing on our marketplaces.
Distributed Relational Database
OceanBase, our proprietary distributed relational database management system, plays a critical role in supporting transaction processing on our marketplaces in a cost-efficient manner.
Search and Online Marketing
Our standard product unit database, or SPU database, is built on the vast amount of items listed on Taobao Marketplace and Tmall. The comprehensive transactional and user behavior data generated on our marketplaces enable us to construct a powerful search engine that generates personalized results.
Our online marketing technology platform supports millions of online marketers and delivers tens of billions of online marketing impressions every day. Our online marketing technology enables us to continuously improve the effectiveness of our online marketing services for our sellersmerchants through the use of aggregated behavioral targeting data and analytics.
Deep Learning
Alimama utilizes cloud-based deep learning extensively to enhance the consumer targeting efficiency and return on investments for online marketers of our P4P marketing, display marketing and DMP service offerings. Supported by our Apsara cloud computing system, Alimama operates a cluster of servers that is capable of analyzing terabytes of data points for the modeling of tens of billions online advertisingmarketing impressions.
Security
We are committed to maintaining a secure e-commerce ecosystem. Our back-end security system handles hundreds of millions of instances of malicious attacks each day to safeguard the security of our e-commerce and cloud platform.platforms.
Multi-Region Availability
Compared to social media platforms, the data availability and security requirement for transactions platforms are higher. Our transaction system is kept live and available in data centers in multiple regions in China. This configuration provides more scalability, stability and redundancy than the traditional redundancy configurations.
YunOS
Our YunOS is a cloud-based mobile operating system for smartphones, Internet of Things devices, set-top boxes, smart televisions and smart cars, among others. With YunOS, users can conveniently and securely synchronize data, such as call data, text messages and photos, across their devices through the cloud. System level based H5/Web, dynamic service linking and unified data technologies, as well as a multi-level security framework enable developers to deliver location-based and contextual Internet services with a focus on the data needs of users.
Sales and Marketing
As Taobao Marketplace is China's largest online shopping destination, we enjoy significant organic traffic through word-of-mouth and general awareness of our brand and platform. We believe word-of-mouth, and the reputation and ubiquitous awareness of our brand and platforms in China and, increasingly, abroad, provide us with the best and most cost-efficient marketing channel. We employ a variety of methods to attract potential sellersmerchants and buyers, registered users,consumers, paying members, online marketers and other ecosystem participants and to promote our brands. Our user base has expanded primarily through word-of-mouth.
We generate the majority of our revenues through online marketing services tofrom our sellers.merchants. As these sellersmerchants are mostly participants on our marketplaces, we do not need to rely on a large sales force for our retail marketplaces. The majority of our sales staff areis engaged in selling membership packages to registered members of our wholesale marketplaces through telephone sales and field sales.
Corporate Social Responsibility
Since our founding, we have been highly committed to sustainable corporate responsibility projects, both through charitable endeavors and by extending the benefits of our ecosystem to the community at large. We believe the best approach to corporate social responsibility is through embedding elements of social responsibility in our business model. Our achievements and initiatives in the areas of corporate social responsibility include those described below:
Creating Job Opportunities
The breadth of our ecosystem and the range of different types of service providers needed within it create employment opportunities. In addition to providing direct business opportunities for merchants, our ecosystem has created new opportunities for service providers in logistics, marketing, consulting, operations outsourcing, training and other online and mobile commerce professions. According to AliResearch, our research division, as of December 2015, it is estimated that our China retail marketplaces contributed to the creation of over 15 million job opportunities, including people working directly for online storefronts and service providers to merchants.
With the power of the Internet, our platforms have leveled the playing fields for businesses in many aspects making it an inclusive place for everyone to thrive and prosper. In fiscal year 2016, approximately half of our active sellers on our China retail marketplaces are female. We also have programs that create equal opportunities for everyone such as cloud customer service program for people with disabilities, entrepreneur programs for university students and Rural Taobao partnership program targeting entrepreneurs returning to their villages to start businesses. We have also established entrepreneurial funds in Hong Kong and Taiwan to support the career and entrepreneurial aspirations of young people locally.
Alleviating Poverty
As we expand to rural areas in China and help rural farmers reach urban consumers, we have created opportunities for people living in poverty to elevate their income levels. For the twelve months ended March 31, 2016, merchants in over 800 state-designated poverty counties in China in aggregate generated GMV of over RMB20 billion on our China retail marketplaces.
Internet Approach to Charity
We support and promote a number of charitable and socially responsible initiatives and programs in ways that we believe are in alignment with our core values and our mission. Since 2010, we have earmarked 0.3% of our annual revenue to fund efforts designed to encourage environmental awareness and conservation and other corporate social responsibility efforts. In 2011, we established Alibaba Foundation, a private charity fund that focuses on supporting environmental protection in China and helping the disadvantaged such as children born with heart defects in underdeveloped areas of China.
Over RMB400 million. In fiscal year 2016, Alibaba Foundation made over RMB210 million in donations to support various charitable causes and initiatives. We have also leveraged our platform to facilitate other charitable organizations to raise over RMB190 million in donations.
Over 60 projects. In fiscal year 2016, Alibaba Foundation supported more than 60 charitable projects, including those hosted by The Nature Conservancy, National Geographic Air and Water Conservation Fund,
Paulson Institute and Institute of Public and Environmental Affairs. For example, we supported the development of Wei Lan Map () mobile app that exposes pollution hotspots in China and the companies and factories responsible for it on a map. Hundreds of corporations have made press releases about the data exposed by this app while a portion of these corporations have reacted by taking actions to rectify the problems exposed.
Over 130,000 hours. Starting from September 2015, we encourage our employees to perform at a minimum three hours of charitable activities every year. Since the program's inception until the end of fiscal year 2016, this program saw over 130,000 hours of social service performed by our employees.
Over 3.3 billion participations. We recognize our immense influence on our ecosystem and we leverage that to extend the reach of our charitable work. In fiscal year 2016, our platforms facilitated over 3.3 billion charitable participations involving over 280 million consumers and over 1.5 million merchants. We encourage our merchants, consumers and other ecosystem participants to participate in socially responsible activities. For example, charitable organizations can set up storefronts on our marketplaces to raise funds and engage volunteers. Merchants can designate certain percentage of their sales proceeds generated on our platforms to go to charitable organizations. Consumers can contribute to charitable causes through purchasing these products or participating in charity auctions hosted on our platforms.
Competition
We face competition principally from established Chinese Internet companies, such as Tencent, Baidu and their respective affiliates, as well as from certain offline retailers and vertical e-commerce players, including those that specialize in particular those offline retailers establishing e-commerce websites.a limited number of categories. These competitors generate significant traffic and have established brand recognition, significant technological capabilities and significant financial resources. The areas in which we compete include:
We also face competition from major global Internet companies. However, at this time,companies, including e-commerce companies around the world. Although foreign e-commerce companies currently have a limited presence in China.
TableChina, we face significant competition from them in the areas of Contentscross-border commerce, in particular as we further carry out geographic expansions into international markets.
Seasonality
Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, including seasonal factors and economic cycles that influence consumer spending as well as promotional shopping activities we conduct.
Historically, we have experienced the highest levels of revenues in the fourth calendar quarter of each year due to a number of factors, including sellersmerchants allocating a significant portion of their online marketing budgets
to the fourth calendar quarter, promotions, such as Singles Day on November 11 of each year and the impact of seasonal buying patterns in respect of certain categories such as apparel. We have also experienced lower levels of revenues in the first calendar quarter of each year due to a lower level of allocation of online marketing budgets by sellersmerchants at the beginning of the calendar year and the Chinese New Year holiday, during which time consumers generally spend less and businesses in China are generally closed. In addition, seasonal weather patterns may affect the timing of buying decisions. For example, unexpectedly long periods of warm weather could delay the purchase of heavier clothing items that have higher average selling prices, resulting in lower than expected GMV.prices. Moreover, as our business grows, we expect that our fixed costs and expenses, such as payroll and benefits, bandwidth and co-location fees, will continue to increase, which will result in operating leverage in seasonally strong quarters but can significantly pressure operating margins in seasonally weak quarters.
Regulation
We operate in an increasingly complex legal and regulatory environment. We and our key service provider, Ant Financial Services, are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC laws, rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the PRC include data protection and privacy, consumer protection, content regulation, intellectual property, competition, cross-border trade, taxation, anti-money laundering and anti-corruption. See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We and AlipayAnt Financial Services are subject to variousa broad range of laws and regulations, and future laws and regulations may impose additional requirements and other obligations on our business or otherwise that could materially and adversely affect our business, financial condition and results of operations."
Our online and mobile commerce businesses are classified as value-added telecommunication businesses by the PRC government. Current PRC laws, rules and regulations generally restrict foreign ownership in value-added telecommunication services. As a result, we operate our online and mobile commerce businesses and other businesses in which foreign investment is restricted or prohibited through the variable interest entities, each of which is owned by PRC citizens or by PRC entities owned by PRC citizens, and holds all licenses associated with these businesses.
The applicable PRC laws, rules and regulations governing value-added telecommunication services may change in the future. We may be required to obtain additional approvals, licenses and permits and to comply with any new regulatory requirements adopted from time to time. Moreover, substantial uncertainties exist with respect to the interpretation and implementation of these PRC laws, rules and regulations. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations."
Regulation of Foreign Investment
The Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, the latest version of which came into effect on April 10, 2015, was promulgated and newlyrecently amended by the MOFCOM and the National Development and Reform Commission and governs investment activities in the PRC by foreign investors. The Catalogue divides industries into three categories — "encouraged," "restricted," and "prohibited" for foreign investment. Industries not listed in the Catalogue are generally deemed as falling into a fourth category, "permitted." The businesses of our significant subsidiaries in the PRC are mainly software development, technical services and consultations, which fall into the encouraged or permitted category. Such significant subsidiaries have
obtained all material approvals required for their business operations. However, industries such as value-added telecommunication services, including Internet information services, are restricted from foreign investment. Among our significant subsidiaries, Taobao (China) Software Co., Ltd. and Zhejiang Tmall Technology Co., Ltd. are registered in China and mainly engaged in software development, technical services and consultations, which fall into the encouraged or permitted category under the latest Catalogue. These two significant subsidiaries have obtained all material approvals required for their business operations. The Catalogue does not apply to our significant subsidiaries that are registered and domiciled in Hong Kong, the British Virgin Islands or the Cayman Islands, and operate outside China. The
businesses of our other PRC subsidiaries — including PRC subsidiaries of our significant subsidiaries — are generally software development, technical services and consulting, which fall into the encouraged or permitted category. Industries such as value-added telecommunication services, including Internet information services, are generally restricted to foreign investment pursuant to the latest Catalogue amended in March 2015.Catalogue. We conduct business operations that are restricted or prohibited to foreign investment through our variable interest entities.
In January 2015, the MOFCOM published a discussion draft of the proposed Foreign Investment Law, which embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOFCOM has solicited comments on this draft and substantial uncertainties exist with respect to its enactment timetable, the final version, interpretation and implementation. For more details, see "Item 33. Key Information — Risks Related to our Corporate Structure — Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law."
Regulation of Telecommunications and Internet Information Services
Regulation of Telecommunication Services
Under the Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated on September 25, 2000 by the State Council of the PRC and most recently amended in July 2014,February 2016, a telecommunication services provider in China must obtain an operating license from the Ministry of Industry and Information Technology, or the MIIT, or its provincial counterparts. The Telecommunications Regulations categorize all telecommunication services in China as either basic telecommunications services or value-added telecommunications services. Our online and mobile commerce businesses, as well as Youku Tudou's online video businesses, are classified as value-added telecommunications services.
Foreign investment in telecommunications businesses is governed by the State Council's Administrative Rules for Foreign Investments in Telecommunications Enterprises, or the Foreign Investment Telecommunications Rules, issued by the State Council on December 11, 2001 and most recently amended on September 10, 2008,in February 2016, under which a foreign investor's beneficial equity ownership in an entity providing value-added telecommunications services in China is not permitted to exceed 50%. In addition, for a foreign investor to acquire any equity interest in a business providing value-added telecommunications services in China, it must demonstrate a positive track record and experience in providing such services. However, according to the Notice on Lifting the Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce) promulgated by the MIIT on June 19, 2015, foreign investors are allowed to hold up to 100% of all equity interest in the online data processing and transaction processing business (operational e-commerce) in China, while other requirements provided by the Foreign Investment Telecommunications Rules shall still apply. It is unclear how this notice will be implemented and there exist high uncertainties with respect to its interpretation and implementation by authorities. The MIIT's Notice Regarding Strengthening Administration of Foreign Investment in Operating Value-Added Telecommunication Businesses, or the MIIT Notice, issued on July 13, 2006 prohibits holders of these services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending to conduct such businesses in China.
In addition to restricting dealings with foreign investors, the MIIT Notice contains a number of detailed requirements applicable to holders of value-added telecommunications services licenses, including that license holders or their shareholders must directly own the domain names and trademarks used in their daily operations and each license holder must possess the necessary facilities for its approved business operations and maintain such facilities in the regions covered by its license, including maintaining its network and providing Internet security in accordance with the relevant regulatory standards. The MIIT or its provincial counterpart has the power to require corrective actions after it discovers any non-compliance of the license holders, and where such license holders fail to take such steps, the MIIT or its provincial counterpart has the power to revoke the value-added telecommunications services licenses.
Regulation of Internet Information Services
As a subsector of the telecommunications industry, Internet information services are regulated by the Administrative Measures on Internet Information Services, or the ICP Measures, promulgated on September 25, 2000 by the State Council and amended on January 8, 2011. "Internet information services" are defined as services that provide information to online users through the Internet. Internet information services providers, also called Internet content providers, or ICPs, that provide commercial services are required to obtain an operating license from the MIIT or its provincial counterpart.
To the extent the Internet information services provided relate to certain matters, including news, publication, education or medical and health carehealthcare (including pharmaceutical products and medical equipment), approvals must also be obtained from the relevant industry regulators in accordance with the laws, rules and regulations governing those industries.
Regulation of Advertising Services
The principal regulations governing advertising businesses in China are:
These laws, rules and regulations require companies such as ours that engage in advertising activities to obtain a business license that explicitly includes advertising in the business scope from the SAIC or its local branches.
Applicable PRC advertising laws, rules and regulations contain certain prohibitions on the content of advertisements in China (including prohibitions on misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest). Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited, and the dissemination of advertisements of certain other products, such as tobacco, patented products, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics, are also subject to specific restrictions and requirements.
Advertisers, advertising operators and advertising distributors, including the businesses that certain of the variable interest entities operate, are required by applicable PRC advertising laws, rules and regulations to ensure that the content of the advertisements they prepare or distribute are true and in compliance with applicable laws, rules and regulations. Violation of these laws, rules and regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke the violator's license or permit for advertising business operations. In addition, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe the legal
rights and interests of third parties, such as infringement of intellectual proprietary rights, unauthorized use of a name or portrait and defamation.
Although advertising services are no longer categorized as a prohibited or restricted area for foreign investment, the Administration Rules of Foreign-invested Advertising Enterprises issued on August 22, 2008 by the SAIC and the MOFCOM, require all foreign investors of advertising enterprises to have a track record in, and mainly engage in, advertising businesses overseas. The establishment of a foreign-invested advertising enterprise is also subject to pre-approval by the SAIC or its local branch.
Regulation of Online and Mobile Commerce
China's online and mobile commerce industry is at an early stage of development and there are few PRC laws, regulations or rules specifically regulating this industry. The SAIC adopted the Interim Measures for the Administration of Online Commodities Trading and Relevant Services on May 31, 2010 and replaced those measures with the Administrative Measures for Online Trading on January 26, 2014, which became effective on March 15, 2014. The SAIC also issued the Opinions on Strengthening the Administration of Online Group Buying Operations on March 12, 2012 to subject group buying website operators to the foregoing measures, especially those relating to marketplace platform service providers. On December 24, 2014, the MOFCOM promulgated the Provisions on the Procedures for Formulating Transaction Rules of Third Party Online Retail Platforms (Trial) to regulate the formulation, revision and enforcement of transaction rules for online retail marketplace platforms.
These newly issued measures impose more stringent requirements and obligations on the online trading or service operators as well as the marketplace platform providers. For example, the marketplace platform providers are obligated to make public and file its transaction rules with MOFCOM or its provincial counterparts, examine the legal status of each third-party merchant selling products or services on the platform and display on a prominent location on the web page of such merchant the information stated in the merchant's business license or a link to such business license, and a group buying website operator must only allow a third-party merchant with a proper business license to sell products or services on its platform. Where the marketplace platform providers also act as online distributors, these marketplace platform providers must make a clear distinction between their online direct sales and sales of third-party merchant products on the marketplace platform.
Since the promulgation of the Administrative Measures for Online Trading, the SAIC has issued a number of guidelines and implementing rules aimed at adding greater specificity to these regulations. The SAIC continues to consider and issue guidelines and implementing rules, and we expect that there will be further development of regulation in this industry. For example, three PRC governmental authorities (the Ministry of Finance, General Administration of Customs and State Administration of Taxation) issued a notice on March 24, 2016 to regulate cross-border e-commerce trading which has experienced rapid growth in recent years. The Notice on Tax Policies of Cross-Border E-Commerce Retail Importation effective as of April 8, 2016, or the New Cross-Border E-commerce Tax Notice, introduced the concept of the Cross-Border E-Commerce Retail Importation Goods Inventory, or the Cross-Border E-Commerce Goods Inventory, which are to be issued and updated by the three authorities together with other relevant authorities from time to time. Goods beyond the scope of the Cross-Border E-commerce Goods Inventory will have no tax codes and be effectively removed from cross-border e-commerce platforms. Two batches of the Cross-Border E-Commerce Goods Inventory have been issued on April 6, 2016 and April 15, 2016, respectively. Cosmetics imported for the first time, nutrition supplements and other special food products required to be registered with the State Food and Drug Administration are excluded from the Cross-Border E-Commerce Goods Inventory and will not be able to be sold on the relevant cross-border e-commerce platforms. However, pursuant to a transition policy issued by the General Administration of Customs, goods which have been imported to or in transit to the bonded areas and special regulated areas of customs before April 8, 2016 can still be sold on the cross-border e-commerce platforms no matter whether these goods are included in the Cross-Border E-Commerce Goods Inventory or not.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through various ministries and agencies, including the MIIT, the News Office of the State Council, the Ministry of Culture and the General Administration of Press and Publication. In addition to various approval and license requirements, these measures specifically prohibit Internet activities that result in the dissemination of any content which is found to contain pornography, promote gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC or compromise State security or secrets. ICPs must monitor and control the information posted on their websites. If any prohibited content is found, they must remove such content immediately, keep a record of it and report to the relevant authorities. If an ICP violates these measures, the PRC government may impose fines and revoke any relevant business operation licenses.
Regulations on Broadcasting Audio/Video Programs through the Internet
On July 6, 2004, the State Administration of Radio, Film and Television, or the SARFT, promulgated the Rules for the Administration of Broadcasting of Audio/Video Programs through the Internet and Other Information Networks, or the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the launch, broadcasting, aggregation, transmission or download of audio/video programs via the Internet and other information networks. Anyone who wishes to engage in Internet broadcasting activities must first obtain an audio/video program transmission license, with a term of two years, issued by the SARFT and operate pursuant to the scope as provided in such license. Foreign invested enterprises are not allowed to engage in these businesses.
On April 13, 2005, the State Council announced Several Decisions on Investment by Non-state-owned Companies in Culture-related Business in China. These decisions encourage and support non-state-owned companies to enter certain culture-related business in China, subject to restrictions and prohibitions for investment in audio/video broadcasting, website news and certain other businesses by non-state-owned companies. These decisions authorize the SARFT, the Ministry of Culture and the General Administration of Press and Publication, or the GAPP, to adopt detailed implementing rules according to these decisions.
On December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Circular 56, which came into effect as of January 31, 2008 and was amended on August 28, 2015. Circular 56 reiterates the requirement set forth in the Audio/Video Broadcasting Rules that online audio/video service providers must obtain a license from the SARFT. Furthermore, Circular 56 requires all online audio/video service providers to be either wholly state-owned or state-controlled. According to relevant official answers to press questions published on the SARFT's website dated February 3, 2008, officials from the SARFT and the MIIT clarified that online audio/video service providers that already had been operating lawfully prior to the issuance of Circular 56 may re-register and continue to operate without becoming state-owned or controlled, provided that such providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after Circular 56 was issued. These policies have been reflected in the Application Procedure for Audio/Video Program Transmission License.
On March 17, 2010, the SARFT issued the Internet Audio/Video Program Services Categories (Provisional), or the Provisional Categories, which classified Internet audio/video programs into four categories. Category I is only open to state-owned broadcast media companies operating in the television section, and the other three categories are open to privately held entities.
In 2009, the SARFT released a Notice on Strengthening the Administration of Online Audio/Video Content. This notice reiterated, among other things, that all movies and television shows released or published online must comply with relevant regulations on the administration of radio, film and television. In other words, these movies and television shows, whether produced in the PRC or overseas, must be pre-approved by the SARFT, and the distributors of these movies and television shows must obtain an applicable permit before releasing any such movie or television show. In 2012, the SARFT and the State Internet Information Office of the PRC issued a Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. In 2014, the General Administration of Press and Publication, Radio, Film and Television, or GAPPRFT, formerly the SARFT and the GAPP, released a Supplemental Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. This notice stresses that entities producing online audio/video content, such as Internet dramas and micro films, must obtain a permit for radio and television program production and operation, and that online audio/video content service providers should not release any Internet dramas or micro films that were produced by any entity lacking such permit. For Internet dramas or micro films produced and uploaded by individual users, the online audio/video service providers transmitting such content will be deemed responsible as the producer. Further, under this notice, online audio/video service providers can only transmit content uploaded by individuals whose identity has been verified and such content must comply with the relevant content management rules. This notice also requires that online audio/video content, include Internet drama and micro films, be filed with the relevant authorities before release.
On October 28, 2011, the SARFT issued the Administrative and Operational Requirements for Licensed Internet TV Organizations, commonly known as Circular 181, which came into effect as of the same date. Circular 181 requires that Smart TVs must be exclusively connected to a specific licensed Internet TV organization and must not have access to the public Internet or network operators' databases. Up to now, there are only seven licensed Internet TV organizations and all are state-owned companies.
On September 2, 2014, the GAPPRFT promulgated a Notice on Further Implementing the Relevant Provisions for the Administration of Broadcasting Foreign Films and TV dramas. The notice stresses that any foreign film or TV drama must have a License for Film Publication or a TV drama Issuance License before being broadcast online, and that the annual total number of foreign films and TV dramas broadcast by a website must not exceed 30% of the total amount of domestic films and TV dramas broadcast by such website in the preceding year. Furthermore, online video operators are required to report their annual plans for the import of foreign films and TV dramas to the GAPPRFT before the end of the preceding year. If the online video operators' import plans are approved, the samples, contracts, copyright certificates, plot summaries and other materials relevant to the foreign films and TV dramas are subject to further content examination before the issuance of Licenses for Film Publication or the TV drama Issuance Licenses. The notice also requires these online video operators to upload information about the foreign films and TV dramas to be broadcast to a unified platform for registration before March 31, 2015. Since April 1, 2015, unregistered foreign films and TV dramas are no longer allowed to be broadcast online.
Regulations on Internet Publication
The GAPP is responsible for nationwide supervision and administration of publishing activities in China. On June 27, 2002, the GAPP and the MIIT jointly promulgated the Internet Publication Tentative Administrative Measures, or the Internet Publication Measures, which took effect on August 1, 2002. Pursuant to the Internet Publication Measures, any entity engaged in Internet publishing activities must obtain the Internet Publication License from the GAPP before conducting any Internet publication activities. The term "Internet publication" is defined as Internet transmission activity by which Internet information service providers publish on the Internet or transmit to end-users via the Internet works that they or others have created, after selection and editing, for browsing, reading, use or downloading by the general public. The works in question primarily include (i) content that has already been published formally, such as books, newspapers, periodicals, audio/video products and electronic publications, or that has been made public via other media; and (ii) edited works of literature and art or works concerning natural science, social science, engineering or other topics.
On February 4, 2016, the GAPPRFT and the MIIT jointly promulgated the Online Publication Service Administration Rules, or the Online Publication Rules, which took effect on March 10, 2016 and replaced the Internet Publication Measures. Pursuant to the Online Publication Rules, an online publication service provider must obtain the Online Publication Service License from the GAPPRFT. The term "online publication service" is defined as the provision of online publications to the public through information networks. The term "online publications" is defined as digital works characteristic of publishing such as editing, production or processing provided to the public through information networks, and primarily include:
The Online Publication Rules expressly prohibit the foreign invested enterprises from providing online publication services. In addition, if an online publication service provider intends to cooperate for an online
publication services project with foreign invested enterprises, overseas organizations or overseas individuals, it must report to the GAPPRFT and obtain an approval in advance. Also, the online publication service provider is prohibited from lending, leasing, selling or otherwise transferring the Online Publication Service License, or to allow any other online information service provider to provide online publication services in its name.
Regulations on Internet Drug Information Service
The State Food and Drug Administration, or the SFDA, promulgated the Administrative Measures on Internet Drug Information Service in July 2004 and certain implementing rules and notices thereafter. These measures set out regulations governing the classification, application, approval, content, qualifications and requirements for Internet drug information services. An ICP service operator that provides information regarding drugs or medical equipment must obtain an Internet Drug Information Service Qualification Certificate from the applicable provincial level counterpart of the SFDA.
Regulations on Internet News Publication
Publishing and disseminating news through the Internet are highly regulated in the PRC. On November 7, 2000, the State Council Information Office, or SCIO, and the MIIT jointly promulgated the Provisional Measures for Administrating Internet Websites Carrying on the News Publication Business, or Internet News Measures. These measures require an ICP operator (other than a government authorized news unit) to obtain the approval from SCIO to publish news on its website or disseminate news through the Internet. Furthermore, any disseminated news is required to be obtained from government-approved sources based on contracts between the ICP operator and these sources. The copies of such contracts must be filed with relevant government authorities.
On September 25, 2005, the SCIO and the MIIT jointly issued the Provisions on the Administration of Internet News Information Services, requiring Internet news information service organizations to provide services as approved by the SCIO, subject to annual inspection under the new provisions. These Provisions also provide that no Internet news information service organizations may take the form of a foreign invested enterprise, whether jointly or wholly owned by the foreign investment, and no cooperation between Internet news information service organizations and foreign invested enterprise is allowed before the SCIO completes the security evaluation.
Regulations on Internet Culture Activities
On February 17, 2011, the Ministry of Culture promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture Measures. The Internet Culture Measures require ICP operators engaging in "Internet culture activities" to obtain a permit from the Ministry of Culture. The term "Internet culture activities" includes, among other things, online dissemination of Internet cultural products (such as audio-video products, gaming products, performances of plays or programs, works of art and cartoons) and the production, reproduction, importation, publication and broadcasting of Internet cultural products.
On November 20, 2006, the Ministry of Culture issued Several Suggestions of the Ministry of Culture on the Development and Administration of the Internet Music, or the Suggestions, which became effective on November 20, 2006. The Suggestions, among other things, reiterate the requirement for the Internet service provider to obtain an Internet culture business permit to carry on any business relating to Internet music products. In addition, foreign investors are prohibited from operating Internet culture businesses. However, the laws and regulations on Internet music products are still evolving, and there have not been any provisions stipulating whether or how music video will be regulated by the Suggestions.
On August 18, 2009, the Ministry of Culture promulgated the Notice on Strengthening and Improving the Content Review of Online Music. According to this notice, only "Internet culture operating entities" approved by the Ministry of Culture may engage in the production, release, dissemination (including providing direct links to music products) and importation of online music products. The content of online music must be reviewed by or filed with the Ministry of Culture. Internet culture operating entities should establish a strict self-monitoring system of online music content and set up a special department in charge of such monitoring.
On October 23, 2015, the Ministry of Culture promulgated the Notice on Further Strengthening and Improving the Content Review of Online Music, which took effect on January 1, 2016. According to this notice, ICP operators are required to submit their content administrative system, review procedures, and work standards to the provincial culture administrative department where they are located for filing within a prescribed period.
Regulations on Producing Audio/Video Programs
On July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, effective as of August 20, 2004 and amended on August 28, 2015. These Measures provide that anyone who wishes to produce or operate radio or television programs must first obtain an operating permit.
On February 1, 2002, the State Council promulgated the Regulations for the Administration of Films, or the Film Regulations, effective as of February 1, 2002. The Film Regulations set forth the general regulatory guidelines for China's film industry and address practical issues with respect to production, censorship, distribution and screening. They also establish the SARFT as the sector's regulatory authority, and serve as the foundation for all other legislation promulgated in this area. The Film Regulations provide the framework for an industry-wide licensing system operated by the SARFT, under which separate permits (and permit application procedures) apply.
Regulation of Internet Security
The Decision in Relation to Protection of the Internet Security enacted by the Standing Committee of the National People's Congress of China on December 28, 2000 provides that the following activities conducted through the Internet are subject to criminal punishment:
The Administrative Measures on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public Security on December 16, 1997 and amended on January 8, 2011, prohibit the use of the Internet in a manner that would result in the leakage of State secrets or the spread of socially destabilizing content. The Provisions on Technological Measures for Internet Security Protection, or the Internet Security Protection Measures, promulgated on December 13, 2005 by Ministry of Public Security require all ICPs to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws and regulations. Under these measures, the value-added telecommunications services license holders must regularly update information security and content control systems for their websites and must also report any public dissemination of prohibited content to local public security authorities. If a value-added telecommunications services license holder violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.
The Communication Network Security Protection Administrative Measures, which was promulgated by the MIIT on January 21, 2010, require that all communication network operators including telecommunications services providers and Internet domain name service providers divide their own communication networks into units. Such communication network units shall be rated in accordance with degree of damage to national security, economic operation, social order and public interest assuming such units is damaged. The communication network operators must file the division and ratings of their communication network with MIIT or its local counterparts. If a communication network operator violates these measures, the MIIT or its local counterparts may order rectification or impose a fine up to RMB30,000 in case such violation is not duly rectified.
Internet security in China is also regulated and restricted from a national security standpoint. On July 1, 2015, the National People's Congress Standing Committee promulgated the New National Security Law which took effect on the same date replaced the former National Security Law promulgated in 1993. According to the New National Security Law, the state shall ensure that the information system and data in important areas are secure and controllable. In addition, according to the New National Security Law, the state shall establish national security review and supervision institutions and mechanisms, and conduct national security reviews of key technologies and IT products and services that affect or may affect national security. There are uncertainties on how the New National Security Law will be implemented in practice.
Regulation of Privacy Protection
Under the ICP Measures, ICPs are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes upon the lawful rights and interests of others. Depending on the nature of the violation, ICPs may face criminal charges or sanctions by PRC security authorities for such acts, and may be ordered to suspend temporarily their services or have their licenses revoked.
Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT on December 29, 2011, ICPs are also prohibited from collecting any user personal information or providing any such information to third parties without the consent of a user. ICPs must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for its services. ICPs are also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, ICPs must take remedial measures immediately and report any material leak to the telecommunications regulatory authority.
In addition, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National People's Congress on December 28, 2012 emphasizes the need to protect electronic information that contains individual identification information and other private data. The decision requires ICPs to establish and publish policies regarding the collection and use of personal electronic information and to take necessary measures to ensure the security of the information and to prevent leakage, damage or loss. Furthermore, MIIT's Rules on Protection of Personal Information of Telecommunications and Internet Users promulgated on July 16, 2013 contain detailed requirements on the use and collection of personal information as well as the security measures to be taken by ICPs.
The PRC government retains the power and authority to order ICPs to provide an Internet user's personal information if such user posts any prohibited content or engages in any illegal activities through the Internet.
Regulation of Consumer Protection
Our online and mobile commerce business is subject to a variety of consumer protection laws, including the PRC Consumer Rights and Interests Protection Law, as amended and effective as of March 15, 2014, and the Administrative Measures for Online Trading, both of which have provided stringent requirements and obligations on business operators, including Internet business operators and platform service providers like us. For example, consumers are entitled to return goods purchased online, subject to certain exceptions, within seven days upon receipt of such goods for no reason. To ensure that sellersmerchants and service providers comply with these laws and regulations, we, as platform operators, are required to implement rules governing transactions on our platform, monitor the information posted by sellersmerchants and service providers, and report any violations by such sellersmerchants or service providers to the relevant authorities. In addition, online marketplace platform providers may, pursuant to PRC consumer protection laws, be exposed to liabilities if the lawful rights and interests of consumers are infringed in connection with consumers' purchase of goods or acceptance of services on online marketplace platforms and the
platform service providers fail to provide consumers with the contact information of the sellermerchant or manufacturer. In addition, platform service providers may be jointly and severally liable with sellersmerchants and manufacturers if they are aware or should be aware that the sellermerchant or manufacturer is using the
online platform to infringe upon the lawful rights and interests of consumers and fail to take measures necessary to prevent or stop such activity.
Failure to comply with these consumer protection laws could subject us to administrative sanctions, such as the issuance of a warning, confiscation of illegal income, imposition of a fine, an order to cease business operations, revocation of business licenses, as well as potential civil or criminal liabilities.
Regulation of Pricing
In China, the prices of a very small number of products and services are guided or fixed by the government. According to the Pricing Law, business operators must, as required by the government departments in charge of pricing, mark the prices explicitly and indicate the name, origin of production, specifications, and other related particulars clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated. Business operators must not commit the specified unlawful pricing activities, such as colluding with others to manipulate the market price, providing fraudulent discounted price information, using false or misleading prices to deceive consumers to transact, or conducting price discrimination against other business operators. Failure to comply with the Pricing Law or other rules or regulations on pricing may subject business operators to administrative sanctions such as warning, orders to cease unlawful activities, payment of compensation to consumers, confiscation of illegal gains, and/or fines. The business operators may be ordered to suspend business for rectification, or have their business licenses revoked if the circumstances are severe. Merchants on Tmall and Taobao Marketplace undertake the primary obligation under the Pricing Law. However, in some cases, we have been and may in the future be held liable and be subject to fines or other penalties if the authorities determine that, as the platform operator, our guidance for platform-wide promotional activities resulted in unlawful pricing activities by the sellersmerchants on our platformplatforms or if the pricing information we provided for platform-wide promotional activities was determined to be untrue or misleading.
Regulation of Intellectual Property Rights
Patent. Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right.
Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain names.Name. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.
Regulation of Anti-counterfeiting
According to the Trademark Law of the PRC, counterfeit or unauthorized production of the label of another person's registered trademark, or sale of any label that is counterfeited or produced without authorization will be deemed as an infringement of the exclusive right to use a registered trademark. The infringing party will be ordered to cease infringement immediately, a fine may be imposed and the counterfeit goods will be confiscated. The infringing party may also be held liable for damages suffered by the owner of the intellectual property rights,
which will be equal to the gains obtained by the infringing party or the losses suffered by such owner as a result of the infringement, including reasonable expenses incurred by such owner in connection with enforcing its rights.
Under the Tort Liability Law of the PRC, an Internet service provider may be subject to joint liability if it is aware that an Internet user is infringing upon the intellectual property rights of others through its Internet services, such as selling counterfeit products, and fails to take necessary measures to stop that activity. If an Internet service provider receives a notice from an infringed party regarding an infringement, the Internet service provider is required to take certain measures, including deleting, blocking and unlinking the infringing content, in a timely manner.
In addition, under the Administrative Measures for Online Trading issued by the SAIC on January 26, 2014, as an operator of an online trading platform, we must adopt measures to ensure safe online transactions, protect consumers' rights and prevent trademark infringement.
Tax Regulations
PRC Enterprise Income Tax
The PRC enterprise income tax, or EIT, is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1, 2008. The EIT Law generally imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises.
The EIT Law and its implementation rules permit certain High and New Technologies Enterprises, or HNTEs, to enjoy a reduced 15% enterprise income tax rate subject to these HNTEs meeting certain qualification criteria. In addition, the relevant EIT laws and regulations also provide that entities recognized as Software Enterprises are able to enjoy a tax holiday consisting of a 2-year-exemption commencing from their first profitable calendar year and a 50% reduction in ordinary tax rate infor the subsequentfollowing three calendar years, while entities qualified as Key Software Enterprises can enjoy a preferential EIT rate of 10%. A number of our PRC subsidiaries and operating entities enjoy these types of preferential tax treatment. See "Item 10. Additional Information — E. Taxation — People's Republic of China Taxation."
Uncertainties exist with respect to how the EIT Law applies to the tax residence status of Alibaba Group and our offshore subsidiaries. Under the EIT Law, an enterprise established outside of China with a "de facto management body" within China is considered a "resident enterprise," which means that it is treated in the same manner as a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define "de facto management body" as a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although Alibaba Group Holding Limited does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in Circular 82 to evaluate the tax residence status of Alibaba Group and our subsidiaries organized outside the PRC.
According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a "de facto management body" in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
We do not believe that we meet any of the conditions outlined in the immediately preceding paragraph. Alibaba Group Holding Limited and our offshore subsidiaries are incorporated outside the PRC. As a holding company, our key assets and records, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that have been deemed a PRC "resident enterprise" by the PRC tax authorities. Accordingly, we believe that Alibaba Group Holding Limited and our offshore subsidiaries should not be treated as a "resident enterprise" for PRC tax purposes if the criteria for "de facto management body" as set forth in Circular 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body" as applicable to our offshore entities, we will continue to monitor our tax status. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income."
In the event that Alibaba Group Holding Limited or any of our offshore subsidiaries is considered to be a PRC resident enterprise:
Under Bulletin 7 issued by the State Administration of Taxation on February 3, 2015, which replaced or supplemented certain previous rules under Circular 698, an "indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, "PRC taxable assets" include assets attributed to an establishment or a place of business in China, immoveable properties in China, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment or a place of business and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment or a place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the implementation details of Bulletin 7. Especially as Bulletin 7 is promulgated recently, it is not clear how it will be implemented. If Bulletin 7 was determined by the tax authorities
to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions might be required to spend valuable resources to comply with Bulletin 7 or to establish that the relevant transactions should not be taxed under Bulletin 7, which may materially and adversely affect us. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We and
our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment or a place of business of a non-PRC company, or immovable properties located in China owned by theirother assets attributable to a PRC establishment of a non-PRC holding companies.company."
Where the payers fail to withhold any or sufficient tax, the non-PRC residents, as the transferors, are required to declare and pay such taxes to the tax authorities on their own within the statutory time limit. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, fines and default interest on those taxes.
PRC Business Tax and Value-Added Tax
Before August 2013 and pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technology development and transfer, such business tax may be exempted subject to approval by the relevant tax authorities.
In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In May and December 2013, and April 2014 and March 2016, the Ministry of Finance and the State Administration of Taxation promulgated Circular 37, Circular 106, Circular 43 and Circular 4336 to further expand the scope of services which are to be subject to Value-Added Tax, or VAT, instead of business tax. Pursuant to these tax rules, from August 1, 2013, a VAT will bewas imposed to replace the business tax in certain service industries, including technology services and advertising services, and from May 1, 2016, VAT replaced business tax in all industries, on a nationwide basis. A VAT rate of 6% applies to revenue derived from the provision of certain services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided. Accordingly, although the 6% VAT rate is higher than the previously applicable 5% business tax rate, no materially different tax cost to us has resulted nor do we expect to result from the replacement of the business tax with a VAT on our services.
PRC Import Tax
Consumer goods imported through cross-border e-commerce platforms were originally classified as "personal baggage or postal articles" under the Notice on Pilot Bonded Area Import Pattern of Cross-Border Trade E-Commerce Services issued by PRC General Administration of Customs on March 4, 2014. A personal baggage or postal articles tax was levied on such goods before the online retailors could deliver the same to buyers. The personal baggage or postal articles tax were exempted if the payable amount was lower than RMB50. The rate of personal baggage or postal articles tax was respectively 10%, 20%, 30% and 50% for different categories of products imported. Under this tax pattern, a quota of RMB1,000 for each purchase order was imposed on online buyers, otherwise the imported goods were classified as normal goods, which are subject to value-added tax, consumption tax and tariff.
The above-mentioned pilot bonded area import pattern of cross-border e-commerce was abolished pursuant to the Notice on Tax Policies of Cross-Border E-commerce Retail Importation, effective on April 8, 2016, or the New Cross-Border E-commerce Tax Notice. The goods imported through cross-border e-commerce platforms are now treated as normal goods rather than "personal baggage or postal articles" and subject to the usual value-added tax, consumption tax and tariff. Normally, a 17% value-added tax will be levied on most products sold on the cross-border e-commerce platform and a 30% consumption tax will be levied on cosmetics and perfumes, while no consumption tax will be levied on skin care products, maternity and baby care products. However, the New Cross-Border E-commerce Tax Notice provides that, if the goods imported through cross-border e-commerce platforms are within the quota of RMB2,000 for each purchase order or RMB20,000 per year for each buyer, the payable amount for the value-added tax and the consumption tax will be reduced to 70% of the payable tax, and the tariff will be waived.
PRC Export Tax
According to the Notice on the Taxation Policies for Cross-border E-Commerce Retail Export, or the E-Commerce Export Taxation Notice, which was jointly issued by the Ministry of Finance and the State Administration of Taxation and took effect as of January 1, 2014, an e-commerce export enterprise may be exempt or refunded from consumption tax and VAT upon satisfaction of the following conditions:
Even if an e-commerce export enterprise does not satisfy the foregoing conditions, it may also be exempt from consumption tax and VAT if it meets the following requirements:
Third-party e-commerce platforms providing transaction services for e-commerce export enterprises are not eligible for a tax refund or exemption under the E-Commerce Export Taxation Notice.
Regulation of Foreign Exchange and Dividend Distribution
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Regulations on Foreign Exchange Administration of the PRC. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE's approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
Since SAFE Circular 142 has been in place for more than five years, SAFE decided to further reform the foreign exchange administration system in order to satisfy and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas on August 4, 2014. This circular suspends the application of SAFE Circular 142 in certain areas and allows a foreign-invested enterprise registered in such areas with a business scope including "investment" to use the RMB capital converted from foreign currency registered capital for equity investments within the PRC. On April 9, 2015, SAFE released the Notice on the Reform of the Administration Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, which came into force and superseded SAFE Circular 142 on June 1, 2015. Circular 19 allows foreign invested enterprises to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business operation and provides the procedures for foreign invested companies to use Renminbi converted from foreign currency-denominated capital for equity investment. Nevertheless, Circular 19 also reiterates the principle that Renminbi converted from foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Since Circular 19 was only recently promulgated, there are uncertainties on how it will be interpreted and implemented in practice.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. In February 2015, SAFE promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE Circular 13, the current foreign exchange procedures will be further simplified, and foreign exchange registrations of direct investment will be handled by the banks designated by the foreign exchange authority instead of SAFE and its branches. However, the foreign invested enterprises are still prohibited by SAFE Circular 13 to use the RMB converted from foreign currency-registered capital to extend entrustment loans, repay bank loans or inter-company loans.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals of SAFE and other PRC government authorities as necessary.
SAFE Circular 37
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as "SAFE Circular 75" promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a "special purpose vehicle." SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share
transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. On February 13, 2015, SAFE released SAFE Circular 13, under which local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, from June 1, 2015. However, since the notice came into force recently, there exist substantial uncertainties with respect to its interpretation and implementation by governmental authorities and banks.
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and we have periodically filed SAFE Circular 75 reports prior to the promulgation of SAFE Circular 37, on behalf of certain employee shareholders whom we know are PRC residents. However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular 37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Share Option Rulesoption rules
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers.
Regulation of Dividend Distributiondividend distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social Insurance Law and the Regulations on the Administration of Housing Funds, employers in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
Anti-monopoly Law
The PRC Anti-monopoly Law, which took effect on August 1, 2008, prohibits monopolistic conduct, such as entering into monopoly agreements, abuse of dominant market position and concentration of undertakings that have the effect of eliminating or restricting competition.
Monopoly Agreement
Competing business operators may not enter into monopoly agreements that eliminate or restrict competition, such as by boycotting transactions, fixing or changing the price of commodities, limiting the output of commodities, fixing the price of commodities for resale to third parties, among others, unless such agreement will satisfy the exemptions under the Anti-monopoly Law, such as improving technologies, or increasing the efficiency and competitiveness of small and medium-sized undertakings.undertakings, or safeguarding legitimate interests in cross-border trade and economic cooperation with foreign counterparts. Sanctions for violations include an order to cease the relevant activities, and confiscation of illegal gains and fines (from 1% to 10% of sales revenue from the previous year, or RMB500,000 if the intended monopoly agreement has not been performed).
Abuse of Dominant Market Position
A business operator with a dominant market position may not abuse its dominant market position to conduct acts, such as selling commodities at unfairly high prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, and refusing to trade with a trading party without any justifiable cause. Sanctions for violation of the prohibition on the abuse of dominant market position include an order to cease the relevant activities, confiscation of the illegal gains and fines (from 1% to 10% of sales revenue from the previous year).
Concentration of Undertakings
Where a concentration of undertakings reaches the declaration threshold stipulated by the State Council, a declaration must be approved by the anti-monopoly authority before the parties implement the concentration. Concentration refers to (1) a merger of undertakings; (2) acquiring control over other undertakings by acquiring
equities or assets; or (3) acquisition of control over, or the possibility of exercising decisive influence on, an undertaking by contract or by any other means. If business operators fail to comply with the mandatory declaration requirement, the anti-monopoly authority is empowered to terminate and/or unwind the transaction, dispose of relevant assets, shares or businesses within certain periods and impose fines of up to RMB500,000.
See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We may become the target of anti-monopoly and unfair competition claims, which may result in our being subject to fines as well as constraints on our business."
Anti-Terrorism Law
The PRC Anti-Terrorism Law, which was promulgated on December 27, 2015 and came into effect on January 1, 2016, imposes obligations on telecommunication business operators and Internet service providers to
provide technical interfaces and technical assistance in decryption and other efforts to public and national security authorities in terrorism prevention and investigation. Also, the Anti-Terrorism Law requires Internet service providers to implement network security and information and content monitoring systems and adopt technical security measures to prevent the dissemination of information containing terrorist or extremist content. Once such content is detected, Internet service providers shall cease the transmission of the information, keep the relevant records, delete the information and report to public and national security bodies. In addition, the Anti-Terrorism Law requires telecommunication business operators and Internet service providers to verify the identity of their clients, and to not provide services to anyone whose identity is unclear or who declines to verify his/her identity. However, the Anti-Terrorism Law does not further specify the required verification measures. Since the Anti-Terrorism Law was promulgated recently, there exist substantial uncertainties with respect to its interpretation and implementation by governmental authorities.
Regulation Applicable to Alipay
Regulation of Non-financial Institution Payment Services
According to the Administrative Measures for the Payment Services Provided by Non-financial Institutions, or the Payment Services Measures, promulgated by the PBOC on June 14, 2010 and effective as of September 1, 2010, a payment institution, a non-financial institution providing monetary transfer services as an intermediary between payees and payers, including online payment, issuance and acceptance of prepaid cards or bank cards, and other payment services specified by the PBOC, is required to obtain a payment business license. Any non-non — financial institution or individual engaged in the payment business without such license may be ordered to cease its payment services and be subject to administrative sanctions and even criminal liabilities. Applications for payment business licenses are examined by the local branches of the PBOC and then submitted to the PBOC for approval. The registered capital of an applicant that engages in a nationwide payment business must be at least RMB100 million, while that of an applicant engaging in a payment business within a province must be at least RMB30 million.
A payment institution is required to conduct its business within the scope of business indicated in its payment business license, and may not undertake any business beyond that scope or outsource its payment business. No payment institution may transfer, lease or lend its payment business license.
In addition, onOn January 20, 2015, the SAFE promulgated the Guiding Opinions on the Pilot Services of Cross-Border Foreign Exchange Payment by Payment Institutions, or the Guiding Opinions, which replaced the previous guiding opinion issued by SAFE on February 1, 2013. Pursuant to the Guiding Opinions, a payment institution is required to obtain approval from the SAFE in order to engage in pilot cross-border foreign exchange payment services and may only provide cross-border foreign exchange payment services for trade in goods or trade in services with real and legitimate transaction background. The payment institution must also verify the real names and identity information of the customers involved in the cross-border transactions, maintain records of the relevant transactions and make monthly reports to the local branch of the SAFE.
In addition, on December 28, 2015, the PBOC promulgated the Administrative Measures for the Online Payment Business of Non-bank Payment Institutions, or the Online Payment Measures, which will come into effect on July 1, 2016. The Online Payment Measures classify online payment accounts into three categories and require online payment institutions to impose classified management based on the real name system with respect to different categories of online payment accounts. The Online Payment Measures require online payment institutions to conduct "know your client" checks and implement the real name system for payment accounts. In addition, a payment account can only be opened by a payment institution with Internet payment business license at the request of customers.
We rely on Alipay to provide payment services on our marketplaces and Alipay has obtained a payment business license from the PBOC as well as approval for cross-border foreign exchange payment services from the SAFE.
Anti-money Laundering Regulations
The PRC Anti-money Laundering Law, which became effective on January 1, 2007, sets forth the principal anti-money laundering requirements applicable to both financial and non-financial institutions with anti-money laundering obligations, such as Alipay, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, preservation of clients' identification information and transactions records, and reports on block transactions and suspicious transactions. The Payment Services Measures also require that the payment institution follow the rules associated with anti-money laundering and comply with their anti-money laundering obligations.
In addition, the PBOC promulgated the Administrative Measures for Payment Institutions Regarding Anti-money Laundering and Counter Terrorism Financing on March 5, 2012, or the Anti-money Laundering Measures, according to which the payment institution must establish and improve unified anti-money laundering internal control systems and file such systems with the local branch of the PBOC. The Anti-money Laundering
Measures also require the payment institution to set up an anti-money laundering department or designate an internal department to be responsible for anti-money laundering and counter terrorism financing work.
InAlipay is in the future, if Alipay expandsprocess of expanding its business internationally, and it may become subject to additional laws, rules and regulations of the jurisdictions in which it chooses to operate. These regulatory regimes may be complex and require extensive time and resources to ensure compliance.
C. Organizational Structure
We conduct our business operations across approximately 320330 subsidiaries and other consolidated entities. The chart below summarizes our corporate legal structure and identifies the significant subsidiaries described in "— A. History and Development of the Company," as well as our other subsidiaries and variable interest entities that are material to our business and the number of their respective subsidiaries, as of March 31, 2015:2016:
Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders
Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added telecommunications services, which include the operations of Internet content providers, or ICPs, we, similar to all
other entities with foreign-incorporated holding company structures operating in our industry in China, operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC through wholly-foreign owned enterprises, majority-owned entities and variable interest entities. The relevant variable interest entities, which are incorporated in the PRC and 100% owned by PRC citizens or by PRC entities owned by PRC citizens, where applicable, hold the ICP licenses and other regulated licenses and operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited. Specifically, our variable interest entities that are material to our business are Zhejiang Taobao Network Co., Ltd., Zhejiang Tmall Network Co., Ltd., Hangzhou Alibaba Advertising Co., Ltd., Hangzhou Ali Technology Co., Ltd. and Alibaba Cloud Computing Ltd. Each of these variable interest entities other than Zhejiang Taobao Network Co., Ltd. is 80%-owned by Jack Ma, our lead founder, executive chairman and one of our principal shareholders, and 20%-owned by Simon Xie, one of our founders. Zhejiang Taobao Network Co., Ltd. is 90%-owned by Jack Ma and 10%-owned by Simon Xie. We have entered into certain contractual arrangements, as described in more detail
below, which collectively enable us to exercise effective control over the variable interest entities and realize substantially all of the economic risks and benefits arising from, the variable interest entities. As a result, we include the financial results of each of the variable interest entities in our consolidated financial statements in accordance with U.S. GAAP as if they were our wholly-owned subsidiaries.
Other than the ICP licenses and other licenses and approvals for businesses in which foreign ownership is restricted or prohibited held by our variable interest entities, we hold our material assets in, and conduct our material operations through, our wholly-foreign owned and majority-owned enterprises, which primarily provide technology and other services to our customers. We generate the significant majority of our revenue directly through our wholly-foreign owned enterprises, which directly capture the profits and associated cash flow from operations without having to rely on contractual arrangements to transfer such cash flow from the variable interest entities to the wholly-foreign owned enterprises.
The following diagram is a simplified illustration of the ownership structure and contractual arrangements that we typically have in place for our variable interest entities:
The following is a summary of the common contractual arrangements that provide us with effective control of our material variable interest entities and that enable us to receive substantially all of the economic benefits from their operations.
Contracts that give us effective controlGive Us Effective Control of the variable interest entitiesVariable Interest Entities
Loan Agreements.agreements. Pursuant to the relevant loan agreement, the respective wholly-foreign owned enterprise has granted an interest-free loan to the relevant variable interest entity equity holders, which may only be used for the purpose of a capital contribution to the relevant variable interest entity or as may be otherwise agreed by the wholly-foreign owned enterprise. The wholly-foreign owned enterprise may require acceleration of repayment at its absolute discretion. When the variable interest entity equity holders make early repayment of the outstanding amount, the wholly-foreign owned enterprise or a third partythird-party designated by it may purchase the equity interests in the variable interest entity at a price equal to the outstanding amount of the loan, subject to any applicable PRC laws, rules and regulations. The variable interest entity equity holders undertake not to enter into any prohibited transactions in relation to the variable interest entity, including the transfer of any business, material assets, intellectual property rights or equity interests in the variable interest entity to any third party.third-party. The parties to the loan agreement for each of our material variable interest entities are Jack Ma and Simon Xie on the one hand,
and Taobao (China) Software Co., Ltd., Zhejiang Tmall Technology Co., Ltd., Alibaba (China) Technology Co., Ltd., Hangzhou Alimama Technology Co., Ltd. and Alisoft (Shanghai) Co.,Zhejiang Alibaba Cloud Computing Ltd., the respective wholly-foreign owned enterprise on the other hand.
Exclusive Call Option Agreements.call option agreements. The variable interest entity equity holders have granted the wholly-foreign owned enterprise an exclusive call option to purchase their equity interest in the variable interest entity at an exercise price equal to the higher of (i) the registered capital in the variable interest entity; and (ii) the minimum price as permitted by applicable PRC laws. Each relevant variable interest entity has further granted the relevant wholly-foreign owned enterprise an exclusive call option to purchase its assets at an exercise price equal to the book value of the assets or the minimum price as permitted by applicable PRC law, whichever is higher. The wholly-foreign owned enterprise may nominate another entity or individual to purchase the equity interest or assets, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of the equity interest or assets pursuant to the call option. Each wholly-foreign owned enterprise is entitled to all dividends and other distributions declared by the variable interest entity, and the variable interest entity equity holders have agreed to give up their rights to receive any distributions or proceeds from the disposal of their equity interests in the variable interest entity which are in excess of the original registered capital that they contributed to the variable interest entity, and to pay any such distributions or premium to the wholly-foreign owned enterprise. The exclusive call option agreements remain in effect until the equity interest or assets that are the subject of such agreements are transferred to the wholly foreign owned enterprise. The parties to the exclusive call option agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise.
Proxy Agreements.agreements. Pursuant to the relevant Proxy Agreement,proxy agreement, each of the variable interest entity equity holders irrevocably authorizes any person designated by the wholly-foreign owned enterprise to exercise his rights as an equity holder of the variable interest entity, including the right to attend and vote at equity holders' meetings and appoint directors. The parties to the proxy agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise.
Equity Pledge Agreements.pledge agreements. Pursuant to the relevant equity pledge agreement, the relevant variable interest entity equity holders have pledged all of their interests in the equity of the variable interest entity as a continuing first priority security interest in favor of the corresponding wholly-foreign owned enterprise to secure the outstanding amounts advanced under the relevant loan agreements described above and to secure the performance of obligations by the variable interest entity and/or its equity holders under the other structure contracts. Each wholly-foreign owned enterprise is entitled to exercise its right to dispose of the variable interest entity equity holders' pledged interests in the equity of the variable interest entity and has priority in receiving payment by the application of proceeds from the auction or sale of such pledged interests, in the event of any breach or default under the loan agreement or other structure contracts, if applicable. These equity pledge agreements remain in
force for the duration of the relevant loan agreement and other structure contracts. The parties to the equity pledge agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise. All of the equity pledges relating to our material variable interest entities have been registered with the relevant office of the Administration for Industry and Commerce in China.
Contracts that enable usEnable Us to receive substantially allReceive Substantially All of the economic benefitsEconomic Benefits from the variable interest entitiesVariable Interest Entities
Exclusive Technical Services Agreements.technical services agreements. Each relevant variable interest entity has entered into an exclusive technical services agreement with the respective wholly-foreign owned enterprise, pursuant to which the relevant wholly-foreign owned enterprise provides exclusive technical services to the variable interest entity. In exchange, the variable interest entity pays a service fee to the wholly-foreign owned enterprise which typically amount to what
would be substantially all of the variable interest entity's pre-tax profit (absent the service fee), resulting in a transfer of substantially all of the profits from the variable interest entity to the wholly-foreign owned enterprise.
The exclusive call option agreements described above also entitle the wholly-foreign owned enterprise to all dividends and other distributions declared by the variable interest entity and to any distributions or proceeds from the disposal by the variable interest entity equity holders of their equity interests in the variable interest entity that are in excess of the original registered capital that they contributed to the variable interest entity.
In the opinion of Fangda Partners, our PRC legal counsel:
However, we have been further advised by our PRC legal counsel, Fangda Partners, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our Internet-based business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Corporate Structure."
D. Property, Plant and Equipment
As of March 31, 2015,2016, we occupied facilities around the world with an aggregate gross floor area of office buildings owned by us totaling 421,445 square meters. As of March 31, 2015, we maintained 126We maintain offices in China, Dubai, France, Germany, Hong Kong, India, Italy, Korea, Taiwan, Turkey, Russia, Singapore, the United Kingdom and 29 offices outside China.the United States. In addition, we maintain data centers in China, Hong Kong, Singapore and the United States and logistics facilities in China.States.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5.5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report.report and in particular, "Item 4. Information on the Company — B. Business Overview." This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Item 3. Key Information — D. Risk Factors" and elsewhere in this annual report. We have prepared our financial statements in accordance with U.S. GAAP. Our fiscal year ends on March 31 and references to fiscal years 2013, 2014, 2015 and 20152016 are to the fiscal years ended March 31, 2013, 2014, 2015 and 2015,2016, respectively.
A. Operating ResultsTable of Contents
Overview
We are the largest onlineachieved significant growth and mobile commerce companystrong operating results in the worldfiscal year 2016. Our total revenue increased by 45% from RMB52,504 million in terms of gross merchandise volumefiscal year 2014 to RMB76,204 million in 2014.fiscal year 2015, and further increased by 33% to RMB101,143 million (US$15,686 million) in fiscal year 2016. Our net income increased by 4% from RMB23,403 million in fiscal year 2014 to RMB24,320 million in fiscal year 2015 and further increased by 193% to RMB71,289 million (US$11,056 million) in fiscal year 2016. Our GMV surpassed RMB3 trillion in fiscal year 2016. We operate Taobao Marketplace, China's largest online shopping destination, Tmall, China's largest third-party platform for brands and retailers, in each case in terms of gross merchandise volume, and Juhuasuan, China's most popular group buying marketplace by its monthly active users, in each case in 2014 according to iResearch. These three marketplaces, which comprisebelieve our China retail marketplaces, generatedfocus on long-term strategic priorities — globalization, rural expansion, building a combined GMV of RMB2,444 billion (US$394 billion) from 350 million active buyers and more than 10 million active sellers in the twelve months ended March 31, 2015. In addition to our three China retail marketplaces, we operate Alibaba.com, China's largest global wholesale marketplace in 2014 by revenue, according to iResearch, 1688.com, our China wholesale marketplace, and AliExpress, our global consumer marketplace, as well as provideworld-class cloud computing services.
We provide the fundamental technology infrastructurebusiness and marketing reach to help businesses leverage the power of the Internet to establish an online presencecreating a comprehensive media and conduct commerce with consumers and businesses. We have been a leader in developing online marketplace standards in China, including consumer protection programs, marketplace rules, qualification standards for merchants, and buyer and seller rating systems. Given the scale we have been able to achieve, an ecosystementertainment platform — has developed around our platform that consists of buyers, sellers, third-party service providers, strategic alliance partners, and investee companies. Our platform and the role we play in connecting buyers and sellers and making it possible for them to do business anytime and anywhere is at the nexus of this ecosystem. Much of our effort, our time and our energy is spent on initiatives that are for the greater good of the ecosystem and the various participants in it. We feellaid a strong responsibilityfoundation for the continued development of the ecosystem and we take ownership for this development. Accordingly, we refer to this as "our ecosystem."
Consumers and businesses benefit from our ecosystem because they can access products and services with a combination of selection, value, quality, convenience and customer experience that is not available elsewhere. Merchants are enabled by our tools and infrastructure to do business and flourish on our platform. Other participants in our ecosystem — including marketing affiliates, logistics service providers, independent software vendors and various professional service providers — provide valuable services to our buyer and seller customers. Our ecosystem has strong self-reinforcing network effects that benefit our marketplace participants, who are invested in our ecosystem's growth and success.
Table of Contentsfuture growth.
We have experienced significant growth across various key metrics for our China retail marketplaces:
We have also recently experienced significant growth in our mobile monetization on our China retail marketplaces:
We have achieved significant scale and growth. Our total revenue increased by 52% from RMB34,517 million in fiscal year 2013 to RMB52,504 million in fiscal year 2014, and further increased by 45% to RMB76,204 million (US$12,293 million) in fiscal year 2015. Our net income increased by 171% from RMB8,649 million in fiscal year 2013 to RMB23,403 million in fiscal year 2014 and modestly increased by 4% to RMB24,320 million (US$3,923 million) in fiscal year 2015.
Key Marketplaces and Services
Our marketplaces and services mainly include the following:
Commerce Businesses
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We primarily generate revenue from the businesses described below:
Revenue | Businesses | |
---|---|---|
China Commerce Retail | • Taobao Marketplace — Online shopping destination | |
• Tmall(1) — Brands and retail platform | ||
• Juhuasuan — Flash sale platform | ||
China Commerce Wholesale | • 1688.com — China wholesale marketplace | |
International Commerce Retail | • AliExpress — Global consumer marketplace | |
International Commerce Wholesale | • Alibaba.com — Global wholesale marketplace | |
Cloud Computing | • Alibaba Cloud — Cloud computing services provider |
Alibaba Cloud Computing offers a complete suiterevenue of cloud computing services, including elastic computing, database services and storage and large scale computing services for our platforms and the platforms of companies integral to our ecosystem, such as Alipay, to sellers on our marketplaces, and other third-party customers, such as start-up companies in mobile applications and Internet gaming to established corporations in entertainment, consumer electronics, financial services, mobile communications, healthcare and education. We also provide Internet infrastructure services, such as web hosting and domain name registration.
Others
Our other businesses consist primarily of our acquired businesses, mainly the mobile Internet services provided by UCWeb and AutoNavi. UCWeb is China's largest mobile browser company in terms of monthly mobile active users, according to iResearch. As of May 2015, UCWeb operated the largest third-party mobile browser in India and Indonesia in terms of page view market share, according to StatCounter (data available at: http://gs.statcounter.com). UCWeb also provides various mobile value-added services, including mobile search, app distribution and a mobile games platform. AutoNavi provides digital map, navigation and location-based services in China. Another affiliate, Alibaba Pictures, produces and distribute films and television programs. It is our movie business flagship which is an importantTmall Global, part of our entertainmentinternational retail business, are captured in Tmall.
See "Item 4. Information on the Company — B. Business Overview" for a detailed discussion of our business and our ecosystem.
Our Monetization Model
The revenue we generate on our retail marketplaces is highly correlated towith the amountnumber and engagement of GMV transacted as well as to the monetization rate achievedconsumers on our platforms, the GMV.myriad value propositions of branding, marketing, promotions, distribution and productivity enhancements we offer merchants and brands, and our data and technology capabilities. The revenue we generate on our wholesale marketplaces is largely driven by the number of paying members.members and the value of the wholesale marketplaces as a marketing and distribution platform. We primarily derive revenue from online marketing services, where sellers pay us marketing fees to acquire user traffic, commissions, based on GMV for transactions settled through Alipaymemberships and membership fees.cloud computing services. In fiscal year 2015, pay-for-performance, or2016, revenue from P4P marketing services and display marketing services accounted for 48% of our total revenue, while53%, commissions and fees fromaccounted for 27%, memberships and value-added services accounted for 30%8%, and 8%cloud computing services accounted for 3%, of our total revenue, respectively. As described below,
The pricing of our marketing services areis primarily performance-based usingor impression-based. Performance-based marketing uses clicks or transactions as the measurement unit for performance. Impression-based marketing uses the number of impressions delivered to the user. The pricing of our marketing services is typically set by market-based bidding systems so that each merchantmarketer determines the price it is willing to pay for suchthe services. The price a merchant is
Marketers' willingness to pay and the amount they are willing to pay for our online marketing services is a function of the marketers' expected return on investment, which generally depends on the merchant'sfollowing factors:
China Commerce Retail. We generate revenue from our China retail marketplaces — Taobao Marketplace, Tmall and Juhuasuan — primarily through the monetization models described below. In the twelve months ended March 31, 2015,fiscal year 2016, 75% of GMV on our China retail marketplaces was settled through Alipay. The percentage of GMV transacted on our China retail marketplaces that settles through Alipay does not vary significantly across such marketplaces. In fiscal year 2015,2016, we generated 63%65% and 35%32% of our China commerce retail marketplaces revenue from online marketing services and commissions, respectively.
Online marketing services.
Online marketing services primarily consist of:
P4P marketing services, where sellersmerchants primarily bid for keywords that match product or service listings appearing in search or browser results on a cost-per-click, or CPC, basis at prices established by our online auction system, which facilitates price discovery through a market-based bidding mechanism. P4P marketing services are provided both on our marketplaces as well as through third-party marketing affiliates; and
For both P4P marketing and display marketing services, we generate a portion of suchour revenue through third-party marketing affiliates. Revenue from P4P and display marketing services provided through third-
party marketing affiliates represented 6%, 6%3% and 3% of our total revenue in fiscal years 2013, 2014, 2015 and 2015, respectively.2016, respectively, and this revenue is recognized on a gross basis.
A significant portion of that commission (of which only our share is recognized as our revenue) is shared with our third-party marketing affiliates;affiliates and
we recognize the remaining portion as our revenue on a net basis. In certain situations where we are obligated to pay for website inventory costs in fixed amounts to third-party marketing affiliates, we recognize the commission revenue on a gross basis.
Commissions on Transactions.transactions. In addition to purchasing online marketing services, sellers on Tmall and Juhuasuanmerchants also pay a commission based on a percentage of GMV for transactions settled through Alipay in the respective marketplaces.transaction value generated on Tmall or from Juhuasuan. The commission percentages typically range from 0.3%0.4% to 5%5.0% depending on the product category. The commission rate we establish varies according to our estimate of the industry profit margins in specific product categories, which we believe mainly determines the amount a seller is willing to pay to generate sales or attract buyers through this channel, and our strategic considerations.categories. For example, for categories that typically have lower gross margins, such as consumer electronics, we charge a lower commission rate, whereas for categories such as apparel, and luxury goods, where gross margins are generally higher for the merchants, we charge a higher commission rate; andrate.
| Storefront fees. Our revenue from storefront fees is primarily comprised of monthly subscription fees for Wangpu (), our storefront software that includes a suite of tools that assist merchants in upgrading, decorating and managing their storefronts. |
Purchaser of services: | Taobao Marketplace | Tmall | Juhuasuan | |||
---|---|---|---|---|---|---|
Taobao | • P4P marketing fees • Display marketing fees • Taobaoke commissions • Storefront fees • Other fees* | • Not applicable | • Commissions • Placement fees | |||
Tmall merchants | • P4P marketing fees | • Commissions | • Commissions |
China Commerce Wholesale. We generate revenue from our China wholesale marketplace, — 1688.com, — primarily through:
Historically, 1688.com was a marketplace that enabled buyers to locate sellers and find products, and it did not enable buyers and sellers to transact with each other through the platform. We have extended our business model to create a transaction platform on 1688.com to enable wholesalers to transact with buyers, the majority of whom are merchants on our retail marketplaces. Buyers and sellers are able to conduct transactions through Alipay directly on 1688.com and have access to settlement and other services on the platform. We have not yet determined what methods we will use to monetize this transaction service.
International Commerce Retail. We generate revenue from our international commerce retail marketplaces, primarily AliExpress, through commissions, which are typically 5% of transaction value. In the twelve months ended March 31, 2016, GMV for transactionson AliExpress settled through Alipay.Alipay was US$5.4 billion. We also generate revenue on AliExpress from sellersmerchants who participate in the third-party affiliate marketing affiliate program for this marketplace. Revenue generated by the third-partyand those who purchase P4P marketing affiliate program is in addition to the 5% commission sellers pay. In the twelve months ended March 31, 2015, 65% of GMV generated on AliExpress was settled through Alipay.services.
International Commerce Wholesale. We generate revenue from our global wholesale marketplaces —marketplace, Alibaba.com, — primarily through:
Cloud Computing and Internet Infrastructure.Computing. We generate revenue from cloud computing and Internet infrastructure services primarily from the time- and usage-based provision of cloud computing services, such as elastic computing, database, servicesstorage and storage andCDN, large scale computing, security and management, and application services, as well as from web-hosting and domain name registration.
Others. We generate revenue from other services that we provide to our marketplace participants, as well as through our acquired businesses, mainly the mobile Internet services provided by UCWeb, as well as other businesses such as AutoNavi, over-the-top TV services and AutoNavi.YunOS. Other revenue also includes annual fees ofpayable by Ant Financial Services to us, calculated at 2.5% of the daily average book balance of the SME loans generated by the SME loan business that we transferred to Ant Financial Services upon the completion of the restructuring of our relationship with Ant Financial Services in early February 2015. Prior to such transfer,this sale, other revenue also included interest income generated by the SME loan business.
Our Operating Philosophy
Our operating philosophy is to manage our various business units to a single profit and loss, or "P&L," rather than setting compartmentalized P&L targets for each business unit. We believe placing specific financial targets, such as revenue, margin or profit, for individual businesses or managers would create barriers against cooperation, damage the network effects among our marketplaces and negatively impact the long-term profit potential of our business. We instead ask our managers to be accountable for operating metrics that reflect the health of our marketplaces and the contribution of their units to our entire business. We believe this approach is consistent with the spirit of the Alibaba Partnership as it closely aligns interests, encourages collaboration and focuses leaders on building a sustainable and thriving ecosystem.
We do not manage our business by allocating revenue among individual marketplaces or business units. We assess the financial performance of our business by reviewing revenues generated in the China commerce and international commerce categories and, within each category, between retail and wholesale. We cross-promote and provide services of our various marketplaces to our users. We believe this approach improves the user experience and enhances our monetization opportunities across our entire business. For example, when searching for product listings, buyers on Taobao Marketplace will also see products from Tmall merchants. In addition, Tmall merchants purchase online marketing services displayed on Taobao Marketplace. Furthermore, we do not manage the business by cross-charging for internal traffic acquisition cost between Taobao Marketplace and Tmall as we believe such cross-charge or cost allocation creates friction and discourages cooperation among business units. We believe this "cross-pollination" among marketplaces improves the buyer experience, is beneficial for our merchants and encourages and develops the network effects in our ecosystem.
Factors Affecting Our Results of Operations
Our Ability to Create Value for Our Users and Generate Revenue. Our ability to create value for our users and generate revenue is driven by the factors described below:
Our Ability to Achieve and Increase Monetization.
Retail marketplaces. We primarily generate our revenue from monetization models that include online marketing services, such as P4P marketing services, as well as commissions based on a percentage of GMV transacted on Tmall, Juhuasuan and AliExpress and settled through Alipay. Ourcontinued ability to increase monetization is affected by a number of factors, including:
Monetization of our mobile platforms. The increasing use of mobile devices to access our marketplaces requires us to develop and improve mobile monetization technologies. The success of this effort will be increasingly important to the extent shopping on mobile devices displaces transactions that could have occurred on personal computers. In the quarter ended March 31, 2015, our mobile GMV exceeded 50% of our total GMV for the first time, and we expect mobile GMV as a percentage of total GMV will continue to grow, as we see increasing number of users accessing our platforms through mobile devices. Our mobile MAUs were 289 million in the month ended March 31, 2015, compared with 265 million in the month ended December 31, 2014 and 163 million in the month ended March 31, 2014. We believe that users of our mobile apps have commercial intent and that our
display of performance-based mobile marketing services provides useful content for users in a native format. Our current focus is on increasing mobile GMV and user engagement.
We are working with merchants on our marketplaces to increasingly take advantage of our mobile interfaces to drive growth in their businesses. While mobile GMV is increasing, we expect monetization rates for mobile interfaces in the near term will be lower than those we have achieved from personal computer interfaces. Over time, we expect the increasing use of mobile devices to have a positive impact on our business. We expect that our mobile monetization rates will continue to approach the rates we realize on our personal computer interfaces as:
The impact of growth in mobile activity is particularly significant on our China retail marketplaces. The following table sets forth information with respect to GMV, revenue and rates of monetization realized in respect of our China retail marketplaces for the periods presented:
| Three months ended | ||||||||||||||||||||||||
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| Jun. 30, 2013 | Sep. 30, 2013 | Dec. 31, 2013 | Mar. 31, 2014 | Jun. 30, 2014 | Sep. 30, 2014 | Dec. 31, 2014 | Mar. 31, 2015 | |||||||||||||||||
| (in millions of RMB except percentages) | ||||||||||||||||||||||||
China retail marketplaces: | |||||||||||||||||||||||||
GMV | 345,134 | 373,659 | 528,709 | 430,085 | 500,916 | 555,666 | 787,047 | 600,092 | |||||||||||||||||
Mobile GMV | 41,299 | 54,823 | 104,391 | 118,001 | 164,428 | 199,054 | 326,889 | 303,772 | |||||||||||||||||
as a percentage of GMV | 12% | 15% | 20% | 27% | 33% | 36% | 42% | 51% | |||||||||||||||||
Revenue | 8,667 | 8,645 | 16,149 | 9,371 | 12,639 | 12,769 | 21,275 | 13,049 | |||||||||||||||||
Mobile revenue | 240 | 332 | 1,171 | 1,162 | 2,454 | 3,719 | 6,420 | 5,247 | |||||||||||||||||
as a percentage of revenue | 3% | 4% | 7% | 12% | 19% | 29% | 30% | 40% | |||||||||||||||||
Monetization rate | 2.51% | 2.31% | 3.05% | 2.18% | 2.52% | 2.30% | 2.70% | 2.17% | |||||||||||||||||
Mobile monetization rate | 0.58% | 0.61% | 1.12% | 0.98% | 1.49% | 1.87% | 1.96% | 1.73% |
Over time, we have begun to increasingly monetize mobile GMV beyond commissions through the introduction of online marketing services through mobile interfaces. As a result of these monetization efforts, our mobile monetization rate began to increase significantly starting from the three months ended December 31, 2013. The mobile monetization rate of 1.73% in the three months ended March 31, 2015 increased by 77% when compared with the 0.98% in the same period in the prior year, while mobile revenue increased by 352% over the same period.
Wholesale Marketplaces. Revenue on our wholesale markets — 1688.com and Alibaba.com — is primarily driven by the number of paying members, membership renewal rates and other value-added marketing services we provide to members. The number of buyers using our wholesale marketplaces will affect sellers' willingness to purchase and renew membership packages with us and to use our marketing services. We periodically review ways to increase value for our participants and create new monetization opportunities for our wholesale marketplaces. For example, going forward, we may generate revenue on 1688.com through monetization of activity on the transaction platform, although we have not yet determined what methods we will use to monetize this transaction service.
Perception of Merchants of the Expected Value of Marketing Spending across Periods. On our China retail marketplaces, revenue may be viewed as the fees sellers are willing to pay to distribute and promote theirscalable products and services build their brandsthat adapt to the quickly evolving industry trends and acquire more customers through our marketplaces. The willingness of a seller
to pay these fees is a function of the sales and profit the seller expects to generate on our marketplaces. These fees may be derived from online marketing services, commissions or from various other fee-based services. The mix of services chosen by a seller to achieve its business goals and promote its products and storefronts may shift over time. On an annual basis, revenue generally grows at a similar rate as GMV, even though the differential between GMV and revenue growth rates is more pronounced on a quarterly basis. Due to promotional events and higher consumer spending in the quarters ended June 30 and December 31, merchants are inclined to allocate more of their marketing spending during these periods to compete for and attract this consumer spending, which therefore drives revenue growth during those periods disproportionately to GMV growth and because increased demand for such services also increases pricing. Conversely, during the quarters ending September 30 and March 31, when merchants expect lower seasonal sales, they generally allocate less advertising spend and revenue growth is less pronounced than GMV growth. These trends tend to even out over any given year such that revenue growth correlates with GMV growth on an annual basis.
Operating Leverage of Our Marketplace Business Model. Our business model has significant operating leverage and our ecosystem enables us to realize structural cost savings, particularly for our retail marketplace businesses.savings. For example, Taobao Marketplace drives significant traffic to Tmall as Tmall product listings also appear on Taobao Marketplace search result pages. In addition, promotional slots purchased on Juhuasuan by Taobao Marketplace and Tmall sellersmerchants also drive buyersconsumers to Taobao Marketplace and Tmall storefronts, thereby enabling sellersmerchants to introduce buyersconsumers to additional product and service offerings beyond those featured on the particular Juhuasuan promotion and drive additional user traffic. This network effect allows for lower traffic acquisition costs across our marketplaces. In addition, due to the large number of buyersconsumers on our marketplaces, we are able to attract a large number of sellers,merchants, which in turn provides a strong source of customers for our online marketing and storefront services. SellersMerchants purchase marketing services through a self-service platform on our China retail marketplaces. As a result, we do not rely on a field sales force to generate revenue for our China retail marketplaces. Our business model also enables us to avoid the costs, risks and capital requirements associated with sourcing merchandise or holding inventory.
Our Investment in User Base, Technology, People and Infrastructure. We have made, and will continue to make, significant investments in our platformplatforms and ecosystem to attract consumers and businesses,merchants, enhance user experience and expand the capabilities and scope of our marketplaces.platforms. We expect our investments will include
developing and marketing new online and mobile products and services, enhancing our cloud computing business, includingand YunOS, ana cloud-based mobile operating system for Internet of Things devices, developing new ways to interact with consumers through our mobile media and entertainment devices, andassets, developing new software tools and enablers to attract additional buyersconsumers and sellersmerchants to our marketplaces.marketplaces as well as executing our globalization strategy. Our operating leverage and margin levels enable us to continue to invest in our people, particularly engineers, scientists and product management personnel, as well as in our underlying technology capabilities and infrastructure. In addition, as a result of our financial strength, we expect to invest in the above mentioned new and existing businesses which will lower our margins but deliver overall long-term growth.
Strategic Investments and Acquisitions. We have made, and intend to continue to make, strategic investments and acquisitions to increase user acquisition and engagement, improve customer experience and expand our user baseproduct, service, and add complementary products and technologies.content offerings. Our strategic investments and acquisitions may affect our future financial results.results, including our margins and our net income. For example, we expect that our recent acquisitions including UCWeb, OneTouchof Youku Tudou and AutoNavi resulteda controlling stake in an increase of expenses but we do not expect theyLazada will materially increasehave a negative effect on our revenuefinancial results, at least in the short term. Moreover, we expect acquisitions of entities with lower overall margins than our margins will have the effect of lowering our margins.short-term. In addition, some of our acquisitions and investments may not be successful, and we may incur impairment charges in the future.
Components of Results of Operations
Revenue
The following table sets forth the principal components of our revenue for the periods indicated:
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||||||||||||||||||||
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| 2013 | 2014 | 2015 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||||||||||||
| RMB | % of revenue | RMB | % of revenue | RMB | US$ | % of revenue | RMB | % of revenue | RMB | % of revenue | RMB | US$ | % of revenue | ||||||||||||||||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||||
China commerce | ||||||||||||||||||||||||||||||||||||||||||||
Retail | 26,970 | 78 | % | 42,832 | 82 | % | 59,732 | 9,636 | 78 | % | 42,832 | 82 | % | 59,732 | 78 | % | 80,033 | 12,412 | 79 | % | ||||||||||||||||||||||||
Wholesale | 2,197 | 6 | % | 2,300 | 4 | % | 3,205 | 517 | 4 | % | 2,300 | 4 | % | 3,205 | 4 | % | 4,288 | 665 | 4 | % | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||
Total China commerce | 29,167 | 84 | % | 45,132 | 86 | % | 62,937 | 10,153 | 82 | % | 45,132 | 86 | % | 62,937 | 82 | % | 84,321 | 13,077 | 83 | % | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||
International commerce | ||||||||||||||||||||||||||||||||||||||||||||
Retail | 392 | 1 | % | 938 | 2 | % | 1,768 | 285 | 3 | % | 938 | 2 | % | 1,768 | 3 | % | 2,204 | 342 | 2 | % | ||||||||||||||||||||||||
Wholesale | 3,768 | 11 | % | 3,913 | 7 | % | 4,718 | 761 | 6 | % | 3,913 | 7 | % | 4,718 | 6 | % | 5,425 | 841 | 6 | % | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||
Total international commerce | 4,160 | 12 | % | 4,851 | 9 | % | 6,486 | 1,046 | 9 | % | 4,851 | 9 | % | 6,486 | 9 | % | 7,629 | 1,183 | 8 | % | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||
Cloud computing and Internet infrastructure | 650 | 2 | % | 773 | 2 | % | 1,271 | 205 | 2 | % | ||||||||||||||||||||||||||||||||||
Cloud computing | 773 | 2 | % | 1,271 | 2 | % | 3,019 | 468 | 3 | % | ||||||||||||||||||||||||||||||||||
Others | 540 | 2 | % | 1,748 | 3 | % | 5,510 | 889 | 7 | % | 1,748 | 3 | % | 5,510 | 7 | % | 6,174 | 958 | 6 | % | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||
Total revenue | 34,517 | 100 | % | 52,504 | 100 | % | 76,204 | 12,293 | 100 | % | 52,504 | 100 | % | 76,204 | 100 | % | 101,143 | 15,686 | 100 | % | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
GMV | 1,077,169 | 1,677,587 | 2,443,721 | 394,212 | 1,677,587 | 2,443,721 | 3,092,385 |
We generate substantially all of our revenue from our retail and wholesale marketplaces. We also earn revenue from services associated with our cloud computing and Internet infrastructure services as well asand other revenue primarily consisting of revenue generated by acquired businesses, mainly thefrom mobile Internet services provided by UCWeb and AutoNavi, as well as interest income generated by the SME loan business before this business was transferred to Ant Financial Services in early February 2015 and annual fee of 2.5% of the daily average book balance of the SME loans generated by the SME loan business after such transfer. See "— Our Monetization Model."UCWeb. Substantially all of our revenue is attributable to our businesses in China. See "— Our Monetization Model" for additional information regarding our revenue.
Cost of Revenue
The principal components of our cost of revenue include: payment processing fees paid to Alipay or other financial institutions; traffic acquisition costs paid to third-party marketing affiliates either at a fixed price or on a
revenue sharing basis; expenses associated with the operation of our websites, such as bandwidth and co-location fees, and depreciation and maintenance expenses for our computers, servers, call centers and other equipment; salary, bonuses, benefits and share-based compensation expense relating to customer service and web operation personnel and payment processing consultants; unit-volume driven rebates;logistics costs relating to fulfillment services provided to us by our affiliate Cainiao Network, primarily related to Tmall Supermarket; rebates and subsidies mainly relating to our new business initiatives; business taxes and related surcharges; and allowance for doubtful accounts in relation to the micro loans. Due to tax reform in China that replaced the business tax withloans and VAT which is netted against revenue, business tax is no longer a significant part of cost of revenues starting from late fiscal year 2013.receivables.
Product Development Expenses
Product development expenses primarily include salaries, bonuses, benefits and share-based compensation expense for our employees engaged in the development, maintenance and enhancement of the infrastructure, applications, operating systems, software, databases and networks for our marketplaces, mobile products and service platforms. In addition, product development expenses include royalty fees paid to Yahoo pursuant to the Yahoo TIPLA. This royalty fee arrangement was terminated upon completion of our initial public offering in September 2014. We expense all of our product development costs as they are incurred.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of online and offline advertising expenses, promotion expenses, sales commissions paid for membership acquisition for our wholesale marketplaces, and salaries, bonuses, benefits and share-based compensation expense for our employees engaged in sales and marketing functions.
General and Administrative Expenses
General and administrative expenses consist mainly of salaries, bonuses, benefits and share-based compensation expense for our management and administrative employees, professional services fees, office facilities, other support overhead costs and charitable contributions. In fiscal year 2014, these expenses included an equity-settled donation expense of RMB1,269 million relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai. As there are no vesting conditions attached to the above share options, equity-settled donation expense of RMB1,269 million was recognized in full. See note 9 to our consolidated financial statements for the years ended March 31, 2013, 2014, 2015 and 20152016 included elsewhere in this annual report for further information on this expense.
Interest and Investment Income, Net
Interest and investment income, net consists of interest income, investment gain or loss related to our treasury management activities and gain or loss on deemed disposals, disposals and revaluation of our long term equity investments. Our interest and investment income, net became more significant in fiscal year 2015 as a result of a net gain of RMB6,535 million (US$1,054 million) recognized with respect to the revaluation of previously held equity interests, relating primarily to the step acquisitions of UCWeb, OneTouch and AutoNavi. In fiscal year 2016, we also recognized a deemed disposal gain of RMB24,734 million (US$3,836 million) arising from the deconsolidation of Alibaba Pictures and a gain of RMB18,603 million (US$2,885 million) from the revaluation of our previously held equity interest in Alibaba Health.
Interest Expense
Our interest expense is comprised of interest payments and amortization of upfront fees and incidental charges associated with our bank borrowings and unsecured senior notes issued in November 2014 as well as dividends paid on our redeemable preference shares, which we redeemed in May 2013. Our interest expense became more significant starting from fiscal year 2013 as a result ofto refinance our previous credit facilities, which were used to fund our privatization of Alibaba.com and to partially finance the repurchase of our ordinary shares from Yahoo in September 2012, and the dividends paid on the US$800 million redeemable preference shares we issued to Yahoo in September 2012. In November 2014, we refinanced our previous US$8.0 billion credit facility with the proceeds from our US$8.0 billion unsecured senior notes offering.syndicated loan arrangements. In addition, we obtained a US$3.0 billion revolving credit facility in August 2014 and a five-year term loan facility of US$3.0 billion in March 2016, which has been subsequently upsized to US$4.0 billion, both of which we have not yet drawn.drawn as of March 31, 2016.
Other Income, Net
Other income, net primarily consists of royalty fees and software technology service fees paid by Alipay, government grants as well as government grants.exchange gain or loss. Alipay pays us royalty fees and software technology service fees pursuant to an intellectual property and software technology services agreement, the terms of which, including the amount of the royalty fees and services fees, we, Ant Financial Services and Alipayas amended in August 2014.2014, or the amended Alipay IPLA. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Share and Asset Purchase Agreement — Alipay Intellectual Property License and Software Technology Services Agreement" for further information on the arrangements between us and Alipay. Government grants primarily relate to grants by central and local governments in connection with our contributions to technology development and investments in local business districts. These grants may not be recurring in nature, and we recognize such income when the grants are received and no further conditions need to be met. Exchange gain or loss, arising from our operations and treasury management activities, recognized in our income statement is largely a result of depreciation or appreciation of RMB, respectively. The amount is also partly impacted by such currency movements on our hedging activities related to the portion that is deemed ineffective from an accounting perspective.
Income Tax Expense
Our income tax expense is comprised primarily of current tax expense, mainly attributable to certain profitable subsidiaries in China, and deferred tax expense, mainly including withholding tax on dividends to be distributed by our major subsidiaries operating in China.
Taxation
Cayman Islands Profits TaxAutoNavi
Under Cayman Islands law,AutoNavi is a leading provider of digital map, navigation and location-based services in China.
DingTalk
DingTalk is our companyproprietary enterprise communications app that provides support for text, voice and video communication, work flow management and collaboration among team members and enterprises of various sizes. With a built-in enterprise directory, users can initiate text chats or voice and video conference calls as well as secured group chats with members of their organization. DingTalk unifies the tasks of critical communication and collaboration in the work place.
Alibaba Health
Alibaba Health is not subjectour flagship vehicle to income, corporation or capital gains tax, and no withholding tax is imposed uponbring innovative solutions to the payment of dividends.healthcare industry.
Hong Kong Profits TaxMonetization Platforms and Systems
Our company's subsidiaries incorporated in Hong Kong were subject to Hong Kong profits tax rate of 16.5% in fiscal years 2013, 2014 and 2015.
PRC Income TaxAlimama
UnderAlimama is our marketing technology platform that provides the PRC Enterprise Income Tax Law,publisher-side serving and demand-side functionalities for merchants and brands to place various marketing display formats on our marketplaces and other third-party properties. The platform supports P4P marketing based on keyword search rankings or EIT Law,display marketing in fixed positions that are bid through auctions, as well as cost-per-thousand impression-based (CPM) marketing formats via the standard enterprise income tax rate is 25%. Entities qualifying as Highdisplay of photos and New Technology Enterprises enjoy a preferential tax rate of 15%. Entities recognized as Software Enterprises are exempt from the EIT for two years beginning from their first profitable calendar year and are entitled to a 50% reduction in EIT for the following three calendar years. Furthermore, entities recognized as key software enterprises within the PRC national plan enjoy a preferential EIT rate of 10%. Certain subsidiaries received the above preferential tax treatments during calendar years 2012, 2013, 2014 and 2015. One of our major subsidiaries in China, Zhejiang Tmall Technology Co. Ltd., or ZTT, which is a wholly foreign-owned enterprise primarily involved in the operation of Tmall, is currently in its third profitable year and as a result is no longer exempt from paying EIT but will be subject to an EIT rate of 12.5% (or 50% of the standard statutory rate) in calendar years 2014, 2015 and 2016, and to an EIT rate of 15% thereafter for so long as the subsidiary continues to qualify as a High and New Technology Enterprise. Primarily as a result of this change, our effective tax rate increased from 11.9% in fiscal year 2014 to 19.8% in fiscal year 2015.
Business Tax, VAT and Other Leviesgraphics.
Our PRC subsidiaries were subjectThe ranking of P4P search results on our core commerce marketplaces is based upon proprietary algorithms that take into account the bid price of keywords, the popularity of an item or merchant, customer feedback ranking of merchants and quality of product displays. For display marketing, the Alimama platform serves marketing messages based on data from our ecosystem, including transactions on our core commerce platforms, payment data from Ant Financial Services, logistics data from Cainiao Network, user navigation and behavioral data from our core commerce and media entertainment properties, as well as demographic and location-based data. The relevance and comprehensiveness of data based on commercial activities and user activities around our ecosystem provide a powerful and unique advantage for Alimama to business tax and related surcharges ontarget the revenue earned for services provided in China. The applicable business tax rate was 5%. In our consolidated income statement, business tax and related surcharges for revenue earned from customers are recognized as cost of revenue. Effectively starting from late fiscal year 2013, our major PRC subsidiaries became subject to VAT on revenue earned for most services under a national VAT reform program which replaced the business tax regime in China. In general, the applicable VAT rate on the revenue earned for services is 6% with companies entitled to credit VAT paid on certain purchases against VAT on sales. Revenue is recognized net of VAT in our consolidated income statement.
PRC Withholding Tax
Pursuantrelevant information to the EIT Law, a 10% withholding tax is generally levied on dividends declared by companies in China to their non-resident enterprise investors. A lower withholding tax rate of 5% is applicable for direct foreign investors incorporated in Hong Kong with at least a 25% equity interest in the PRC company and who meet themost relevant conditions or requirements pursuant to the tax arrangement between the PRC and Hong Kong. As the equity holders of our major subsidiaries in China are qualified Hong Kong incorporated companies, our deferred tax liabilities for distributable earnings are calculated based on a 5% withholding tax. As of March 31, 2015, we have fully accrued the withholding tax on the earnings distributable by all of our subsidiaries in China.
Share-based Compensationusers.
We have various equity incentive plans pursuantdeveloped a system that we call Super ID to whichtrack users across different properties and devices. For example, we are able to identify a user watching a Youku Tudou video on a PC as the employees, consultantssame user shopping on our Taobao App. Our Super ID system takes disparate data and directors of our company, our affiliates and certain other companies are granted options or awarded RSUs to acquire our ordinary shares. We believe share-based awards are vital to attract, incentivize and retain our employees and consultants. In addition to on-hire grants for new recruits above a specific job level, we also make performance grants and promotion grants on an annual basis to our top performing employees. RSUs and share options granted inattributes the above categories are generally subjectdata to a four-year vesting schedule. Depending on the naturesingle user, and the purpose of the grant, share optionsin this we can provide marketers with valuable insights into user behavior and RSUs generally vest 25% upon the first anniversary of the vesting commencement date or 50% upon the second anniversary of the vesting commencement date, and thereafter 25% every year.preferences.
Shortly before The Alimama technology platform supports marketing delivered through personal computers and mobile devices. Under Alimama's bidding system, marketers may set a higher or lower bid price for mobile marketing than the bid price for marketing on personal computers. Alimama also has an affiliate marketing program to place marketing displays on third-party websites and mobile apps, thereby enabling marketers, if they so choose, to extend their marketing and promotional reach to properties and users beyond our initial public offeringown marketplaces.
We believe we have one of the largest online marketing affiliate networks in September 2014, we granted certain RSUsChina in terms of revenue shared with third-party website properties and share optionsmobile apps. Our affiliate marketing program not only provides additional traffic to our seniorcore commerce marketplaces, but also generates revenue to us. Under the Taobaoke program, merchants on Taobao Marketplace and Tmall can generate additional traffic and transactions from third-party websites and mobile apps, and the marketer pays commissions based on a percentage of transaction value sourced from such third-party affiliates. We share a significant portion of that commission with our third-party affiliate partners.
Alimama operates the Taobao Ad Network and Exchange, or TANX, one of the largest real-time bidding online marketing exchanges in China. TANX helps publishers to monetize their media inventories both on web properties and mobile apps. TANX automates the buying and selling of billions of marketing impressions on a daily basis. Participants on TANX include publishers, marketers and demand side platforms operated by agencies.
Alimama also offers a data management team membersplatform through TANX, or DMP, for marketers that wish to execute their campaigns with proprietary and tailored data. DMP helps the marketer to identify targeted audience groups by mapping their own proprietary data set to the data captured in our ecosystem. By customizing and tagging the attributes of consumers, the marketer is able to reach and expand its targeted audiences.
UCWeb Mobile Marketing System
Our mobile search engine, Shenma (), monetizes through a keyword bidding system that enables marketers to reach users who search for information related to their products or services. We engage third-party distributors to sell some of our mobile marketing services to marketers. UC Browser monetizes primarily through time-based display marketing where marketers place icons that link to their webpage or apps in UC Browser. Its news feed feature UC Headline enables marketers to place marketing messages in news feed on cost-per-click (CPC) basis or impressions on time basis. Our mobile marketing platform enables marketers to launch targeted marketing for apps, games, web pages and services on mobile media including UC Browser, UC Headline and third-party media partners, leveraging our deep consumer insights.
Youku Tudou Advertising System
Youku Tudou monetizes primarily through brand advertising. Its online advertising services include in-video, display, sponsorship and other forms of advertisements. In-video advertisements appear at certain times during the playback of a video. These video advertisements can be pre-roll, post-roll, mid-roll or pause advertisements. Display advertisements can be delivered alongside a video and may take the form of graphical banners or text hyperlinks. Other forms of advertisements include product placements in the web video series produced in-house, sponsored live events or viral videos produced in-house. Youku Tudou's advertising solutions present brand advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia formats with the interactivity and precise targeting capabilities of the Internet.
Other Major Elements of our Ecosystem
Logistics
Cainiao Network is a joint venture that we formed in May 2013 with other shareholders who are engaged in logistics, retail, and real estate, including four major express courier companies in China. Cainiao Network does not deliver packages itself. It operates a logistics data platform that leverages the capacity and capabilities of logistics partners to fulfill transactions between merchants and consumers at a large scale. Cainiao Network uses
data insights and technology to improve efficiency across the logistics value chain. The proprietary data platform provides real-time access to data for merchants to better manage their inventory and warehousing and for consumers to track their orders. In addition, Cainiao Network's data platform helps logistics service providers to improve the efficiency and effectiveness of their services, such as leveraging data to optimize the delivery routes used by express courier companies.
Cainiao Network provides two major types of services — assisted-delivery services and end-to-end logistics solutions.
Through the platform approach, Cainiao Network integrates the resources of logistics service providers to build out the logistics ecosystem. As of March 31, 2016, Cainiao Network's fifteen strategic express courier partners employed over 1,700,000 delivery personnel in more than 600 cities and 31 provinces in China, according to data provided by them. Collectively they operated more than 150,000 hubs and sorting stations. The top six of these express courier partners handled the delivery of the majority of packages from our China retail marketplaces in the twelve months ended March 31, 2016. We believe that orders from transactions generated on our marketplaces represented a significant portion of these express courier partners' total delivery volumes in the twelve months ended March 31, 2016. Cainiao Network is still in an early stage of development. It has yet to monetize the majority of the value-added services it provides under the assisted-delivery model.
In addition to enabling the fulfillment and delivery of orders that fit in standard size packages, we and Cainiao Network also partner with specialized logistics service providers for category-specific solutions where items require special handling and services. The following are examples of category-specific solutions that we and Cainiao Network have organized to enhance the consumer experience:
In order to enhance consumer experience and improve efficiency in last-mile delivery in both rural and urban areas, Cainiao Network is also engaged in initiatives including arranging delivery from county-level Rural Taobao stations to villages, and setting up pick-up stations around urban communities.
During the twelve months ended March 31, 2016, Cainiao Network and its logistics partners enabled the delivery of 12.2 billion packages from our China retail marketplaces. Currently, Cainiao Network primarily derives its revenue from end-to-end logistics solutions and generates a significant portion of its revenue from providing these services to Tmall Supermarket.
Proprietary Logistics Data Platform
Cainiao Network operates a proprietary logistics data platform. This platform links consumers, merchants and logistics service providers and allows them to share information relating to orders, delivery routes and time, and user feedbacks. The logistics data platform can interface with a broad range of systems including our marketplace transaction systems, Alipay's payment system, third-party transportation management systems, and the CRM, ERP and warehouse management systems of merchants. Information generated from the data platform serves many purposes: merchants can review the performance grants that were subject toof delivery service providers on different routes; logistics service providers can compare their performance against peers; and consumers can track orders, receive delivery time information, and stay in touch with delivery personnel.
Recent Equity Financing of Cainiao Network
Cainiao Network completed a six-yearround of equity financing of approximately RMB10 billion in March 2016. Existing shareholders and new investors, including major sovereign wealth funds and private equity funds, participated in the financing. We subscribed for Cainiao Network's shares on an approximately pro rata vesting schedule. We believe share-based awards are the appropriate tool to align the interestsbasis. As of the grantees with those of our shareholders.March 31, 2016, we own an approximately 47% equity interest in Cainiao Network. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities — Logistics — Cainiao Smart Logistics Network Limited."
Payments
In addition, Junhan,Alipay, a major equity holderwholly-owned subsidiary of Ant Financial Services, grantedprovides payment and escrow services for transactions on Taobao Marketplace, Tmall, 1688.com, AliExpress and certain share-based awards similarof our other platforms. Alipay also provides payment and escrow services to share appreciation awards linkedthird parties in China and overseas. Alipay is the principal means by which consumers pay for their purchases on our China retail marketplaces. Except for credit card transactions where Alipay charges the merchant to the valuationcover processing costs with banks, neither we nor Alipay charge any payment fees to merchants doing business on our platform. Instead, we pay Alipay a fee to cover its cost of operating payment and escrow services it provides on our marketplaces pursuant to a commercial agreement with Ant Financial Services to most ofand Alipay. For additional details on our employees. These share-based awards have vesting schedules that are conditioned upon the fulfillment of requisite services to us, and such awards will be settled in cash by Junhan upon disposal by our employees. We have no obligation to reimburse Junhan,commercial relationship with Ant Financial Services or its subsidiaries for the cost associated with these awards. Seeand Alipay, see "Item 7. Major Shareholders and Related Party Transactions — B. Related Party TransactionTransactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Equity-based AwardsSubsidiaries."
Alipay also offers a mobile app, Alipay Wallet, which further facilitates mobile commerce and other consumer services and digital transactions by making payment accessible and convenient through a mobile device. During the twelve months ended March 31, 2016, there were over 450 million Alipay annual active users.
Local Services
Through investee companies, we are engaged in the online-to-offline, or O2O, local services business involving restaurants, food delivery, movie ticketing and retail stores, among others.
Koubei Restaurant and Local Services Guide
In 2015, we and Ant Financial Services set up the joint venture Koubei (), one of the leading restaurant and local services guide businesses in China. Koubei operates O2O services in conjunction with Alipay and AutoNavi's map navigation by generating demand to Our Employeeslocal establishments such as restaurants, supermarkets and convenient stores by offering consumers a Related Party.""closed loop" experience, from acquiring information on mobile to finding the store to claiming discounts to payment. For the three months ended March 31, 2016, Koubei generated RMB21 billion (US$3 billion) in GMV settled through Alipay with merchants.
Ele.Me Food Delivery
In March 2016, we jointly invested with Ant Financial Services in Ele.me (), a leading food delivery company in China. Consumers using the company's food delivery app can order meals, snacks and beverages on a mobile device. Through a delivery network of employed and outsourced personnel, the company's service covered over 300 cities in China as of March 31, 2016. Under a cooperation agreement with the company, food orders generated from the Taobao App and Alipay Wallet are fulfilled by Ele.me.
Movie Ticketing
We recognized share-based compensation expense of RMB1,259 million, RMB2,844 millionAlibaba Pictures, our equity investee and RMB13,028 million (US$2,102 million) in fiscal years 2013, 2014 and 2015, respectively, representing 4%, 5% and 17%the flagship unit of our revenue in those respective periods. The following table sets forthmovie business, operates an analysisonline movie ticketing platform. In May 2016, the platform raised RMB1.7 billion Series A financing from a group of share-based compensation expenseinvestors led by function for the periods indicated.
| Year ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||||
| RMB | RMB | RMB | US$ | |||||||||
| (in millions) | ||||||||||||
Cost of revenue | 382 | 1,154 | 4,176 | 674 | |||||||||
Product development expenses | 453 | 795 | 3,876 | 625 | |||||||||
Sales and marketing expenses | 120 | 189 | 1,235 | 199 | |||||||||
General and administrative expenses | 304 | 706 | 3,741 | 604 | |||||||||
| | | | | | | | | | | | | |
Total | 1,259 | 2,844 | 13,028 | 2,102 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Share-based compensation expense increased significantly in fiscal year 2015 due to performance-based and retention grants of share-based awards to our employees and members of senior management prior to our initial public offering. In addition, as a result of "mark-to-market" accounting required under U.S. GAAP, the increase in share-based compensation also reflected the re-measurement charge relating to our share-based awards granted to the employees ofCDH Investments, Ant Financial Services and share-based awardsSina.com.
Customer Service for China Retail Marketplaces
Merchants on our platforms serve their customers with tools we provide. In addition, our customer service representatives serve consumers and merchants on our marketplaces through telephone hotlines, real-time instant messaging and online inquiry systems. Our dispute resolution system's adjudication panel of Ant Financial Services grantedexperienced consumers and merchants provides an easy way for consumers and merchants to resolve their disputes, while other more complicated disputes are referred to our employeescustomer service representatives. In the twelve months ended March 31, 2016, we received dispute cases representing approximately 0.04% of annual orders placed on our China retail marketplaces.
With certain exceptions, consumers on our China retail marketplaces may return the purchased goods within seven days from their receipt. Alipay's payment escrow services ensure efficient refunds. In addition, for qualified buyers with good credit history, we may accelerate refund procedure by Junhan.making the refund payment directly to the buyer upon the buyer's refund application and providing of proof of shipment for the return goods.
Transaction Platform Safety Programs
The expense arising from Ant Financial Services' share-based awards granted to our employees represents a non-cash charge that will not result in any economic costs or equity dilution to our shareholders. It isPreserving the view of Jack Ma, our executive chairman, who controls Ant Financial Services, that the grant of these equity awards to our employees will benefit us because of the strategic importance of Ant Financial Services as a payment service provider to us and our significant participation in the profit and value accretion of Ant Financial Services through our agreements with Ant Financial Services.
We expect that our share-based compensation expense will continue to be affected by the change in fair valueintegrity of our sharesmarketplaces is a top priority for us. We are committed to protecting intellectual property rights and eradicating counterfeit merchandise and fictitious activities. Counterfeiting and infringement of intellectual property, both online and offline, are industry-wide issues affecting brands and merchants globally. We work with rights holders, trade associations and governments around the quantity of awards we grant to our employees and consultants in the future. Furthermore, we expect that our share-based compensation expense will continue to increase, primarily because of the expected increase in fair value of share-based awards of Ant Financial Services. See "— Critical Accounting Policies and Estimates — Share-based Compensation Expense and Valuation of Our Ordinary Shares" for additional information regarding our share-based compensation expense.
Recent Investment, Acquisition and Strategic Alliance Activities
In addition to organic growth, we have made, or have entered into agreements to make, strategic investments, acquisitions and alliances that are intended to increase our service offerings and expand our capabilities. Theworld.
financial results for these strategic transactions that were completed are reflected inAnti-Counterfeiting
To protect consumers, merchants and brands and to maintain the integrity of our operating results beginning with the period of their respective completion. Minority investments are accounted for under the equity method ifmarketplaces, we have significant influencetaken the following measures through investment in common stock or in-substance common stock over the investees, or otherwise under the cost method.
Our investmentour platforms, with other industry participants and acquisition strategy focuses on enhancing three aspects of our business:with governmental authorities:
Combatting Fictitious Transactions
With respect to fictitious activities, we have and will continue to invest significant resources in protecting the trust and credit system we have built on our marketplaces. Measures to prevent, detect and reduce the occurrence of fictitious transactions on Taobao Marketplace and Tmall we have implemented include:
Penalties
We aim to protect consumers from being affected by excluding counterfeit merchandise and fictitious transactions from the ranking system, credit system and transaction volume statistics. When such activities are confirmed, we penalize the parties involved through a number of means including: limiting the relevant merchant's ability to add listings, imposing restrictions on participation in promotional activities on our marketplaces, placing
the relevant merchant's product listings at the bottom in search ranking results, closing down storefronts and permanently banning the merchant from opening any accounts on our platforms.
Consumer Protection
We believe every consumer has the right to safety and protection from false and misleading claims. We encourage our merchants to make product quality a priority and have set up various programs to this end. In addition, all Tmall merchants are required to contribute to and maintain a consumer protection fund for the benefit of consumers. Consumer protection fund deposit requirements vary by product category and typically range from RMB50,000 to RMB150,000 per storefront. For Tmall Global merchants, the consumer protection fund deposit requirement is typically RMB150,000 for standard storefronts. The majority of Taobao Marketplace merchants maintain individual consumer protection funds whose minimum amounts range from RMB1,000 to RMB10,000. All Tmall and Taobao Marketplace merchants are required to sign agreements with us authorizing us to make deductions from their Alipay accounts in the event of confirmed consumer claims. Many merchants on both Tmall and Taobao Marketplace fulfill more than our basic requirements to demonstrate their confidence in the quality of their services and products. They provide a larger deposit than required and make additional service commitments, such as expedited shipment, free maintenance for electronics and installation services for furniture purchases. We incentivize merchants to set up customer protection funds by programming our search results to prioritize the rankings of product listings for merchants who have established these funds. In addition, the consumer protection fund amounts are displayed on the merchant's information page. As of March 31, 2016, consumer protection funds deposited in the Alipay accounts of merchants on our China retail marketplaces in aggregate totaled over RMB17 billion. If the amount in a merchant's consumer protection fund is insufficient, we may still choose to compensate consumers ourself for any losses, although we are not legally obligated to do so.
Our Technology
Technology is key to our success in achieving efficiency for our business, improving the user experience, and enabling innovation. As of March 31, 2016, we employed a team of over 18,000 research and development personnel engaged in building our technology platform and developing new online and mobile products. Key components of our technology include those described below:
Cloud Computing
Our cloud computing platform, called Apsara, is a general purpose distributed computing platform built with proprietary technology that enable server clusters to perform with enhanced computing power. Apsara offers a suite of cloud services including elastic computing, database storage and services, and large-scale data processing services through web-based API.
Content Delivery Network
The technology underlying AliCDN, our content delivery network, accelerates the loading of product photographs on web pages delivered to users and offers them a fast and smooth experience.
Data Science
Our data science technology serves various types of data-intensive computational needs, including deep learning, high-volume batch processing and multi-variable and multi-dimensional real-time analytics. The data mining and transaction, payment and behavioral data science capabilities are used extensively in numerous applications such as search and online marketing on our marketplaces.
Distributed Relational Database
OceanBase, our proprietary distributed relational database management system, plays a critical role in supporting transaction processing on our marketplaces in a cost-efficient manner.
Search and Online Marketing
Our standard product unit database, or SPU database, is built on the vast amount of items listed on Taobao Marketplace and Tmall. The comprehensive transactional and user behavior data generated on our marketplaces enable us to construct a powerful search engine that generates personalized results.
Our online marketing technology platform supports millions of online marketers and delivers tens of billions of online marketing impressions every day. Our online marketing technology enables us to continuously improve the effectiveness of our online marketing services for our merchants through the use of aggregated behavioral targeting data and analytics.
Deep Learning
Alimama utilizes cloud-based deep learning extensively to enhance the consumer targeting efficiency and return on investments for online marketers of our P4P marketing, display marketing and DMP service offerings. Supported by our Apsara cloud computing system, Alimama operates a cluster of servers that is capable of analyzing terabytes of data points for the modeling of tens of billions online marketing impressions.
Security
We are committed to maintaining a secure e-commerce ecosystem. Our back-end security system handles hundreds of millions of instances of malicious attacks each day to safeguard the security of our e-commerce and cloud platforms.
Multi-Region Availability
Compared to social media platforms, the data availability and security requirement for transactions platforms are higher. Our transaction system is kept live and available in data centers in multiple regions in China. This configuration provides more scalability, stability and redundancy than the traditional redundancy configurations.
YunOS
Our YunOS is a cloud-based mobile operating system for smartphones, Internet of Things devices, set-top boxes, smart televisions and smart cars, among others. With YunOS, users can conveniently and securely synchronize data, such as call data, text messages and photos, across their devices through the cloud. System level based H5/Web, dynamic service linking and unified data technologies, as well as a multi-level security framework enable developers to deliver location-based and contextual Internet services with a focus on the data needs of users.
Sales and Marketing
As Taobao Marketplace is China's largest online shopping destination, we enjoy significant organic traffic through word-of-mouth and general awareness of our brand and platform. We believe word-of-mouth, and the reputation and ubiquitous awareness of our brand and platforms in China and, increasingly, abroad, provide us with the best and most cost-efficient marketing channel. We employ a variety of methods to attract potential merchants and consumers, paying members, online marketers and other ecosystem participants and to promote our brands.
We generate the majority of our revenues through online marketing services from our merchants. As these merchants are mostly participants on our marketplaces, we do not need to rely on a large sales force for our retail marketplaces. The majority of our sales staff is engaged in selling membership packages to registered members of our wholesale marketplaces through telephone sales and field sales.
Corporate Social Responsibility
Since our founding, we have been highly committed to sustainable corporate responsibility projects, both through charitable endeavors and by extending the benefits of our ecosystem to the community at large. We believe the best approach to corporate social responsibility is through embedding elements of social responsibility in our business model. Our achievements and initiatives in the areas of corporate social responsibility include those described below:
Creating Job Opportunities
The breadth of our ecosystem and the range of different types of service providers needed within it create employment opportunities. In addition to providing direct business opportunities for merchants, our ecosystem has created new opportunities for service providers in logistics, marketing, consulting, operations outsourcing, training and other online and mobile commerce professions. According to AliResearch, our research division, as of December 2015, it is estimated that our China retail marketplaces contributed to the creation of over 15 million job opportunities, including people working directly for online storefronts and service providers to merchants.
With the power of the Internet, our platforms have leveled the playing fields for businesses in many aspects making it an inclusive place for everyone to thrive and prosper. In fiscal year 2016, approximately half of our active sellers on our China retail marketplaces are female. We also have programs that create equal opportunities for everyone such as cloud customer service program for people with disabilities, entrepreneur programs for university students and Rural Taobao partnership program targeting entrepreneurs returning to their villages to start businesses. We have also established entrepreneurial funds in Hong Kong and Taiwan to support the career and entrepreneurial aspirations of young people locally.
Alleviating Poverty
As we expand to rural areas in China and help rural farmers reach urban consumers, we have created opportunities for people living in poverty to elevate their income levels. For the twelve months ended March 31, 2016, merchants in over 800 state-designated poverty counties in China in aggregate generated GMV of over RMB20 billion on our China retail marketplaces.
Internet Approach to Charity
We support and promote a number of charitable and socially responsible initiatives and programs in ways that we believe are in alignment with our core values and our mission. Since 2010, we have earmarked 0.3% of our annual revenue to fund efforts designed to encourage environmental awareness and conservation and other corporate social responsibility efforts. In 2011, we established Alibaba Foundation, a private charity fund that focuses on supporting environmental protection in China and helping the disadvantaged such as children born with heart defects in underdeveloped areas of China.
Over RMB400 million. In fiscal year 2016, Alibaba Foundation made over RMB210 million in donations to support various charitable causes and initiatives. We have also leveraged our platform to facilitate other charitable organizations to raise over RMB190 million in donations.
Over 60 projects. In fiscal year 2016, Alibaba Foundation supported more than 60 charitable projects, including those hosted by The Nature Conservancy, National Geographic Air and Water Conservation Fund,
Paulson Institute and Institute of Public and Environmental Affairs. For example, we supported the development of Wei Lan Map () mobile app that exposes pollution hotspots in China and the companies and factories responsible for it on a map. Hundreds of corporations have made press releases about the data exposed by this app while a portion of these corporations have reacted by taking actions to rectify the problems exposed.
Over 130,000 hours. Starting from September 2015, we encourage our employees to perform at a minimum three hours of charitable activities every year. Since the program's inception until the end of fiscal year 2016, this program saw over 130,000 hours of social service performed by our employees.
Over 3.3 billion participations. We recognize our immense influence on our ecosystem and we leverage that to extend the reach of our charitable work. In fiscal year 2016, our platforms facilitated over 3.3 billion charitable participations involving over 280 million consumers and over 1.5 million merchants. We encourage our merchants, consumers and other ecosystem participants to participate in socially responsible activities. For example, charitable organizations can set up storefronts on our marketplaces to raise funds and engage volunteers. Merchants can designate certain percentage of their sales proceeds generated on our platforms to go to charitable organizations. Consumers can contribute to charitable causes through purchasing these products or participating in charity auctions hosted on our platforms.
Competition
We face competition principally from established Chinese Internet companies, such as Tencent, Baidu and their respective affiliates, as well as from certain offline retailers and vertical e-commerce players, including those that specialize in a limited number of categories. These competitors generate significant traffic and have established brand recognition, significant technological capabilities and significant financial resources. The areas in which we compete include:
In doing so, We also face competition from major global Internet companies, including e-commerce companies around the world. Although foreign e-commerce companies currently have a limited presence in China, we aimface significant competition from them in the areas of cross-border commerce, in particular as we further carry out geographic expansions into international markets.
Seasonality
Our overall operating results fluctuate from quarter to remain focusedquarter as a result of a variety of factors, including seasonal factors and economic cycles that influence consumer spending as well as promotional shopping activities we conduct.
Historically, we have experienced the highest levels of revenues in the fourth calendar quarter of each year due to a number of factors, including merchants allocating a significant portion of their online marketing budgets
to the fourth calendar quarter, promotions, such as Singles Day on our mission to make it easy to do business anywhere and realize our vision that our customers will "meet, work and live @ Alibaba."
Consistent with our goal to deliver sustainable, long-term growth, we take a deliberate and staged approach to our corporate development strategy. In some cases, we may begin with an initial minority investment followed by business cooperation. Where the business results, cooperationNovember 11 of each year and the overall relationship established withimpact of seasonal buying patterns in respect of certain categories such as apparel. We have also experienced lower levels of revenues in the managementfirst calendar quarter of each year due to a lower level of allocation of online marketing budgets by merchants at the beginning of the investee company fit with our ongoing business strategy, we may increase our investment or acquirecalendar year and the investee companyChinese New Year holiday, during which time consumers generally spend less and businesses in full. Examples of this type of approach include our investments in UCWeb, AutoNavi, and Weibo Corporation, or Weibo, where the period from initial investment to eventual acquisition or increase in investment spanned more than one fiscal year. Our investment approach also involves supporting entrepreneurs to innovate and develop leading products and technologies.
We have funded our strategic acquisitions and investments primarily from cash generated from our operations and through debt and equity financing. Going forward, we expect to fund additional investments through cash generated from our operations and through debt and equity financing. Our recently completed acquisitions, including UCWeb, OneTouch and AutoNavi, resulted in an increase of approximately 7,300 additional employees but we do not expect they will materially increase our revenue in the short term.China are generally closed. In addition, because we did not consolidateseasonal weather patterns may affect the expenses attributable to these additional employees fortiming of buying decisions. For example, unexpectedly long periods of warm weather could delay the full fiscal year 2015,purchase of heavier clothing items that have higher average selling prices. Moreover, as our business grows, we expect that our fixed costs and expenses, such expensesas payroll and benefits, bandwidth and co-location fees, will continue to increase, forwhich will result in operating leverage in seasonally strong quarters but can significantly pressure operating margins in seasonally weak quarters.
Regulation
We operate in an increasingly complex legal and regulatory environment. We and our key service provider, Ant Financial Services, are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the next fiscal year, when such expenses would have been consolidated forprincipal PRC laws, rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the full year. Moreover, we expect that acquisitions of entities with lower overall margins than our margins will have the effect of lowering our margins. Although we expect our margins to be negatively affected by acquisitions of target companies with lower margins, we do not expect our investment activities to have any significant negative impact on our liquidity or operations. However, there can be no assurance that our future financial results would not be materiallyPRC include data protection and adversely affected if our strategic investmentsprivacy, consumer protection, content regulation, intellectual property, competition, cross-border trade, taxation, anti-money laundering and acquisitions are not successful.anti-corruption. See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — IncreasedWe and Ant Financial Services are subject to a broad range of laws and regulations, and future laws and regulations may impose additional requirements and other obligations on our business or otherwise that could materially and adversely affect our business, financial condition and results of operations."
Our online and mobile commerce businesses are classified as value-added telecommunication businesses by the PRC government. Current PRC laws, rules and regulations generally restrict foreign ownership in value-added telecommunication services. As a result, we operate our online and mobile commerce businesses and other businesses in which foreign investment is restricted or prohibited through variable interest entities, each of which is owned by PRC citizens or by PRC entities owned by PRC citizens, and holds all licenses associated with these businesses.
The applicable PRC laws, rules and regulations governing value-added telecommunication services may change in the future. We may be required to obtain additional approvals, licenses and permits and to comply with any new regulatory requirements adopted from time to time. Moreover, substantial uncertainties exist with respect to the interpretation and implementation of these PRC laws, rules and regulations. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations."
Regulation of Foreign Investment
The Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, the latest version of which came into effect on April 10, 2015, was promulgated and recently amended by the MOFCOM and the National Development and Reform Commission and governs investment activities in the PRC by foreign investors. The Catalogue divides industries into three categories — "encouraged," "restricted," and "prohibited" for foreign investment. Industries not listed in the Catalogue are generally deemed as falling into a fourth category, "permitted." However, industries such as value-added telecommunication services, including Internet information services, are restricted from foreign investment. Among our significant subsidiaries, Taobao (China) Software Co., Ltd. and Zhejiang Tmall Technology Co., Ltd. are registered in China and mainly engaged in software development, technical services and consultations, which fall into the encouraged or permitted category under the latest Catalogue. These two significant subsidiaries have obtained all material approvals required for their business operations. The Catalogue does not apply to our significant subsidiaries that are registered and domiciled in Hong Kong, the British Virgin Islands or the Cayman Islands, and operate outside China. The
businesses of our other PRC subsidiaries — including PRC subsidiaries of our significant subsidiaries — are generally software development, technical services and consulting, which fall into the encouraged or permitted category. Industries such as value-added telecommunication services, including Internet information services, are generally restricted to foreign investment pursuant to the latest Catalogue. We conduct business operations that are restricted or prohibited to foreign investment through our variable interest entities.
In January 2015, the MOFCOM published a discussion draft of the proposed Foreign Investment Law, which embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOFCOM has solicited comments on this draft and substantial uncertainties exist with respect to its enactment timetable, the final version, interpretation and implementation. For more details, see "Item 3. Key Information — Risks Related to our Corporate Structure — Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law."
Regulation of Telecommunications and Internet Information Services
Regulation of Telecommunication Services
Under the Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated on September 25, 2000 by the State Council of the PRC and most recently amended in February 2016, a telecommunication services provider in China must obtain an operating license from the Ministry of Industry and Information Technology, or the MIIT, or its provincial counterparts. The Telecommunications Regulations categorize all telecommunication services in China as either basic telecommunications services or value-added telecommunications services. Our online and mobile commerce businesses, as well as Youku Tudou's online video businesses, are classified as value-added telecommunications services.
Foreign investment in telecommunications businesses is governed by the State Council's Administrative Rules for Foreign Investments in Telecommunications Enterprises, or the Foreign Investment Telecommunications Rules, issued by the State Council on December 11, 2001 and most recently amended in February 2016, under which a foreign investor's beneficial equity ownership in an entity providing value-added telecommunications services in China is not permitted to exceed 50%. In addition, for a foreign investor to acquire any equity interest in a business providing value-added telecommunications services in China, it must demonstrate a positive track record and experience in providing such services. However, according to the Notice on Lifting the Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce) promulgated by the MIIT on June 19, 2015, foreign investors are allowed to hold up to 100% of all equity interest in the online data processing and transaction processing business (operational e-commerce) in China, while other requirements provided by the Foreign Investment Telecommunications Rules shall still apply. It is unclear how this notice will be implemented and there exist high uncertainties with respect to its interpretation and implementation by authorities. The MIIT's Notice Regarding Strengthening Administration of Foreign Investment in Operating Value-Added Telecommunication Businesses, or the MIIT Notice, issued on July 13, 2006 prohibits holders of these services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending to conduct such businesses in China.
In addition to restricting dealings with foreign investors, the MIIT Notice contains a number of detailed requirements applicable to holders of value-added telecommunications services licenses, including that license holders or their shareholders must directly own the domain names and trademarks used in their daily operations and each license holder must possess the necessary facilities for its approved business operations and maintain such facilities in the regions covered by its license, including maintaining its network and providing Internet security in accordance with the relevant regulatory standards. The MIIT or its provincial counterpart has the power to require corrective actions after it discovers any non-compliance of the license holders, and where such license holders fail to take such steps, the MIIT or its provincial counterpart has the power to revoke the value-added telecommunications services licenses.
Regulation of Internet Information Services
As a subsector of the telecommunications industry, Internet information services are regulated by the Administrative Measures on Internet Information Services, or the ICP Measures, promulgated on September 25, 2000 by the State Council and amended on January 8, 2011. "Internet information services" are defined as services that provide information to online users through the Internet. Internet information services providers, also called Internet content providers, or ICPs, that provide commercial services are required to obtain an operating license from the MIIT or its provincial counterpart.
To the extent the Internet information services provided relate to certain matters, including news, publication, education or medical and healthcare (including pharmaceutical products and medical equipment), approvals must also be obtained from the relevant industry regulators in accordance with the laws, rules and regulations governing those industries.
Regulation of Advertising Services
The principal regulations governing advertising businesses in China are:
These laws, rules and regulations require companies such as ours that engage in advertising activities to obtain a business license that explicitly includes advertising in the business scope from the SAIC or its local branches.
Applicable PRC advertising laws, rules and regulations contain certain prohibitions on the content of advertisements in China (including prohibitions on misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest). Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited, and the dissemination of advertisements of certain other products, such as tobacco, patented products, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics, are also subject to specific restrictions and requirements.
Advertisers, advertising operators and advertising distributors, including the businesses that certain of the variable interest entities operate, are required by applicable PRC advertising laws, rules and regulations to ensure that the content of the advertisements they prepare or distribute are true and in compliance with applicable laws, rules and regulations. Violation of these laws, rules and regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke the violator's license or permit for advertising business operations. In addition, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe the legal rights and interests of third parties, such as infringement of intellectual proprietary rights, unauthorized use of a name or portrait and defamation.
Regulation of Online and Mobile Commerce
China's online and mobile commerce industry is at an early stage of development and there are few PRC laws, regulations or rules specifically regulating this industry. The SAIC adopted the Interim Measures for the Administration of Online Commodities Trading and Relevant Services on May 31, 2010 and replaced those measures with the Administrative Measures for Online Trading on January 26, 2014, which became effective on March 15, 2014. The SAIC also issued the Opinions on Strengthening the Administration of Online Group Buying Operations on March 12, 2012 to subject group buying website operators to the foregoing measures, especially those relating to marketplace platform service providers. On December 24, 2014, the MOFCOM promulgated the Provisions on the Procedures for Formulating Transaction Rules of Third Party Online Retail Platforms (Trial) to regulate the formulation, revision and enforcement of transaction rules for online retail marketplace platforms.
These newly issued measures impose more stringent requirements and obligations on the online trading or service operators as well as the marketplace platform providers. For example, the marketplace platform providers are obligated to make public and file its transaction rules with MOFCOM or its provincial counterparts, examine the legal status of each third-party merchant selling products or services on the platform and display on a prominent location on the web page of such merchant the information stated in the merchant's business license or a link to such business license, and a group buying website operator must only allow a third-party merchant with a proper business license to sell products or services on its platform. Where the marketplace platform providers also act as online distributors, these marketplace platform providers must make a clear distinction between their online direct sales and sales of third-party merchant products on the marketplace platform.
Since the promulgation of the Administrative Measures for Online Trading, the SAIC has issued a number of guidelines and implementing rules aimed at adding greater specificity to these regulations. The SAIC continues to consider and issue guidelines and implementing rules, and we expect that there will be further development of regulation in this industry. For example, three PRC governmental authorities (the Ministry of Finance, General Administration of Customs and State Administration of Taxation) issued a notice on March 24, 2016 to regulate cross-border e-commerce trading which has experienced rapid growth in recent years. The Notice on Tax Policies of Cross-Border E-Commerce Retail Importation effective as of April 8, 2016, or the New Cross-Border E-commerce Tax Notice, introduced the concept of the Cross-Border E-Commerce Retail Importation Goods Inventory, or the Cross-Border E-Commerce Goods Inventory, which are to be issued and updated by the three authorities together with other relevant authorities from time to time. Goods beyond the scope of the Cross-Border E-commerce Goods Inventory will have no tax codes and be effectively removed from cross-border e-commerce platforms. Two batches of the Cross-Border E-Commerce Goods Inventory have been issued on April 6, 2016 and April 15, 2016, respectively. Cosmetics imported for the first time, nutrition supplements and other special food products required to be registered with the State Food and Drug Administration are excluded from the Cross-Border E-Commerce Goods Inventory and will not be able to be sold on the relevant cross-border e-commerce platforms. However, pursuant to a transition policy issued by the General Administration of Customs, goods which have been imported to or in transit to the bonded areas and special regulated areas of customs before April 8, 2016 can still be sold on the cross-border e-commerce platforms no matter whether these goods are included in the Cross-Border E-Commerce Goods Inventory or not.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through various ministries and agencies, including the MIIT, the News Office of the State Council, the Ministry of Culture and the General Administration of Press and Publication. In addition to various approval and license requirements, these measures specifically prohibit Internet activities that result in the dissemination of any content which is found to contain pornography, promote gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC or compromise State security or secrets. ICPs must monitor and control the information posted on their websites. If any prohibited content is found, they must remove such content immediately, keep a record of it and report to the relevant authorities. If an ICP violates these measures, the PRC government may impose fines and revoke any relevant business operation licenses.
Regulations on Broadcasting Audio/Video Programs through the Internet
On July 6, 2004, the State Administration of Radio, Film and Television, or the SARFT, promulgated the Rules for the Administration of Broadcasting of Audio/Video Programs through the Internet and Other Information Networks, or the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the launch, broadcasting, aggregation, transmission or download of audio/video programs via the Internet and other information networks. Anyone who wishes to engage in Internet broadcasting activities must first obtain an audio/video program transmission license, with a term of two years, issued by the SARFT and operate pursuant to the scope as provided in such license. Foreign invested enterprises are not allowed to engage in these businesses.
On April 13, 2005, the State Council announced Several Decisions on Investment by Non-state-owned Companies in Culture-related Business in China. These decisions encourage and support non-state-owned companies to enter certain culture-related business in China, subject to restrictions and prohibitions for investment in audio/video broadcasting, website news and certain other businesses by non-state-owned companies. These decisions authorize the SARFT, the Ministry of Culture and the General Administration of Press and Publication, or the GAPP, to adopt detailed implementing rules according to these decisions.
On December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Circular 56, which came into effect as of January 31, 2008 and was amended on August 28, 2015. Circular 56 reiterates the requirement set forth in the Audio/Video Broadcasting Rules that online audio/video service providers must obtain a license from the SARFT. Furthermore, Circular 56 requires all online audio/video service providers to be either wholly state-owned or state-controlled. According to relevant official answers to press questions published on the SARFT's website dated February 3, 2008, officials from the SARFT and the MIIT clarified that online audio/video service providers that already had been operating lawfully prior to the issuance of Circular 56 may re-register and continue to operate without becoming state-owned or controlled, provided that such providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after Circular 56 was issued. These policies have been reflected in the Application Procedure for Audio/Video Program Transmission License.
On March 17, 2010, the SARFT issued the Internet Audio/Video Program Services Categories (Provisional), or the Provisional Categories, which classified Internet audio/video programs into four categories. Category I is only open to state-owned broadcast media companies operating in the television section, and the other three categories are open to privately held entities.
In 2009, the SARFT released a Notice on Strengthening the Administration of Online Audio/Video Content. This notice reiterated, among other things, that all movies and television shows released or published online must comply with relevant regulations on the administration of radio, film and television. In other words, these movies and television shows, whether produced in the PRC or overseas, must be pre-approved by the SARFT, and the distributors of these movies and television shows must obtain an applicable permit before releasing any such movie or television show. In 2012, the SARFT and the State Internet Information Office of the PRC issued a Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. In 2014, the General Administration of Press and Publication, Radio, Film and Television, or GAPPRFT, formerly the SARFT and the GAPP, released a Supplemental Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. This notice stresses that entities producing online audio/video content, such as Internet dramas and micro films, must obtain a permit for radio and television program production and operation, and that online audio/video content service providers should not release any Internet dramas or micro films that were produced by any entity lacking such permit. For Internet dramas or micro films produced and uploaded by individual users, the online audio/video service providers transmitting such content will be deemed responsible as the producer. Further, under this notice, online audio/video service providers can only transmit content uploaded by individuals whose identity has been verified and such content must comply with the relevant content management rules. This notice also requires that online audio/video content, include Internet drama and micro films, be filed with the relevant authorities before release.
On October 28, 2011, the SARFT issued the Administrative and Operational Requirements for Licensed Internet TV Organizations, commonly known as Circular 181, which came into effect as of the same date. Circular 181 requires that Smart TVs must be exclusively connected to a specific licensed Internet TV organization and must not have access to the public Internet or network operators' databases. Up to now, there are only seven licensed Internet TV organizations and all are state-owned companies.
On September 2, 2014, the GAPPRFT promulgated a Notice on Further Implementing the Relevant Provisions for the Administration of Broadcasting Foreign Films and TV dramas. The notice stresses that any foreign film or TV drama must have a License for Film Publication or a TV drama Issuance License before being broadcast online, and that the annual total number of foreign films and TV dramas broadcast by a website must not exceed 30% of the total amount of domestic films and TV dramas broadcast by such website in the preceding year. Furthermore, online video operators are required to report their annual plans for the import of foreign films and TV dramas to the GAPPRFT before the end of the preceding year. If the online video operators' import plans are approved, the samples, contracts, copyright certificates, plot summaries and other materials relevant to the foreign films and TV dramas are subject to further content examination before the issuance of Licenses for Film Publication or the TV drama Issuance Licenses. The notice also requires these online video operators to upload information about the foreign films and TV dramas to be broadcast to a unified platform for registration before March 31, 2015. Since April 1, 2015, unregistered foreign films and TV dramas are no longer allowed to be broadcast online.
Regulations on Internet Publication
The GAPP is responsible for nationwide supervision and administration of publishing activities in China. On June 27, 2002, the GAPP and the MIIT jointly promulgated the Internet Publication Tentative Administrative Measures, or the Internet Publication Measures, which took effect on August 1, 2002. Pursuant to the Internet Publication Measures, any entity engaged in Internet publishing activities must obtain the Internet Publication License from the GAPP before conducting any Internet publication activities. The term "Internet publication" is defined as Internet transmission activity by which Internet information service providers publish on the Internet or transmit to end-users via the Internet works that they or others have created, after selection and editing, for browsing, reading, use or downloading by the general public. The works in question primarily include (i) content that has already been published formally, such as books, newspapers, periodicals, audio/video products and electronic publications, or that has been made public via other media; and (ii) edited works of literature and art or works concerning natural science, social science, engineering or other topics.
On February 4, 2016, the GAPPRFT and the MIIT jointly promulgated the Online Publication Service Administration Rules, or the Online Publication Rules, which took effect on March 10, 2016 and replaced the Internet Publication Measures. Pursuant to the Online Publication Rules, an online publication service provider must obtain the Online Publication Service License from the GAPPRFT. The term "online publication service" is defined as the provision of online publications to the public through information networks. The term "online publications" is defined as digital works characteristic of publishing such as editing, production or processing provided to the public through information networks, and primarily include:
The Online Publication Rules expressly prohibit the foreign invested enterprises from providing online publication services. In addition, if an online publication service provider intends to cooperate for an online
publication services project with foreign invested enterprises, overseas organizations or overseas individuals, it must report to the GAPPRFT and obtain an approval in advance. Also, the online publication service provider is prohibited from lending, leasing, selling or otherwise transferring the Online Publication Service License, or to allow any other online information service provider to provide online publication services in its name.
Regulations on Internet Drug Information Service
The State Food and Drug Administration, or the SFDA, promulgated the Administrative Measures on Internet Drug Information Service in July 2004 and certain implementing rules and notices thereafter. These measures set out regulations governing the classification, application, approval, content, qualifications and requirements for Internet drug information services. An ICP service operator that provides information regarding drugs or medical equipment must obtain an Internet Drug Information Service Qualification Certificate from the applicable provincial level counterpart of the SFDA.
Regulations on Internet News Publication
Publishing and disseminating news through the Internet are highly regulated in the PRC. On November 7, 2000, the State Council Information Office, or SCIO, and the MIIT jointly promulgated the Provisional Measures for Administrating Internet Websites Carrying on the News Publication Business, or Internet News Measures. These measures require an ICP operator (other than a government authorized news unit) to obtain the approval from SCIO to publish news on its website or disseminate news through the Internet. Furthermore, any disseminated news is required to be obtained from government-approved sources based on contracts between the ICP operator and these sources. The copies of such contracts must be filed with relevant government authorities.
On September 25, 2005, the SCIO and the MIIT jointly issued the Provisions on the Administration of Internet News Information Services, requiring Internet news information service organizations to provide services as approved by the SCIO, subject to annual inspection under the new provisions. These Provisions also provide that no Internet news information service organizations may take the form of a foreign invested enterprise, whether jointly or wholly owned by the foreign investment, and no cooperation between Internet news information service organizations and foreign invested enterprise is allowed before the SCIO completes the security evaluation.
Regulations on Internet Culture Activities
On February 17, 2011, the Ministry of Culture promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture Measures. The Internet Culture Measures require ICP operators engaging in "Internet culture activities" to obtain a permit from the Ministry of Culture. The term "Internet culture activities" includes, among other things, online dissemination of Internet cultural products (such as audio-video products, gaming products, performances of plays or programs, works of art and cartoons) and the production, reproduction, importation, publication and broadcasting of Internet cultural products.
On November 20, 2006, the Ministry of Culture issued Several Suggestions of the Ministry of Culture on the Development and Administration of the Internet Music, or the Suggestions, which became effective on November 20, 2006. The Suggestions, among other things, reiterate the requirement for the Internet service provider to obtain an Internet culture business permit to carry on any business relating to Internet music products. In addition, foreign investors are prohibited from operating Internet culture businesses. However, the laws and regulations on Internet music products are still evolving, and there have not been any provisions stipulating whether or how music video will be regulated by the Suggestions.
On August 18, 2009, the Ministry of Culture promulgated the Notice on Strengthening and Improving the Content Review of Online Music. According to this notice, only "Internet culture operating entities" approved by the Ministry of Culture may engage in the production, release, dissemination (including providing direct links to music products) and importation of online music products. The content of online music must be reviewed by or filed with the Ministry of Culture. Internet culture operating entities should establish a strict self-monitoring system of online music content and set up a special department in charge of such monitoring.
On October 23, 2015, the Ministry of Culture promulgated the Notice on Further Strengthening and Improving the Content Review of Online Music, which took effect on January 1, 2016. According to this notice, ICP operators are required to submit their content administrative system, review procedures, and work standards to the provincial culture administrative department where they are located for filing within a prescribed period.
Regulations on Producing Audio/Video Programs
On July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, effective as of August 20, 2004 and amended on August 28, 2015. These Measures provide that anyone who wishes to produce or operate radio or television programs must first obtain an operating permit.
On February 1, 2002, the State Council promulgated the Regulations for the Administration of Films, or the Film Regulations, effective as of February 1, 2002. The Film Regulations set forth the general regulatory guidelines for China's film industry and address practical issues with respect to production, censorship, distribution and screening. They also establish the SARFT as the sector's regulatory authority, and serve as the foundation for all other legislation promulgated in this area. The Film Regulations provide the framework for an industry-wide licensing system operated by the SARFT, under which separate permits (and permit application procedures) apply.
Regulation of Internet Security
The Decision in Relation to Protection of the Internet Security enacted by the Standing Committee of the National People's Congress of China on December 28, 2000 provides that the following activities conducted through the Internet are subject to criminal punishment:
The Administrative Measures on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public Security on December 16, 1997 and amended on January 8, 2011, prohibit the use of the Internet in a manner that would result in the leakage of State secrets or the spread of socially destabilizing content. The Provisions on Technological Measures for Internet Security Protection, or the Internet Security Protection Measures, promulgated on December 13, 2005 by Ministry of Public Security require all ICPs to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws and regulations. Under these measures, the value-added telecommunications services license holders must regularly update information security and content control systems for their websites and must also report any public dissemination of prohibited content to local public security authorities. If a value-added telecommunications services license holder violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.
The Communication Network Security Protection Administrative Measures, which was promulgated by the MIIT on January 21, 2010, require that all communication network operators including telecommunications services providers and Internet domain name service providers divide their own communication networks into units. Such communication network units shall be rated in accordance with degree of damage to national security, economic operation, social order and public interest assuming such units is damaged. The communication network operators must file the division and ratings of their communication network with MIIT or its local counterparts. If a communication network operator violates these measures, the MIIT or its local counterparts may order rectification or impose a fine up to RMB30,000 in case such violation is not duly rectified.
Internet security in China is also regulated and restricted from a national security standpoint. On July 1, 2015, the National People's Congress Standing Committee promulgated the New National Security Law which took effect on the same date replaced the former National Security Law promulgated in 1993. According to the New National Security Law, the state shall ensure that the information system and data in important areas are secure and controllable. In addition, according to the New National Security Law, the state shall establish national security review and supervision institutions and mechanisms, and conduct national security reviews of key technologies and IT products and services that affect or may affect national security. There are uncertainties on how the New National Security Law will be implemented in practice.
Regulation of Privacy Protection
Under the ICP Measures, ICPs are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes upon the lawful rights and interests of others. Depending on the nature of the violation, ICPs may face criminal charges or sanctions by PRC security authorities for such acts, and may be ordered to suspend temporarily their services or have their licenses revoked.
Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT on December 29, 2011, ICPs are also prohibited from collecting any user personal information or providing any such information to third parties without the consent of a user. ICPs must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for its services. ICPs are also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, ICPs must take remedial measures immediately and report any material leak to the telecommunications regulatory authority.
In addition, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National People's Congress on December 28, 2012 emphasizes the need to protect electronic information that contains individual identification information and other private data. The decision requires ICPs to establish and publish policies regarding the collection and use of personal electronic information and to take necessary measures to ensure the security of the information and to prevent leakage, damage or loss. Furthermore, MIIT's Rules on Protection of Personal Information of Telecommunications and Internet Users promulgated on July 16, 2013 contain detailed requirements on the use and collection of personal information as well as the security measures to be taken by ICPs.
The PRC government retains the power and authority to order ICPs to provide an Internet user's personal information if such user posts any prohibited content or engages in any illegal activities through the Internet.
Regulation of Consumer Protection
Our online and mobile commerce business is subject to a variety of consumer protection laws, including the PRC Consumer Rights and Interests Protection Law, as amended and effective as of March 15, 2014, and the Administrative Measures for Online Trading, both of which have provided stringent requirements and obligations on business operators, including Internet business operators and platform service providers like us. For example, consumers are entitled to return goods purchased online, subject to certain exceptions, within seven days upon receipt of such goods for no reason. To ensure that merchants and service providers comply with these laws and regulations, we, as platform operators, are required to implement rules governing transactions on our platform, monitor the information posted by merchants and service providers, and report any violations by such merchants or service providers to the relevant authorities. In addition, online marketplace platform providers may, pursuant to PRC consumer protection laws, be exposed to liabilities if the lawful rights and interests of consumers are infringed in connection with consumers' purchase of goods or acceptance of services on online marketplace platforms and the platform service providers fail to provide consumers with the contact information of the merchant or manufacturer. In addition, platform service providers may be jointly and severally liable with merchants and manufacturers if they are aware or should be aware that the merchant or manufacturer is using the
online platform to infringe upon the lawful rights and interests of consumers and fail to take measures necessary to prevent or stop such activity.
Failure to comply with these consumer protection laws could subject us to administrative sanctions, such as the issuance of a warning, confiscation of illegal income, imposition of a fine, an order to cease business operations, revocation of business licenses, as well as potential civil or criminal liabilities.
Regulation of Pricing
In China, the prices of a very small number of products and services are guided or fixed by the government. According to the Pricing Law, business operators must, as required by the government departments in charge of pricing, mark the prices explicitly and indicate the name, origin of production, specifications, and other related particulars clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated. Business operators must not commit the specified unlawful pricing activities, such as colluding with others to manipulate the market price, providing fraudulent discounted price information, using false or misleading prices to deceive consumers to transact, or conducting price discrimination against other business operators. Failure to comply with the Pricing Law or other rules or regulations on pricing may subject business operators to administrative sanctions such as warning, orders to cease unlawful activities, payment of compensation to consumers, confiscation of illegal gains, and/or fines. The business operators may be ordered to suspend business for rectification, or have their business licenses revoked if the circumstances are severe. Merchants on Tmall and Taobao Marketplace undertake the primary obligation under the Pricing Law. However, in some cases, we have been and may in the future be held liable and be subject to fines or other penalties if the authorities determine that, as the platform operator, our guidance for platform-wide promotional activities resulted in unlawful pricing activities by the merchants on our platforms or if the pricing information we provided for platform-wide promotional activities was determined to be untrue or misleading.
Regulation of Intellectual Property Rights
Patent. Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right.
Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain Name. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.
Regulation of Anti-counterfeiting
According to the Trademark Law of the PRC, counterfeit or unauthorized production of the label of another person's registered trademark, or sale of any label that is counterfeited or produced without authorization will be deemed as an infringement of the exclusive right to use a registered trademark. The infringing party will be ordered to cease infringement immediately, a fine may be imposed and the counterfeit goods will be confiscated. The infringing party may also be held liable for damages suffered by the owner of the intellectual property rights, which will be equal to the gains obtained by the infringing party or the losses suffered by such owner as a result of the infringement, including reasonable expenses incurred by such owner in connection with enforcing its rights.
Under the Tort Liability Law of the PRC, an Internet service provider may be subject to joint liability if it is aware that an Internet user is infringing upon the intellectual property rights of others through its Internet services, such as selling counterfeit products, and fails to take necessary measures to stop that activity. If an Internet service provider receives a notice from an infringed party regarding an infringement, the Internet service provider is required to take certain measures, including deleting, blocking and unlinking the infringing content, in a timely manner.
In addition, under the Administrative Measures for Online Trading issued by the SAIC on January 26, 2014, as an operator of an online trading platform, we must adopt measures to ensure safe online transactions, protect consumers' rights and prevent trademark infringement.
Tax Regulations
PRC Enterprise Income Tax
The PRC enterprise income tax, or EIT, is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1, 2008. The EIT Law generally imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises.
The EIT Law and its implementation rules permit certain High and New Technologies Enterprises, or HNTEs, to enjoy a reduced 15% enterprise income tax rate subject to these HNTEs meeting certain qualification criteria. In addition, the relevant EIT laws and regulations also provide that entities recognized as Software Enterprises are able to enjoy a tax holiday consisting of a 2-year-exemption commencing from their first profitable calendar year and a 50% reduction in ordinary tax rate for the following three calendar years, while entities qualified as Key Software Enterprises can enjoy a preferential EIT rate of 10%. A number of our PRC subsidiaries and operating entities enjoy these types of preferential tax treatment. See "Item 10. Additional Information — E. Taxation — People's Republic of China Taxation."
Uncertainties exist with respect to how the EIT Law applies to the tax residence status of Alibaba Group and our offshore subsidiaries. Under the EIT Law, an enterprise established outside of China with a "de facto management body" within China is considered a "resident enterprise," which means that it is treated in the same manner as a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define "de facto management body" as a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although Alibaba Group Holding Limited does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in Circular 82 to evaluate the tax residence status of Alibaba Group and our subsidiaries organized outside the PRC.
According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a "de facto management body" in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
We do not believe that we meet any of the conditions outlined in the immediately preceding paragraph. Alibaba Group Holding Limited and our offshore subsidiaries are incorporated outside the PRC. As a holding company, our key assets and records, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that have been deemed a PRC "resident enterprise" by the PRC tax authorities. Accordingly, we believe that Alibaba Group Holding Limited and our offshore subsidiaries should not be treated as a "resident enterprise" for PRC tax purposes if the criteria for "de facto management body" as set forth in Circular 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body" as applicable to our offshore entities, we will continue to monitor our tax status. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income."
In the event that Alibaba Group Holding Limited or any of our offshore subsidiaries is considered to be a PRC resident enterprise:
Under Bulletin 7 issued by the State Administration of Taxation on February 3, 2015, which replaced or supplemented certain previous rules under Circular 698, an "indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, "PRC taxable assets" include assets attributed to an establishment or a place of business in China, immoveable properties in China, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment or a place of business and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment or a place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the implementation details of Bulletin 7. If Bulletin 7 was determined by the tax authorities to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions might be required to spend valuable resources to comply with Bulletin 7 or to establish that the relevant transactions should not be taxed under Bulletin 7, which may materially and adversely affect us. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We and
our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment or a place of business of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company."
Where the payers fail to withhold any or sufficient tax, the non-PRC residents, as the transferors, are required to declare and pay such taxes to the tax authorities on their own within the statutory time limit. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, and interest on those taxes.
PRC Business Tax and Value-Added Tax
Before August 2013 and pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technology development and transfer, such business tax may negatively affectbe exempted subject to approval by the relevant tax authorities.
In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In May and December 2013, April 2014 and March 2016, the Ministry of Finance and the State Administration of Taxation promulgated Circular 37, Circular 106, Circular 43 and Circular 36 to further expand the scope of services which are to be subject to Value-Added Tax, or VAT, instead of business tax. Pursuant to these tax rules, from August 1, 2013, a VAT was imposed to replace the business tax in certain service industries, including technology services and advertising services, and from May 1, 2016, VAT replaced business tax in all industries, on a nationwide basis. A VAT rate of 6% applies to revenue derived from the provision of certain services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided. Accordingly, although the 6% VAT rate is higher than the previously applicable 5% business tax rate, no materially different tax cost to us has resulted nor do we expect to result from the replacement of the business tax with a VAT on our margins"services.
PRC Import Tax
Consumer goods imported through cross-border e-commerce platforms were originally classified as "personal baggage or postal articles" under the Notice on Pilot Bonded Area Import Pattern of Cross-Border Trade E-Commerce Services issued by PRC General Administration of Customs on March 4, 2014. A personal baggage or postal articles tax was levied on such goods before the online retailors could deliver the same to buyers. The personal baggage or postal articles tax were exempted if the payable amount was lower than RMB50. The rate of personal baggage or postal articles tax was respectively 10%, 20%, 30% and 50% for different categories of products imported. Under this tax pattern, a quota of RMB1,000 for each purchase order was imposed on online buyers, otherwise the imported goods were classified as normal goods, which are subject to value-added tax, consumption tax and tariff.
The above-mentioned pilot bonded area import pattern of cross-border e-commerce was abolished pursuant to the Notice on Tax Policies of Cross-Border E-commerce Retail Importation, effective on April 8, 2016, or the New Cross-Border E-commerce Tax Notice. The goods imported through cross-border e-commerce platforms are now treated as normal goods rather than "personal baggage or postal articles" and subject to the usual value-added tax, consumption tax and tariff. Normally, a 17% value-added tax will be levied on most products sold on the cross-border e-commerce platform and a 30% consumption tax will be levied on cosmetics and perfumes, while no consumption tax will be levied on skin care products, maternity and baby care products. However, the New Cross-Border E-commerce Tax Notice provides that, if the goods imported through cross-border e-commerce platforms are within the quota of RMB2,000 for each purchase order or RMB20,000 per year for each buyer, the payable amount for the value-added tax and the consumption tax will be reduced to 70% of the payable tax, and the tariff will be waived.
PRC Export Tax
According to the Notice on the Taxation Policies for Cross-border E-Commerce Retail Export, or the E-Commerce Export Taxation Notice, which was jointly issued by the Ministry of Finance and the State Administration of Taxation and took effect as of January 1, 2014, an e-commerce export enterprise may be exempt or refunded from consumption tax and VAT upon satisfaction of the following conditions:
Even if an e-commerce export enterprise does not satisfy the foregoing conditions, it may also be exempt from consumption tax and VAT if it meets the following requirements:
Third-party e-commerce platforms providing transaction services for e-commerce export enterprises are not eligible for a tax refund or exemption under the E-Commerce Export Taxation Notice.
Regulation of Foreign Exchange and Dividend Distribution
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Regulations on Foreign Exchange Administration of the PRC. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE's approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
Since SAFE Circular 142 has been in place for more than five years, SAFE decided to further reform the foreign exchange administration system in order to satisfy and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas on August 4, 2014. This circular suspends the application of SAFE Circular 142 in certain areas and allows a foreign-invested enterprise registered in such areas with a business scope including "investment" to use the RMB capital converted from foreign currency registered capital for equity investments within the PRC. On April 9, 2015, SAFE released the Notice on the Reform of the Administration Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, which came into force and superseded SAFE Circular 142 on June 1, 2015. Circular 19 allows foreign invested enterprises to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business operation and provides the procedures for foreign invested companies to use Renminbi converted from foreign currency-denominated capital for equity investment. Nevertheless, Circular 19 also reiterates the principle that Renminbi converted from foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Since Circular 19 was only recently promulgated, there are uncertainties on how it will be interpreted and implemented in practice.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. In February 2015, SAFE promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE Circular 13, the current foreign exchange procedures will be further simplified, and foreign exchange registrations of direct investment will be handled by the banks designated by the foreign exchange authority instead of SAFE and its branches. However, the foreign invested enterprises are still prohibited by SAFE Circular 13 to use the RMB converted from foreign currency-registered capital to extend entrustment loans, repay bank loans or inter-company loans.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals of SAFE and other PRC government authorities as necessary.
SAFE Circular 37
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as "SAFE Circular 75" promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a "special purpose vehicle." SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share
transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. On February 13, 2015, SAFE released SAFE Circular 13, under which local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, from June 1, 2015. However, since the notice came into force recently, there exist substantial uncertainties with respect to its interpretation and implementation by governmental authorities and banks.
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and we have periodically filed SAFE Circular 75 reports prior to the promulgation of SAFE Circular 37, on behalf of certain employee shareholders whom we know are PRC residents. However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular 37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Share option rules
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers.
Regulation of dividend distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social Insurance Law and the Regulations on the Administration of Housing Funds, employers in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
Anti-monopoly Law
The PRC Anti-monopoly Law, which took effect on August 1, 2008, prohibits monopolistic conduct, such as entering into monopoly agreements, abuse of dominant market position and concentration of undertakings that have the effect of eliminating or restricting competition.
Monopoly Agreement
Competing business operators may not enter into monopoly agreements that eliminate or restrict competition, such as by boycotting transactions, fixing or changing the price of commodities, limiting the output of commodities, fixing the price of commodities for resale to third parties, among others, unless such agreement will satisfy the exemptions under the Anti-monopoly Law, such as improving technologies, increasing the efficiency and competitiveness of small and medium-sized undertakings, or safeguarding legitimate interests in cross-border trade and economic cooperation with foreign counterparts. Sanctions for violations include an order to cease the relevant activities, and confiscation of illegal gains and fines (from 1% to 10% of sales revenue from the previous year, or RMB500,000 if the intended monopoly agreement has not been performed).
Abuse of Dominant Market Position
A business operator with a dominant market position may not abuse its dominant market position to conduct acts, such as selling commodities at unfairly high prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, and refusing to trade with a trading party without any justifiable cause. Sanctions for violation of the prohibition on the abuse of dominant market position include an order to cease the relevant activities, confiscation of the illegal gains and fines (from 1% to 10% of sales revenue from the previous year).
Concentration of Undertakings
Where a concentration of undertakings reaches the declaration threshold stipulated by the State Council, a declaration must be approved by the anti-monopoly authority before the parties implement the concentration. Concentration refers to (1) a merger of undertakings; (2) acquiring control over other undertakings by acquiring equities or assets; or (3) acquisition of control over, or the possibility of exercising decisive influence on, an undertaking by contract or by any other means. If business operators fail to comply with the mandatory declaration requirement, the anti-monopoly authority is empowered to terminate and/or unwind the transaction, dispose of relevant assets, shares or businesses within certain periods and impose fines of up to RMB500,000.
See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We facemay become the target of anti-monopoly and unfair competition claims, which may result in our being subject to fines as well as constraints on our business."
Anti-Terrorism Law
The PRC Anti-Terrorism Law, which was promulgated on December 27, 2015 and came into effect on January 1, 2016, imposes obligations on telecommunication business operators and Internet service providers to
provide technical interfaces and technical assistance in decryption and other efforts to public and national security authorities in terrorism prevention and investigation. Also, the Anti-Terrorism Law requires Internet service providers to implement network security and information and content monitoring systems and adopt technical security measures to prevent the dissemination of information containing terrorist or extremist content. Once such content is detected, Internet service providers shall cease the transmission of the information, keep the relevant records, delete the information and report to public and national security bodies. In addition, the Anti-Terrorism Law requires telecommunication business operators and Internet service providers to verify the identity of their clients, and to not provide services to anyone whose identity is unclear or who declines to verify his/her identity. However, the Anti-Terrorism Law does not further specify the required verification measures. Since the Anti-Terrorism Law was promulgated recently, there exist substantial uncertainties with respect to its interpretation and implementation by governmental authorities.
Regulation Applicable to Alipay
Regulation of Non-financial Institution Payment Services
According to the Administrative Measures for the Payment Services Provided by Non-financial Institutions, or the Payment Services Measures, promulgated by the PBOC on June 14, 2010 and effective as of September 1, 2010, a payment institution, a non-financial institution providing monetary transfer services as an intermediary between payees and payers, including online payment, issuance and acceptance of prepaid cards or bank cards, and other payment services specified by the PBOC, is required to obtain a payment business license. Any non — financial institution or individual engaged in the payment business without such license may be ordered to cease its payment services and be subject to administrative sanctions and even criminal liabilities. Applications for payment business licenses are examined by the local branches of the PBOC and then submitted to the PBOC for approval. The registered capital of an applicant that engages in a nationwide payment business must be at least RMB100 million, while that of an applicant engaging in a payment business within a province must be at least RMB30 million.
A payment institution is required to conduct its business within the scope of business indicated in its payment business license, and may not undertake any business beyond that scope or outsource its payment business. No payment institution may transfer, lease or lend its payment business license.
On January 20, 2015, the SAFE promulgated the Guiding Opinions on the Pilot Services of Cross-Border Foreign Exchange Payment by Payment Institutions, or the Guiding Opinions, which replaced the previous guiding opinion issued by SAFE on February 1, 2013. Pursuant to the Guiding Opinions, a payment institution is required to obtain approval from the SAFE in order to engage in pilot cross-border foreign exchange payment services and may only provide cross-border foreign exchange payment services for trade in goods or trade in services with real and legitimate transaction background. The payment institution must also verify the real names and identity information of the customers involved in the cross-border transactions, maintain records of the relevant transactions and make monthly reports to the local branch of the SAFE.
In addition, on December 28, 2015, the PBOC promulgated the Administrative Measures for the Online Payment Business of Non-bank Payment Institutions, or the Online Payment Measures, which will come into effect on July 1, 2016. The Online Payment Measures classify online payment accounts into three categories and require online payment institutions to impose classified management based on the real name system with respect to different categories of online payment accounts. The Online Payment Measures require online payment institutions to conduct "know your client" checks and implement the real name system for payment accounts. In addition, a payment account can only be opened by a payment institution with Internet payment business license at the request of customers.
We rely on Alipay to provide payment services on our marketplaces and Alipay has obtained a payment business license from the PBOC as well as approval for cross-border foreign exchange payment services from the SAFE.
Anti-money Laundering Regulations
The PRC Anti-money Laundering Law, which became effective on January 1, 2007, sets forth the principal anti-money laundering requirements applicable to both financial and non-financial institutions with anti-money laundering obligations, such as Alipay, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, preservation of clients' identification information and transactions records, and reports on block transactions and suspicious transactions. The Payment Services Measures also require that the payment institution follow the rules associated with anti-money laundering and comply with their anti-money laundering obligations.
In addition, the PBOC promulgated the Administrative Measures for Payment Institutions Regarding Anti-money Laundering and Counter Terrorism Financing on March 5, 2012, or the Anti-money Laundering Measures, according to which the payment institution must establish and improve unified anti-money laundering internal control systems and file such systems with the local branch of the PBOC. The Anti-money Laundering Measures also require the payment institution to set up an anti-money laundering department or designate an internal department to be responsible for anti-money laundering and counter terrorism financing work.
Alipay is in the process of expanding its business internationally, and it may become subject to additional laws, rules and regulations of the jurisdictions in which it chooses to operate. These regulatory regimes may be complex and require extensive time and resources to ensure compliance.
C. Organizational Structure
We conduct our business operations across approximately 330 subsidiaries and other consolidated entities. The chart below summarizes our corporate legal structure and identifies the significant subsidiaries described in "— A. History and Development of the Company," as well as our other subsidiaries and variable interest entities that are material to our business and the number of their respective subsidiaries, as of March 31, 2016:
Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders
Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added telecommunications services, which include the operations of Internet content providers, or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in China, operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC through wholly-foreign owned enterprises, majority-owned entities and variable interest entities. The relevant variable interest entities, which are incorporated in the PRC and 100% owned by PRC citizens or by PRC entities owned by PRC citizens, where applicable, hold the ICP licenses and other regulated licenses and operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited. Specifically, our variable interest entities that are material to our business are Zhejiang Taobao Network Co., Ltd., Zhejiang Tmall Network Co., Ltd., Hangzhou Alibaba Advertising Co., Ltd., Hangzhou Ali Technology Co., Ltd. and Alibaba Cloud Computing Ltd. Each of these variable interest entities other than Zhejiang Taobao Network Co., Ltd. is 80%-owned by Jack Ma, our lead founder, executive chairman and one of our principal shareholders, and 20%-owned by Simon Xie, one of our founders. Zhejiang Taobao Network Co., Ltd. is 90%-owned by Jack Ma and 10%-owned by Simon Xie. We have entered into certain contractual arrangements, as described in more detail
below, which collectively enable us to exercise effective control over the variable interest entities and realize substantially all of the economic risks and benefits arising from, the variable interest entities. As a result, we include the financial results of each of the variable interest entities in our consolidated financial statements in accordance with U.S. GAAP as if they were our wholly-owned subsidiaries.
Other than the ICP licenses and other licenses and approvals for businesses in which foreign ownership is restricted or prohibited held by our variable interest entities, we hold our material assets in, and conduct our material operations through, our wholly-foreign owned and majority-owned enterprises, which primarily provide technology and other services to our customers. We generate the significant majority of our revenue directly through our wholly-foreign owned enterprises, which directly capture the profits and associated cash flow from operations without having to rely on contractual arrangements to transfer such cash flow from the variable interest entities to the wholly-foreign owned enterprises.
The following diagram is a simplified illustration of the ownership structure and contractual arrangements that we typically have in place for our variable interest entities:
The following is a summary of the common contractual arrangements that provide us with effective control of our material variable interest entities and that enable us to receive substantially all of the economic benefits from their operations.
Contracts that Give Us Effective Control of the Variable Interest Entities
Loan agreements. Pursuant to the relevant loan agreement, the respective wholly-foreign owned enterprise has granted an interest-free loan to the relevant variable interest entity equity holders, which may only be used for the purpose of a capital contribution to the relevant variable interest entity or as may be otherwise agreed by the wholly-foreign owned enterprise. The wholly-foreign owned enterprise may require acceleration of repayment at its absolute discretion. When the variable interest entity equity holders make early repayment of the outstanding amount, the wholly-foreign owned enterprise or a third-party designated by it may purchase the equity interests in the variable interest entity at a price equal to the outstanding amount of the loan, subject to any applicable PRC laws, rules and regulations. The variable interest entity equity holders undertake not to enter into any prohibited transactions in relation to the variable interest entity, including the transfer of any business, material assets, intellectual property rights or equity interests in the variable interest entity to any third-party. The parties to the loan agreement for each of our material variable interest entities are Jack Ma and Simon Xie on the one hand,
and Taobao (China) Software Co., Ltd., Zhejiang Tmall Technology Co., Ltd., Alibaba (China) Technology Co., Ltd., Hangzhou Alimama Technology Co., Ltd. and Zhejiang Alibaba Cloud Computing Ltd., the respective wholly-foreign owned enterprise on the other hand.
Exclusive call option agreements. The variable interest entity equity holders have granted the wholly-foreign owned enterprise an exclusive call option to purchase their equity interest in the variable interest entity at an exercise price equal to the higher of (i) the registered capital in the variable interest entity; and (ii) the minimum price as permitted by applicable PRC laws. Each relevant variable interest entity has further granted the relevant wholly-foreign owned enterprise an exclusive call option to purchase its assets at an exercise price equal to the book value of the assets or the minimum price as permitted by applicable PRC law, whichever is higher. The wholly-foreign owned enterprise may nominate another entity or individual to purchase the equity interest or assets, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of the equity interest or assets pursuant to the call option. Each wholly-foreign owned enterprise is entitled to all dividends and other distributions declared by the variable interest entity, and the variable interest entity equity holders have agreed to give up their rights to receive any distributions or proceeds from the disposal of their equity interests in the variable interest entity which are in excess of the original registered capital that they contributed to the variable interest entity, and to pay any such distributions or premium to the wholly-foreign owned enterprise. The exclusive call option agreements remain in effect until the equity interest or assets that are the subject of such agreements are transferred to the wholly foreign owned enterprise. The parties to the exclusive call option agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise.
Proxy agreements. Pursuant to the relevant proxy agreement, each of the variable interest entity equity holders irrevocably authorizes any person designated by the wholly-foreign owned enterprise to exercise his rights as an equity holder of the variable interest entity, including the right to attend and vote at equity holders' meetings and appoint directors. The parties to the proxy agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise.
Equity pledge agreements. Pursuant to the relevant equity pledge agreement, the relevant variable interest entity equity holders have pledged all of their interests in the equity of the variable interest entity as a continuing first priority security interest in favor of the corresponding wholly-foreign owned enterprise to secure the outstanding amounts advanced under the relevant loan agreements described above and to secure the performance of obligations by the variable interest entity and/or its equity holders under the other structure contracts. Each wholly-foreign owned enterprise is entitled to exercise its right to dispose of the variable interest entity equity holders' pledged interests in the equity of the variable interest entity and has priority in receiving payment by the application of proceeds from the auction or sale of such pledged interests, in the event of any breach or default under the loan agreement or other structure contracts, if applicable. These equity pledge agreements remain in force for the duration of the relevant loan agreement and other structure contracts. The parties to the equity pledge agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise. All of the equity pledges relating to our acquisitions,material variable interest entities have been registered with the relevant office of the Administration for Industry and Commerce in China.
Contracts that Enable Us to Receive Substantially All of the Economic Benefits from the Variable Interest Entities
Exclusive technical services agreements. Each relevant variable interest entity has entered into an exclusive technical services agreement with the respective wholly-foreign owned enterprise, pursuant to which the relevant wholly-foreign owned enterprise provides exclusive technical services to the variable interest entity. In exchange, the variable interest entity pays a service fee to the wholly-foreign owned enterprise which typically amount to what
would be substantially all of the variable interest entity's pre-tax profit (absent the service fee), resulting in a transfer of substantially all of the profits from the variable interest entity to the wholly-foreign owned enterprise.
The exclusive call option agreements described above also entitle the wholly-foreign owned enterprise to all dividends and other distributions declared by the variable interest entity and to any distributions or proceeds from the disposal by the variable interest entity equity holders of their equity interests in the variable interest entity that are in excess of the original registered capital that they contributed to the variable interest entity.
In the opinion of Fangda Partners, our PRC legal counsel:
However, we have been further advised by our PRC legal counsel, Fangda Partners, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our Internet-based business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Corporate Structure."
D. Property, Plant and Equipment
As of March 31, 2016, we occupied facilities around the world with an aggregate gross floor area of office buildings owned by us totaling 421,445 square meters. We maintain offices in China, Dubai, France, Germany, Hong Kong, India, Italy, Korea, Taiwan, Turkey, Russia, Singapore, the United Kingdom and the United States. In addition, we maintain data centers in China, Hong Kong, Singapore and the United States.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report and in particular, "Item 4. Information on the Company — B. Business Overview." This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Item 3. Key Information — D. Risk Factors" and elsewhere in this annual report. We have prepared our financial statements in accordance with U.S. GAAP. Our fiscal year ends on March 31 and references to fiscal years 2014, 2015 and 2016 are to the fiscal years ended March 31, 2014, 2015 and 2016, respectively.
Overview
We achieved significant growth and strong operating results in fiscal year 2016. Our total revenue increased by 45% from RMB52,504 million in fiscal year 2014 to RMB76,204 million in fiscal year 2015, and further increased by 33% to RMB101,143 million (US$15,686 million) in fiscal year 2016. Our net income increased by 4% from RMB23,403 million in fiscal year 2014 to RMB24,320 million in fiscal year 2015 and further increased by 193% to RMB71,289 million (US$11,056 million) in fiscal year 2016. Our GMV surpassed RMB3 trillion in fiscal year 2016. We believe our focus on long-term strategic priorities — globalization, rural expansion, building a world-class cloud computing business and creating a comprehensive media and entertainment platform — has laid a strong foundation for future growth.
We have experienced significant growth across various key metrics for our China retail marketplaces:
We have also experienced significant growth in our mobile monetization on our China retail marketplaces:
We primarily generate revenue from the businesses described below:
Revenue | Businesses | |
---|---|---|
China Commerce Retail | • Taobao Marketplace — Online shopping destination | |
• Tmall(1) — Brands and retail platform | ||
• Juhuasuan — Flash sale platform | ||
China Commerce Wholesale | • 1688.com — China wholesale marketplace | |
International Commerce Retail | • AliExpress — Global consumer marketplace | |
International Commerce Wholesale | • Alibaba.com — Global wholesale marketplace | |
Cloud Computing | • Alibaba Cloud — Cloud computing services provider |
See "Item 4. Information on the Company — B. Business Overview" for a detailed discussion of our business and our ecosystem.
Our Monetization Model
The revenue we generate on our retail marketplaces is highly correlated with the number and engagement of the consumers on our platforms, the myriad value propositions of branding, marketing, promotions, distribution and productivity enhancements we offer merchants and brands, and our data and technology capabilities. The revenue we generate on our wholesale marketplaces is largely driven by the number of paying members and the value of the wholesale marketplaces as a marketing and distribution platform. We primarily derive revenue from online marketing services, commissions, memberships and cloud computing services. In fiscal year 2016, revenue from P4P marketing services and display marketing services accounted for 53%, commissions accounted for 27%, memberships and value-added services accounted for 8%, and cloud computing services accounted for 3%, of our total revenue, respectively.
The pricing of our marketing services is primarily performance-based or impression-based. Performance-based marketing uses clicks or transactions as the measurement unit for performance. Impression-based marketing uses the number of impressions delivered to the user. The pricing of our marketing services is typically set by market-based bidding systems so that each marketer determines the price it is willing to pay for the services.
Marketers' willingness to pay and the amount they are willing to pay for our online marketing services is a function of the marketers' expected return on investment, which generally depends on the following factors:
China Commerce Retail. We generate revenue from our China retail marketplaces primarily through the monetization models described below. In fiscal year 2016, 75% of GMV on our China retail marketplaces was settled through Alipay. In fiscal year 2016, we generated 65% and 32% of our China commerce retail revenue from online marketing services and commissions, respectively.
Online marketing services.
Online marketing services primarily consist of:
For both P4P marketing and display marketing services, we generate a portion of our revenue through third-party marketing affiliates. Revenue from P4P and display marketing services provided through third- party marketing affiliates represented 6%, 3% and 3% of our total revenue in fiscal years 2014, 2015 and 2016, respectively, and this revenue is recognized on a gross basis.
Commissions on transactions. In addition to purchasing online marketing services, merchants also pay a commission based on a percentage of transaction value generated on Tmall or from Juhuasuan. The commission percentages typically range from 0.4% to 5.0% depending on the product category. The commission rate we establish varies according to our estimate of the industry profit margins in specific product categories. For example, for categories that typically have lower gross margins, such as consumer electronics, we charge a lower commission rate, whereas for categories such as apparel, where gross margins are generally higher for the merchants, we charge a higher commission rate.
Storefront fees. Our revenue from storefront fees is primarily comprised of monthly subscription fees for Wangpu (), our storefront software that includes a suite of tools that assist merchants in upgrading, decorating and managing their storefronts.
Purchaser of services: | Taobao Marketplace | Tmall | Juhuasuan | |||
---|---|---|---|---|---|---|
Taobao Marketplace merchants | • P4P marketing fees • Display marketing fees • Taobaoke commissions • Storefront fees • Other fees* | • Not applicable | • Commissions • Placement fees | |||
Tmall merchants | • P4P marketing fees | • Commissions | • Commissions |
China Commerce Wholesale. We generate revenue from our China wholesale marketplace, 1688.com, primarily through:
International Commerce Retail. We generate revenue from our international retail marketplaces, primarily AliExpress, through commissions, which are typically 5% of transaction value. In the twelve months ended March 31, 2016, GMV on AliExpress settled through Alipay was US$5.4 billion. We also generate revenue on AliExpress from merchants who participate in the third-party affiliate marketing program and those who purchase P4P marketing services.
International Commerce Wholesale. We generate revenue from our global wholesale marketplace, Alibaba.com, primarily through:
Cloud Computing. We generate revenue from cloud computing services primarily from the time- and usage-based provision of cloud computing services, such as elastic computing, database, storage and CDN, large scale computing, security and management, and application services, as well as from web-hosting and domain name registration.
Others. We generate revenue from mobile Internet services provided by UCWeb, as well as other businesses such as AutoNavi, over-the-top TV services and YunOS. Other revenue also includes annual fees payable by Ant Financial Services to us, calculated at 2.5% of the daily average book balance of the SME loans generated by the SME loan business we transferred to Ant Financial Services upon the completion of the restructuring of our relationship with Ant Financial Services in early February 2015. Prior to this sale, other revenue also included interest income generated by the SME loan business.
Factors Affecting Our Results of Operations
Our Ability to Create Value for Our Users and Generate Revenue. Our ability to create value for our users and generate revenue is driven by the factors described below:
Operating Leverage of Our Marketplace Business Model. Our business model has significant operating leverage and our ecosystem enables us to realize structural cost savings. For example, Taobao Marketplace drives significant traffic to Tmall as Tmall product listings also appear on Taobao Marketplace search result pages. In addition, promotional slots purchased on Juhuasuan by Taobao Marketplace and Tmall merchants also drive consumers to Taobao Marketplace and Tmall storefronts, thereby enabling merchants to introduce consumers to additional product and service offerings beyond those featured on the particular Juhuasuan promotion and drive additional user traffic. This network effect allows for lower traffic acquisition costs across our marketplaces. In addition, due to the large number of consumers on our marketplaces, we are able to attract a large number of merchants, which in turn provides a strong source of customers for our online marketing and storefront services. Merchants purchase marketing services through a self-service platform on our China retail marketplaces. As a result, we do not rely on a field sales force to generate revenue for our China retail marketplaces.
Our Investment in User Base, Technology, People and Infrastructure. We have made, and will continue to make, significant investments in our platforms and alliances."ecosystem to attract consumers and merchants, enhance user experience and expand the capabilities and scope of our platforms. We expect our investments will include
developing and marketing new products and services, enhancing our cloud computing business, and YunOS, a cloud-based mobile operating system for Internet of Things devices, developing new ways to interact with consumers through our mobile media and entertainment assets, developing new software tools to attract additional consumers and merchants to our marketplaces as well as executing our globalization strategy. Our significant recentoperating leverage and pendingmargin levels enable us to continue to invest in our people, particularly engineers, scientists and product management personnel, as well as in our underlying technology capabilities and infrastructure. In addition, as a result of our financial strength, we expect to invest in the above mentioned new and existing businesses which will lower our margins but deliver overall long-term growth.
Strategic Investments and Acquisitions. We have made, and intend to make, strategic investments and acquisitions are set forth belowto increase user acquisition and are categorized by business area. For thoseengagement, improve customer experience and expand our product, service, and content offerings. Our strategic investments and acquisitions described belowmay affect our future financial results, including our margins and our net income. For example, we expect that our recent acquisitions of Youku Tudou and a controlling stake in Lazada will have a negative effect on our financial results, at least in the short-term. In addition, some of our acquisitions and investments may not be successful, and we may incur impairment charges in the future.
Components of Results of Operations
Revenue
The following table sets forth the principal components of our revenue for the periods indicated:
| Year ended March 31, | |||||||||||||||||||||
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| 2014 | 2015 | 2016 | |||||||||||||||||||
| RMB | % of revenue | RMB | % of revenue | RMB | US$ | % of revenue | |||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||
China commerce | ||||||||||||||||||||||
Retail | 42,832 | 82 | % | 59,732 | 78 | % | 80,033 | 12,412 | 79 | % | ||||||||||||
Wholesale | 2,300 | 4 | % | 3,205 | 4 | % | 4,288 | 665 | 4 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total China commerce | 45,132 | 86 | % | 62,937 | 82 | % | 84,321 | 13,077 | 83 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
International commerce | ||||||||||||||||||||||
Retail | 938 | 2 | % | 1,768 | 3 | % | 2,204 | 342 | 2 | % | ||||||||||||
Wholesale | 3,913 | 7 | % | 4,718 | 6 | % | 5,425 | 841 | 6 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total international commerce | 4,851 | 9 | % | 6,486 | 9 | % | 7,629 | 1,183 | 8 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Cloud computing | 773 | 2 | % | 1,271 | 2 | % | 3,019 | 468 | 3 | % | ||||||||||||
Others | 1,748 | 3 | % | 5,510 | 7 | % | 6,174 | 958 | 6 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total revenue | 52,504 | 100 | % | 76,204 | 100 | % | 101,143 | 15,686 | 100 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
GMV | 1,677,587 | 2,443,721 | 3,092,385 |
We generate substantially all of our revenue from our retail and wholesale marketplaces. We also earn revenue from services associated with our cloud computing services and other revenue primarily from mobile Internet services provided by UCWeb. Substantially all of our revenue is attributable to our businesses in China. See "— Our Monetization Model" for additional information regarding our revenue.
Cost of Revenue
The principal components of our cost of revenue include: payment processing fees paid to Alipay or other financial institutions; traffic acquisition costs paid to third-party marketing affiliates either at a fixed price or on a
revenue sharing basis; expenses associated with the operation of our websites, such as bandwidth and co-location fees, and depreciation and maintenance expenses for our computers, servers, call centers and other equipment; salary, bonuses, benefits and share-based compensation expense relating to customer service and web operation personnel and payment processing consultants; logistics costs relating to fulfillment services provided to us by our affiliate Cainiao Network, primarily related to Tmall Supermarket; rebates and subsidies mainly relating to our new business initiatives; business taxes and related surcharges; and allowance for doubtful accounts in relation to the micro loans and VAT receivables.
Product Development Expenses
Product development expenses primarily include salaries, bonuses, benefits and share-based compensation expense for our employees engaged in the development, maintenance and enhancement of the infrastructure, applications, operating systems, software, databases and networks for our marketplaces, mobile products and service platforms. In addition, product development expenses include royalty fees paid to Yahoo pursuant to the Yahoo TIPLA. This royalty fee arrangement was terminated upon completion of our initial public offering in September 2014. We expense all of our product development costs as they are incurred.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of online and offline advertising expenses, promotion expenses, sales commissions paid for membership acquisition for our wholesale marketplaces, and salaries, bonuses, benefits and share-based compensation expense for our employees engaged in sales and marketing functions.
General and Administrative Expenses
General and administrative expenses consist mainly of salaries, bonuses, benefits and share-based compensation expense for our management and administrative employees, professional services fees, office facilities, other support overhead costs and charitable contributions. In fiscal year 2014, these expenses included an equity-settled donation expense of RMB1,269 million relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai. As there are no vesting conditions attached to the above share options, equity-settled donation expense of RMB1,269 million was recognized in full. See note 9 to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report for further information on this expense.
Interest and Investment Income, Net
Interest and investment income, net consists of interest income, investment gain or loss related to our treasury management activities and gain or loss on deemed disposals, disposals and revaluation of our long term equity investments. Our interest and investment income, net became more significant in fiscal year 2015 as a result of a net gain of RMB6,535 million recognized with respect to the revaluation of previously held equity interests, relating primarily to the step acquisitions of UCWeb, OneTouch and AutoNavi. In fiscal year 2016, we also recognized a deemed disposal gain of RMB24,734 million (US$3,836 million) arising from the deconsolidation of Alibaba Pictures and a gain of RMB18,603 million (US$2,885 million) from the revaluation of our previously held equity interest in Alibaba Health.
Interest Expense
Our interest expense is comprised of interest payments and amortization of upfront fees and incidental charges associated with our bank borrowings and unsecured senior notes issued in November 2014 to refinance our previous syndicated loan arrangements. In addition, we obtained a US$3.0 billion revolving credit facility in August 2014 and a five-year term loan facility of US$3.0 billion in March 2016, which has been subsequently upsized to US$4.0 billion, both of which we have not yet closed, there can be no assurance that the closing conditions will be satisfied in a timely manner or at all.drawn as of March 31, 2016.
MobileOther Income, Net
UCWeb, China's largest mobile browser companyOther income, net primarily consists of royalty fees and software technology service fees paid by Alipay, government grants as well as exchange gain or loss. Alipay pays us royalty fees and software technology service fees pursuant to an intellectual property and software technology services agreement, as amended in termsAugust 2014, or the amended Alipay IPLA. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Share and Asset Purchase Agreement — Alipay Intellectual Property License and Software Technology Services Agreement" for further information on the arrangements between us and Alipay. Government grants primarily relate to grants by central and local governments in connection with our contributions to technology development and investments in local business districts. These grants may not be recurring in nature, and we recognize such income when the grants are received and no further conditions need to be met. Exchange gain or loss, arising from our operations and treasury management activities, recognized in our income statement is largely a result of monthly mobile active users, accordingdepreciation or appreciation of RMB, respectively. The amount is also partly impacted by such currency movements on our hedging activities related to iResearch, which had 310 million active users globally during March 2015. Over several years through several rounds of investments, the last of which was completed in April 2014, we acquired 66% of the economic interests of UCWeb in the form of convertible preferred shares. In June 2014, we exchanged all the outstanding shares in UCWeb held by the other shareholders with cash of US$458 million and restricted shares and RSUs in the aggregate number of 12.3 million.portion that is deemed ineffective from an accounting perspective.
Income Tax Expense
Our income tax expense is comprised primarily of current tax expense, mainly attributable to certain profitable subsidiaries in China, and deferred tax expense, mainly including withholding tax on dividends to be distributed by our major subsidiaries operating in China.
Taxation
AutoNavi,
AutoNavi is a leading provider of digital map, content and navigation and location-based services in China.
DingTalk
DingTalk is our proprietary enterprise communications app that provides support for text, voice and video communication, work flow management and collaboration among team members and enterprises of various sizes. With a built-in enterprise directory, users can initiate text chats or voice and video conference calls as well as secured group chats with members of their organization. DingTalk unifies the tasks of critical communication and collaboration in the work place.
Alibaba Health
Alibaba Health is our flagship vehicle to bring innovative solutions to the healthcare industry.
Monetization Platforms and Systems
Alimama
Alimama is our marketing technology platform that provides the publisher-side serving and demand-side functionalities for merchants and brands to place various marketing display formats on our marketplaces and other third-party properties. The platform supports P4P marketing based on keyword search rankings or display marketing in fixed positions that are bid through auctions, as well as cost-per-thousand impression-based (CPM) marketing formats via the display of photos and graphics.
The ranking of P4P search results on our core commerce marketplaces is based upon proprietary algorithms that take into account the bid price of keywords, the popularity of an item or merchant, customer feedback ranking of merchants and quality of product displays. For display marketing, the Alimama platform serves marketing messages based on data from our ecosystem, including transactions on our core commerce platforms, payment data from Ant Financial Services, logistics data from Cainiao Network, user navigation and behavioral data from our core commerce and media entertainment properties, as well as demographic and location-based data. The relevance and comprehensiveness of data based on commercial activities and user activities around our ecosystem provide a powerful and unique advantage for Alimama to target the most relevant information to the most relevant users.
We have developed a system that we call Super ID to track users across different properties and devices. For example, we are able to identify a user watching a Youku Tudou video on a PC as the same user shopping on our Taobao App. Our Super ID system takes disparate data and attributes the data to a single user, and in this we can provide marketers with valuable insights into user behavior and preferences.
The Alimama technology platform supports marketing delivered through personal computers and mobile devices. Under Alimama's bidding system, marketers may set a higher or lower bid price for mobile marketing than the bid price for marketing on personal computers. Alimama also has an affiliate marketing program to place marketing displays on third-party websites and mobile apps, thereby enabling marketers, if they so choose, to extend their marketing and promotional reach to properties and users beyond our own marketplaces.
We believe we have one of the largest online marketing affiliate networks in China in terms of revenue shared with third-party website properties and mobile apps. Our affiliate marketing program not only provides additional traffic to our core commerce marketplaces, but also generates revenue to us. Under the Taobaoke program, merchants on Taobao Marketplace and Tmall can generate additional traffic and transactions from third-party websites and mobile apps, and the marketer pays commissions based on a percentage of transaction value sourced from such third-party affiliates. We share a significant portion of that was previously listedcommission with our third-party affiliate partners.
Alimama operates the Taobao Ad Network and Exchange, or TANX, one of the largest real-time bidding online marketing exchanges in China. TANX helps publishers to monetize their media inventories both on web properties and mobile apps. TANX automates the Nasdaq Global Select Market. Inbuying and selling of billions of marketing impressions on a daily basis. Participants on TANX include publishers, marketers and demand side platforms operated by agencies.
Alimama also offers a data management platform through TANX, or DMP, for marketers that wish to execute their campaigns with proprietary and tailored data. DMP helps the marketer to identify targeted audience groups by mapping their own proprietary data set to the data captured in our ecosystem. By customizing and tagging the attributes of consumers, the marketer is able to reach and expand its targeted audiences.
UCWeb Mobile Marketing System
Our mobile search engine, Shenma (), monetizes through a keyword bidding system that enables marketers to reach users who search for information related to their products or services. We engage third-party distributors to sell some of our mobile marketing services to marketers. UC Browser monetizes primarily through time-based display marketing where marketers place icons that link to their webpage or apps in UC Browser. Its news feed feature UC Headline enables marketers to place marketing messages in news feed on cost-per-click (CPC) basis or impressions on time basis. Our mobile marketing platform enables marketers to launch targeted marketing for apps, games, web pages and services on mobile media including UC Browser, UC Headline and third-party media partners, leveraging our deep consumer insights.
Youku Tudou Advertising System
Youku Tudou monetizes primarily through brand advertising. Its online advertising services include in-video, display, sponsorship and other forms of advertisements. In-video advertisements appear at certain times during the playback of a video. These video advertisements can be pre-roll, post-roll, mid-roll or pause advertisements. Display advertisements can be delivered alongside a video and may take the form of graphical banners or text hyperlinks. Other forms of advertisements include product placements in the web video series produced in-house, sponsored live events or viral videos produced in-house. Youku Tudou's advertising solutions present brand advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia formats with the interactivity and precise targeting capabilities of the Internet.
Other Major Elements of our Ecosystem
Logistics
Cainiao Network is a joint venture that we formed in May 2013 with other shareholders who are engaged in logistics, retail, and real estate, including four major express courier companies in China. Cainiao Network does not deliver packages itself. It operates a logistics data platform that leverages the capacity and capabilities of logistics partners to fulfill transactions between merchants and consumers at a large scale. Cainiao Network uses
data insights and technology to improve efficiency across the logistics value chain. The proprietary data platform provides real-time access to data for merchants to better manage their inventory and warehousing and for consumers to track their orders. In addition, Cainiao Network's data platform helps logistics service providers to improve the efficiency and effectiveness of their services, such as leveraging data to optimize the delivery routes used by express courier companies.
Cainiao Network provides two major types of services — assisted-delivery services and end-to-end logistics solutions.
Through the platform approach, Cainiao Network integrates the resources of logistics service providers to build out the logistics ecosystem. As of March 31, 2016, Cainiao Network's fifteen strategic express courier partners employed over 1,700,000 delivery personnel in more than 600 cities and 31 provinces in China, according to data provided by them. Collectively they operated more than 150,000 hubs and sorting stations. The top six of these express courier partners handled the delivery of the majority of packages from our China retail marketplaces in the twelve months ended March 31, 2016. We believe that orders from transactions generated on our marketplaces represented a significant portion of these express courier partners' total delivery volumes in the twelve months ended March 31, 2016. Cainiao Network is still in an early stage of development. It has yet to monetize the majority of the value-added services it provides under the assisted-delivery model.
In addition to enabling the fulfillment and delivery of orders that fit in standard size packages, we and Cainiao Network also partner with specialized logistics service providers for category-specific solutions where items require special handling and services. The following are examples of category-specific solutions that we and Cainiao Network have organized to enhance the consumer experience:
In order to enhance consumer experience and improve efficiency in last-mile delivery in both rural and urban areas, Cainiao Network is also engaged in initiatives including arranging delivery from county-level Rural Taobao stations to villages, and setting up pick-up stations around urban communities.
During the twelve months ended March 31, 2016, Cainiao Network and its logistics partners enabled the delivery of 12.2 billion packages from our offlineChina retail marketplaces. Currently, Cainiao Network primarily derives its revenue from end-to-end logistics solutions and generates a significant portion of its revenue from providing these services to Tmall Supermarket.
Proprietary Logistics Data Platform
Cainiao Network operates a proprietary logistics data platform. This platform links consumers, merchants and logistics service providers and allows them to share information relating to orders, delivery routes and time, and user feedbacks. The logistics data platform can interface with a broad range of systems including our marketplace transaction systems, Alipay's payment system, third-party transportation management systems, and the CRM, ERP and warehouse management systems of merchants. Information generated from the data platform serves many purposes: merchants can review the performance of delivery service providers on different routes; logistics service providers can compare their performance against peers; and consumers can track orders, receive delivery time information, and stay in touch with delivery personnel.
Recent Equity Financing of Cainiao Network
Cainiao Network completed a round of equity financing of approximately RMB10 billion in March 2016. Existing shareholders and new investors, including major sovereign wealth funds and private equity funds, participated in the financing. We subscribed for Cainiao Network's shares on an approximately pro rata basis. As of March 31, 2016, we own an approximately 47% equity interest in Cainiao Network. See "Item 5. Operating and Financial Review and Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities — Logistics — Cainiao Smart Logistics Network Limited."
Payments
Alipay, a wholly-owned subsidiary of Ant Financial Services, provides payment and escrow services for transactions on Taobao Marketplace, Tmall, 1688.com, AliExpress and certain of our other platforms. Alipay also provides payment and escrow services to third parties in China and overseas. Alipay is the principal means by which consumers pay for their purchases on our China retail marketplaces. Except for credit card transactions where Alipay charges the merchant to cover processing costs with banks, neither we nor Alipay charge any payment fees to merchants doing business on our platform. Instead, we pay Alipay a fee to cover its cost of operating payment and escrow services it provides on our marketplaces pursuant to a commercial agreement with Ant Financial Services and Alipay. For additional details on our commercial relationship with Ant Financial Services and Alipay, see "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries."
Alipay also offers a mobile app, Alipay Wallet, which further facilitates mobile commerce and other consumer services and digital transactions by making payment accessible and convenient through a mobile device. During the twelve months ended March 31, 2016, there were over 450 million Alipay annual active users.
Local Services
Through investee companies, we are engaged in the online-to-offline, or O2O, local services business involving restaurants, food delivery, movie ticketing and retail stores, among others.
Koubei Restaurant and Local Services Guide
In 2015, we and Ant Financial Services set up the joint venture Koubei (), one of the leading restaurant and local services guide businesses in China. Koubei operates O2O services in conjunction with Alipay and AutoNavi's map navigation by generating demand to local establishments such as restaurants, supermarkets and convenient stores by offering consumers a "closed loop" experience, from acquiring information on mobile to finding the store to claiming discounts to payment. For the three months ended March 31, 2016, Koubei generated RMB21 billion (US$3 billion) in GMV settled through Alipay with merchants.
Ele.Me Food Delivery
In March 2016, we jointly invested with Ant Financial Services in Ele.me (), a leading food delivery company in China. Consumers using the company's food delivery app can order meals, snacks and beverages on a mobile device. Through a delivery network of employed and outsourced personnel, the company's service covered over 300 cities in China as of March 31, 2016. Under a cooperation agreement with the company, food orders generated from the Taobao App and Alipay Wallet are fulfilled by Ele.me.
Movie Ticketing
Alibaba Pictures, our equity investee and the flagship unit of our movie business, operates an online movie ticketing platform. In May 2016, the platform raised RMB1.7 billion Series A financing from a group of investors led by CDH Investments, Ant Financial Services and Sina.com.
Customer Service for China Retail Marketplaces
Merchants on our platforms serve their customers with tools we provide. In addition, our customer service representatives serve consumers and merchants on our marketplaces through telephone hotlines, real-time instant messaging and online inquiry systems. Our dispute resolution system's adjudication panel of experienced consumers and merchants provides an easy way for consumers and merchants to resolve their disputes, while other more complicated disputes are referred to our customer service representatives. In the twelve months ended March 31, 2016, we received dispute cases representing approximately 0.04% of annual orders placed on our China retail marketplaces.
With certain exceptions, consumers on our China retail marketplaces may return the purchased goods within seven days from their receipt. Alipay's payment escrow services ensure efficient refunds. In addition, for qualified buyers with good credit history, we may accelerate refund procedure by making the refund payment directly to the buyer upon the buyer's refund application and providing of proof of shipment for the return goods.
Transaction Platform Safety Programs
Preserving the integrity of our marketplaces is a top priority for us. We are committed to protecting intellectual property rights and eradicating counterfeit merchandise and fictitious activities. Counterfeiting and infringement of intellectual property, both online and offline, are industry-wide issues affecting brands and merchants globally. We work with rights holders, trade associations and governments around the world.
Anti-Counterfeiting
To protect consumers, merchants and brands and to maintain the integrity of our marketplaces, we have taken the following measures through our platforms, with other industry participants and with governmental authorities:
Combatting Fictitious Transactions
With respect to fictitious activities, we have and will continue to invest significant resources in protecting the trust and credit system we have built on our marketplaces. Measures to prevent, detect and reduce the occurrence of fictitious transactions on Taobao Marketplace and Tmall we have implemented include:
Penalties
We aim to protect consumers from being affected by excluding counterfeit merchandise and fictitious transactions from the ranking system, credit system and transaction volume statistics. When such activities are confirmed, we penalize the parties involved through a number of means including: limiting the relevant merchant's ability to add listings, imposing restrictions on participation in promotional activities on our marketplaces, placing
the relevant merchant's product listings at the bottom in search ranking results, closing down storefronts and permanently banning the merchant from opening any accounts on our platforms.
Consumer Protection
We believe every consumer has the right to safety and protection from false and misleading claims. We encourage our merchants to make product quality a priority and have set up various programs to this end. In addition, all Tmall merchants are required to contribute to and maintain a consumer protection fund for the benefit of consumers. Consumer protection fund deposit requirements vary by product category and typically range from RMB50,000 to RMB150,000 per storefront. For Tmall Global merchants, the consumer protection fund deposit requirement is typically RMB150,000 for standard storefronts. The majority of Taobao Marketplace merchants maintain individual consumer protection funds whose minimum amounts range from RMB1,000 to RMB10,000. All Tmall and Taobao Marketplace merchants are required to sign agreements with us authorizing us to make deductions from their Alipay accounts in the event of confirmed consumer claims. Many merchants on both Tmall and Taobao Marketplace fulfill more than our basic requirements to demonstrate their confidence in the quality of their services and products. They provide a larger deposit than required and make additional service commitments, such as expedited shipment, free maintenance for electronics and installation services for furniture purchases. We incentivize merchants to set up customer protection funds by programming our search results to prioritize the rankings of product listings for merchants who have established these funds. In addition, the consumer protection fund amounts are displayed on the merchant's information page. As of March 31, 2016, consumer protection funds deposited in the Alipay accounts of merchants on our China retail marketplaces in aggregate totaled over RMB17 billion. If the amount in a merchant's consumer protection fund is insufficient, we may still choose to compensate consumers ourself for any losses, although we are not legally obligated to do so.
Our Technology
Technology is key to our success in achieving efficiency for our business, improving the user experience, and enabling innovation. As of March 31, 2016, we employed a team of over 18,000 research and development personnel engaged in building our technology platform and developing new online and mobile products. Key components of our technology include those described below:
Cloud Computing
Our cloud computing platform, called Apsara, is a general purpose distributed computing platform built with proprietary technology that enable server clusters to perform with enhanced computing power. Apsara offers a suite of cloud services including elastic computing, database storage and services, and large-scale data processing services through web-based API.
Content Delivery Network
The technology underlying AliCDN, our content delivery network, accelerates the loading of product photographs on web pages delivered to users and offers them a fast and smooth experience.
Data Science
Our data science technology serves various types of data-intensive computational needs, including deep learning, high-volume batch processing and multi-variable and multi-dimensional real-time analytics. The data mining and transaction, payment and behavioral data science capabilities are used extensively in numerous applications such as search and online marketing on our marketplaces.
Distributed Relational Database
OceanBase, our proprietary distributed relational database management system, plays a critical role in supporting transaction processing on our marketplaces in a cost-efficient manner.
Search and Online Marketing
Our standard product unit database, or SPU database, is built on the vast amount of items listed on Taobao Marketplace and Tmall. The comprehensive transactional and user behavior data generated on our marketplaces enable us to construct a powerful search engine that generates personalized results.
Our online marketing technology platform supports millions of online marketers and delivers tens of billions of online marketing impressions every day. Our online marketing technology enables us to continuously improve the effectiveness of our online marketing services for our merchants through the use of aggregated behavioral targeting data and analytics.
Deep Learning
Alimama utilizes cloud-based deep learning extensively to enhance the consumer targeting efficiency and return on investments for online marketers of our P4P marketing, display marketing and DMP service offerings. Supported by our Apsara cloud computing system, Alimama operates a cluster of servers that is capable of analyzing terabytes of data points for the modeling of tens of billions online marketing impressions.
Security
We are committed to maintaining a secure e-commerce ecosystem. Our back-end security system handles hundreds of millions of instances of malicious attacks each day to safeguard the security of our e-commerce and cloud platforms.
Multi-Region Availability
Compared to social media platforms, the data availability and security requirement for transactions platforms are higher. Our transaction system is kept live and available in data centers in multiple regions in China. This configuration provides more scalability, stability and redundancy than the traditional redundancy configurations.
YunOS
Our YunOS is a cloud-based mobile operating system for smartphones, Internet of Things devices, set-top boxes, smart televisions and smart cars, among others. With YunOS, users can conveniently and securely synchronize data, such as call data, text messages and photos, across their devices through the cloud. System level based H5/Web, dynamic service linking and unified data technologies, as well as a multi-level security framework enable developers to deliver location-based and contextual Internet services with a focus on the data needs of users.
Sales and Marketing
As Taobao Marketplace is China's largest online shopping destination, we invested US$294enjoy significant organic traffic through word-of-mouth and general awareness of our brand and platform. We believe word-of-mouth, and the reputation and ubiquitous awareness of our brand and platforms in China and, increasingly, abroad, provide us with the best and most cost-efficient marketing channel. We employ a variety of methods to attract potential merchants and consumers, paying members, online marketers and other ecosystem participants and to promote our brands.
We generate the majority of our revenues through online marketing services from our merchants. As these merchants are mostly participants on our marketplaces, we do not need to rely on a large sales force for our retail marketplaces. The majority of our sales staff is engaged in selling membership packages to registered members of our wholesale marketplaces through telephone sales and field sales.
Corporate Social Responsibility
Since our founding, we have been highly committed to sustainable corporate responsibility projects, both through charitable endeavors and by extending the benefits of our ecosystem to the community at large. We believe the best approach to corporate social responsibility is through embedding elements of social responsibility in our business model. Our achievements and initiatives in the areas of corporate social responsibility include those described below:
Creating Job Opportunities
The breadth of our ecosystem and the range of different types of service providers needed within it create employment opportunities. In addition to providing direct business opportunities for merchants, our ecosystem has created new opportunities for service providers in logistics, marketing, consulting, operations outsourcing, training and other online and mobile commerce professions. According to AliResearch, our research division, as of December 2015, it is estimated that our China retail marketplaces contributed to the creation of over 15 million job opportunities, including people working directly for online storefronts and service providers to merchants.
With the power of the Internet, our platforms have leveled the playing fields for businesses in many aspects making it an inclusive place for everyone to thrive and prosper. In fiscal year 2016, approximately half of our active sellers on our China retail marketplaces are female. We also have programs that create equal opportunities for everyone such as cloud customer service program for people with disabilities, entrepreneur programs for university students and Rural Taobao partnership program targeting entrepreneurs returning to their villages to start businesses. We have also established entrepreneurial funds in Hong Kong and Taiwan to support the career and entrepreneurial aspirations of young people locally.
Alleviating Poverty
As we expand to rural areas in China and help rural farmers reach urban consumers, we have created opportunities for people living in poverty to elevate their income levels. For the twelve months ended March 31, 2016, merchants in over 800 state-designated poverty counties in China in aggregate generated GMV of over RMB20 billion on our China retail marketplaces.
Internet Approach to Charity
We support and promote a number of charitable and socially responsible initiatives and programs in ways that we believe are in alignment with our core values and our mission. Since 2010, we have earmarked 0.3% of our annual revenue to fund efforts designed to encourage environmental awareness and conservation and other corporate social responsibility efforts. In 2011, we established Alibaba Foundation, a private charity fund that focuses on supporting environmental protection in China and helping the disadvantaged such as children born with heart defects in underdeveloped areas of China.
Over RMB400 million. In fiscal year 2016, Alibaba Foundation made over RMB210 million in newly issued preferreddonations to support various charitable causes and ordinary shares of AutoNavi, representing approximately 28% of its total outstanding shares on a fully-diluted basis.initiatives. We have also leveraged our platform to facilitate other charitable organizations to raise over RMB190 million in donations.
Over 60 projects. In July 2014, wefiscal year 2016, Alibaba Foundation supported more than 60 charitable projects, including those hosted by The Nature Conservancy, National Geographic Air and Water Conservation Fund,
acquiredPaulson Institute and Institute of Public and Environmental Affairs. For example, we supported the remainingdevelopment of Wei Lan Map () mobile app that exposes pollution hotspots in China and the companies and factories responsible for it on a map. Hundreds of corporations have made press releases about the data exposed by this app while a portion of these corporations have reacted by taking actions to rectify the problems exposed.
Over 130,000 hours. Starting from September 2015, we encourage our employees to perform at a minimum three hours of charitable activities every year. Since the program's inception until the end of fiscal year 2016, this program saw over 130,000 hours of social service performed by our employees.
Over 3.3 billion participations. We recognize our immense influence on our ecosystem and we leverage that to extend the reach of our charitable work. In fiscal year 2016, our platforms facilitated over 3.3 billion charitable participations involving over 280 million consumers and over 1.5 million merchants. We encourage our merchants, consumers and other ecosystem participants to participate in socially responsible activities. For example, charitable organizations can set up storefronts on our marketplaces to raise funds and engage volunteers. Merchants can designate certain percentage of their sales proceeds generated on our platforms to go to charitable organizations. Consumers can contribute to charitable causes through purchasing these products or participating in charity auctions hosted on our platforms.
Competition
We face competition principally from established Chinese Internet companies, such as Tencent, Baidu and their respective affiliates, as well as from certain offline retailers and vertical e-commerce players, including those that specialize in a limited number of categories. These competitors generate significant traffic and have established brand recognition, significant technological capabilities and significant financial resources. The areas in which we compete include:
We also face competition from major global Internet companies, including e-commerce companies around the world. Although foreign e-commerce companies currently have a limited presence in China, we face significant competition from them in the areas of cross-border commerce, in particular as we further carry out geographic expansions into international markets.
Seasonality
Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, including seasonal factors and economic cycles that influence consumer spending as well as promotional shopping activities we conduct.
Historically, we have experienced the highest levels of revenues in the fourth calendar quarter of each year due to a number of factors, including merchants allocating a significant portion of their online marketing budgets
to the fourth calendar quarter, promotions, such as Singles Day on November 11 of each year and the impact of seasonal buying patterns in respect of certain categories such as apparel. We have also experienced lower levels of revenues in the first calendar quarter of each year due to a lower level of allocation of online marketing budgets by merchants at the beginning of the calendar year and the Chinese New Year holiday, during which time consumers generally spend less and businesses in China are generally closed. In addition, seasonal weather patterns may affect the timing of buying decisions. For example, unexpectedly long periods of warm weather could delay the purchase of heavier clothing items that have higher average selling prices. Moreover, as our business grows, we expect that our fixed costs and expenses, such as payroll and benefits, bandwidth and co-location fees, will continue to increase, which will result in operating leverage in seasonally strong quarters but can significantly pressure operating margins in seasonally weak quarters.
Regulation
We operate in an increasingly complex legal and regulatory environment. We and our key service provider, Ant Financial Services, are subject to a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC laws, rules and regulations relevant to our business and operations. Areas in which we are subject to laws, rules and regulations outside of the PRC include data protection and privacy, consumer protection, content regulation, intellectual property, competition, cross-border trade, taxation, anti-money laundering and anti-corruption. See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We and Ant Financial Services are subject to a broad range of laws and regulations, and future laws and regulations may impose additional requirements and other obligations on our business or otherwise that could materially and adversely affect our business, financial condition and results of operations."
Our online and mobile commerce businesses are classified as value-added telecommunication businesses by the PRC government. Current PRC laws, rules and regulations generally restrict foreign ownership in value-added telecommunication services. As a result, we operate our online and mobile commerce businesses and other businesses in which foreign investment is restricted or prohibited through variable interest entities, each of which is owned by PRC citizens or by PRC entities owned by PRC citizens, and holds all licenses associated with these businesses.
The applicable PRC laws, rules and regulations governing value-added telecommunication services may change in the future. We may be required to obtain additional approvals, licenses and permits and to comply with any new regulatory requirements adopted from time to time. Moreover, substantial uncertainties exist with respect to the interpretation and implementation of these PRC laws, rules and regulations. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations."
Regulation of Foreign Investment
The Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, the latest version of which came into effect on April 10, 2015, was promulgated and recently amended by the MOFCOM and the National Development and Reform Commission and governs investment activities in the PRC by foreign investors. The Catalogue divides industries into three categories — "encouraged," "restricted," and "prohibited" for foreign investment. Industries not listed in the Catalogue are generally deemed as falling into a fourth category, "permitted." However, industries such as value-added telecommunication services, including Internet information services, are restricted from foreign investment. Among our significant subsidiaries, Taobao (China) Software Co., Ltd. and Zhejiang Tmall Technology Co., Ltd. are registered in China and mainly engaged in software development, technical services and consultations, which fall into the encouraged or permitted category under the latest Catalogue. These two significant subsidiaries have obtained all material approvals required for their business operations. The Catalogue does not apply to our significant subsidiaries that are registered and domiciled in Hong Kong, the British Virgin Islands or the Cayman Islands, and operate outside China. The
businesses of our other PRC subsidiaries — including PRC subsidiaries of our significant subsidiaries — are generally software development, technical services and consulting, which fall into the encouraged or permitted category. Industries such as value-added telecommunication services, including Internet information services, are generally restricted to foreign investment pursuant to the latest Catalogue. We conduct business operations that are restricted or prohibited to foreign investment through our variable interest entities.
In January 2015, the MOFCOM published a discussion draft of the proposed Foreign Investment Law, which embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOFCOM has solicited comments on this draft and substantial uncertainties exist with respect to its enactment timetable, the final version, interpretation and implementation. For more details, see "Item 3. Key Information — Risks Related to our Corporate Structure — Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law."
Regulation of Telecommunications and Internet Information Services
Regulation of Telecommunication Services
Under the Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated on September 25, 2000 by the State Council of the PRC and most recently amended in February 2016, a telecommunication services provider in China must obtain an operating license from the Ministry of Industry and Information Technology, or the MIIT, or its provincial counterparts. The Telecommunications Regulations categorize all telecommunication services in China as either basic telecommunications services or value-added telecommunications services. Our online and mobile commerce businesses, as well as Youku Tudou's online video businesses, are classified as value-added telecommunications services.
Foreign investment in telecommunications businesses is governed by the State Council's Administrative Rules for Foreign Investments in Telecommunications Enterprises, or the Foreign Investment Telecommunications Rules, issued by the State Council on December 11, 2001 and most recently amended in February 2016, under which a foreign investor's beneficial equity ownership in an entity providing value-added telecommunications services in China is not permitted to exceed 50%. In addition, for a foreign investor to acquire any equity interest in a business providing value-added telecommunications services in China, it must demonstrate a positive track record and experience in providing such services. However, according to the Notice on Lifting the Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce) promulgated by the MIIT on June 19, 2015, foreign investors are allowed to hold up to 100% of all equity interest in the online data processing and transaction processing business (operational e-commerce) in China, while other requirements provided by the Foreign Investment Telecommunications Rules shall still apply. It is unclear how this notice will be implemented and there exist high uncertainties with respect to its interpretation and implementation by authorities. The MIIT's Notice Regarding Strengthening Administration of Foreign Investment in Operating Value-Added Telecommunication Businesses, or the MIIT Notice, issued on July 13, 2006 prohibits holders of these services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending to conduct such businesses in China.
In addition to restricting dealings with foreign investors, the MIIT Notice contains a number of detailed requirements applicable to holders of value-added telecommunications services licenses, including that license holders or their shareholders must directly own the domain names and trademarks used in their daily operations and each license holder must possess the necessary facilities for its approved business operations and maintain such facilities in the regions covered by its license, including maintaining its network and providing Internet security in accordance with the relevant regulatory standards. The MIIT or its provincial counterpart has the power to require corrective actions after it discovers any non-compliance of the license holders, and where such license holders fail to take such steps, the MIIT or its provincial counterpart has the power to revoke the value-added telecommunications services licenses.
Regulation of Internet Information Services
As a subsector of the telecommunications industry, Internet information services are regulated by the Administrative Measures on Internet Information Services, or the ICP Measures, promulgated on September 25, 2000 by the State Council and amended on January 8, 2011. "Internet information services" are defined as services that provide information to online users through the Internet. Internet information services providers, also called Internet content providers, or ICPs, that provide commercial services are required to obtain an operating license from the MIIT or its provincial counterpart.
To the extent the Internet information services provided relate to certain matters, including news, publication, education or medical and healthcare (including pharmaceutical products and medical equipment), approvals must also be obtained from the relevant industry regulators in accordance with the laws, rules and regulations governing those industries.
Regulation of Advertising Services
The principal regulations governing advertising businesses in China are:
These laws, rules and regulations require companies such as ours that engage in advertising activities to obtain a business license that explicitly includes advertising in the business scope from the SAIC or its local branches.
Applicable PRC advertising laws, rules and regulations contain certain prohibitions on the content of advertisements in China (including prohibitions on misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest). Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited, and the dissemination of advertisements of certain other products, such as tobacco, patented products, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics, are also subject to specific restrictions and requirements.
Advertisers, advertising operators and advertising distributors, including the businesses that certain of the variable interest entities operate, are required by applicable PRC advertising laws, rules and regulations to ensure that the content of the advertisements they prepare or distribute are true and in compliance with applicable laws, rules and regulations. Violation of these laws, rules and regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke the violator's license or permit for advertising business operations. In addition, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe the legal rights and interests of third parties, such as infringement of intellectual proprietary rights, unauthorized use of a name or portrait and defamation.
Regulation of Online and Mobile Commerce
China's online and mobile commerce industry is at an early stage of development and there are few PRC laws, regulations or rules specifically regulating this industry. The SAIC adopted the Interim Measures for the Administration of Online Commodities Trading and Relevant Services on May 31, 2010 and replaced those measures with the Administrative Measures for Online Trading on January 26, 2014, which became effective on March 15, 2014. The SAIC also issued the Opinions on Strengthening the Administration of Online Group Buying Operations on March 12, 2012 to subject group buying website operators to the foregoing measures, especially those relating to marketplace platform service providers. On December 24, 2014, the MOFCOM promulgated the Provisions on the Procedures for Formulating Transaction Rules of Third Party Online Retail Platforms (Trial) to regulate the formulation, revision and enforcement of transaction rules for online retail marketplace platforms.
These newly issued measures impose more stringent requirements and obligations on the online trading or service operators as well as the marketplace platform providers. For example, the marketplace platform providers are obligated to make public and file its transaction rules with MOFCOM or its provincial counterparts, examine the legal status of each third-party merchant selling products or services on the platform and display on a prominent location on the web page of such merchant the information stated in the merchant's business license or a link to such business license, and a group buying website operator must only allow a third-party merchant with a proper business license to sell products or services on its platform. Where the marketplace platform providers also act as online distributors, these marketplace platform providers must make a clear distinction between their online direct sales and sales of third-party merchant products on the marketplace platform.
Since the promulgation of the Administrative Measures for Online Trading, the SAIC has issued a number of guidelines and implementing rules aimed at adding greater specificity to these regulations. The SAIC continues to consider and issue guidelines and implementing rules, and we expect that there will be further development of regulation in this industry. For example, three PRC governmental authorities (the Ministry of Finance, General Administration of Customs and State Administration of Taxation) issued a notice on March 24, 2016 to regulate cross-border e-commerce trading which has experienced rapid growth in recent years. The Notice on Tax Policies of Cross-Border E-Commerce Retail Importation effective as of April 8, 2016, or the New Cross-Border E-commerce Tax Notice, introduced the concept of the Cross-Border E-Commerce Retail Importation Goods Inventory, or the Cross-Border E-Commerce Goods Inventory, which are to be issued and updated by the three authorities together with other relevant authorities from time to time. Goods beyond the scope of the Cross-Border E-commerce Goods Inventory will have no tax codes and be effectively removed from cross-border e-commerce platforms. Two batches of the Cross-Border E-Commerce Goods Inventory have been issued on April 6, 2016 and April 15, 2016, respectively. Cosmetics imported for the first time, nutrition supplements and other special food products required to be registered with the State Food and Drug Administration are excluded from the Cross-Border E-Commerce Goods Inventory and will not be able to be sold on the relevant cross-border e-commerce platforms. However, pursuant to a transition policy issued by the General Administration of Customs, goods which have been imported to or in transit to the bonded areas and special regulated areas of customs before April 8, 2016 can still be sold on the cross-border e-commerce platforms no matter whether these goods are included in the Cross-Border E-Commerce Goods Inventory or not.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through various ministries and agencies, including the MIIT, the News Office of the State Council, the Ministry of Culture and the General Administration of Press and Publication. In addition to various approval and license requirements, these measures specifically prohibit Internet activities that result in the dissemination of any content which is found to contain pornography, promote gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC or compromise State security or secrets. ICPs must monitor and control the information posted on their websites. If any prohibited content is found, they must remove such content immediately, keep a record of it and report to the relevant authorities. If an ICP violates these measures, the PRC government may impose fines and revoke any relevant business operation licenses.
Regulations on Broadcasting Audio/Video Programs through the Internet
On July 6, 2004, the State Administration of Radio, Film and Television, or the SARFT, promulgated the Rules for the Administration of Broadcasting of Audio/Video Programs through the Internet and Other Information Networks, or the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the launch, broadcasting, aggregation, transmission or download of audio/video programs via the Internet and other information networks. Anyone who wishes to engage in Internet broadcasting activities must first obtain an audio/video program transmission license, with a term of two years, issued by the SARFT and operate pursuant to the scope as provided in such license. Foreign invested enterprises are not allowed to engage in these businesses.
On April 13, 2005, the State Council announced Several Decisions on Investment by Non-state-owned Companies in Culture-related Business in China. These decisions encourage and support non-state-owned companies to enter certain culture-related business in China, subject to restrictions and prohibitions for investment in audio/video broadcasting, website news and certain other businesses by non-state-owned companies. These decisions authorize the SARFT, the Ministry of Culture and the General Administration of Press and Publication, or the GAPP, to adopt detailed implementing rules according to these decisions.
On December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Circular 56, which came into effect as of January 31, 2008 and was amended on August 28, 2015. Circular 56 reiterates the requirement set forth in the Audio/Video Broadcasting Rules that online audio/video service providers must obtain a license from the SARFT. Furthermore, Circular 56 requires all online audio/video service providers to be either wholly state-owned or state-controlled. According to relevant official answers to press questions published on the SARFT's website dated February 3, 2008, officials from the SARFT and the MIIT clarified that online audio/video service providers that already had been operating lawfully prior to the issuance of Circular 56 may re-register and continue to operate without becoming state-owned or controlled, provided that such providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after Circular 56 was issued. These policies have been reflected in the Application Procedure for Audio/Video Program Transmission License.
On March 17, 2010, the SARFT issued the Internet Audio/Video Program Services Categories (Provisional), or the Provisional Categories, which classified Internet audio/video programs into four categories. Category I is only open to state-owned broadcast media companies operating in the television section, and the other three categories are open to privately held entities.
In 2009, the SARFT released a Notice on Strengthening the Administration of Online Audio/Video Content. This notice reiterated, among other things, that all movies and television shows released or published online must comply with relevant regulations on the administration of radio, film and television. In other words, these movies and television shows, whether produced in the PRC or overseas, must be pre-approved by the SARFT, and the distributors of these movies and television shows must obtain an applicable permit before releasing any such movie or television show. In 2012, the SARFT and the State Internet Information Office of the PRC issued a Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. In 2014, the General Administration of Press and Publication, Radio, Film and Television, or GAPPRFT, formerly the SARFT and the GAPP, released a Supplemental Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. This notice stresses that entities producing online audio/video content, such as Internet dramas and micro films, must obtain a permit for radio and television program production and operation, and that online audio/video content service providers should not release any Internet dramas or micro films that were produced by any entity lacking such permit. For Internet dramas or micro films produced and uploaded by individual users, the online audio/video service providers transmitting such content will be deemed responsible as the producer. Further, under this notice, online audio/video service providers can only transmit content uploaded by individuals whose identity has been verified and such content must comply with the relevant content management rules. This notice also requires that online audio/video content, include Internet drama and micro films, be filed with the relevant authorities before release.
On October 28, 2011, the SARFT issued the Administrative and Operational Requirements for Licensed Internet TV Organizations, commonly known as Circular 181, which came into effect as of the same date. Circular 181 requires that Smart TVs must be exclusively connected to a specific licensed Internet TV organization and must not have access to the public Internet or network operators' databases. Up to now, there are only seven licensed Internet TV organizations and all are state-owned companies.
On September 2, 2014, the GAPPRFT promulgated a Notice on Further Implementing the Relevant Provisions for the Administration of Broadcasting Foreign Films and TV dramas. The notice stresses that any foreign film or TV drama must have a License for Film Publication or a TV drama Issuance License before being broadcast online, and that the annual total number of foreign films and TV dramas broadcast by a website must not exceed 30% of the total amount of domestic films and TV dramas broadcast by such website in the preceding year. Furthermore, online video operators are required to report their annual plans for the import of foreign films and TV dramas to the GAPPRFT before the end of the preceding year. If the online video operators' import plans are approved, the samples, contracts, copyright certificates, plot summaries and other materials relevant to the foreign films and TV dramas are subject to further content examination before the issuance of Licenses for Film Publication or the TV drama Issuance Licenses. The notice also requires these online video operators to upload information about the foreign films and TV dramas to be broadcast to a unified platform for registration before March 31, 2015. Since April 1, 2015, unregistered foreign films and TV dramas are no longer allowed to be broadcast online.
Regulations on Internet Publication
The GAPP is responsible for nationwide supervision and administration of publishing activities in China. On June 27, 2002, the GAPP and the MIIT jointly promulgated the Internet Publication Tentative Administrative Measures, or the Internet Publication Measures, which took effect on August 1, 2002. Pursuant to the Internet Publication Measures, any entity engaged in Internet publishing activities must obtain the Internet Publication License from the GAPP before conducting any Internet publication activities. The term "Internet publication" is defined as Internet transmission activity by which Internet information service providers publish on the Internet or transmit to end-users via the Internet works that they or others have created, after selection and editing, for browsing, reading, use or downloading by the general public. The works in question primarily include (i) content that has already been published formally, such as books, newspapers, periodicals, audio/video products and electronic publications, or that has been made public via other media; and (ii) edited works of literature and art or works concerning natural science, social science, engineering or other topics.
On February 4, 2016, the GAPPRFT and the MIIT jointly promulgated the Online Publication Service Administration Rules, or the Online Publication Rules, which took effect on March 10, 2016 and replaced the Internet Publication Measures. Pursuant to the Online Publication Rules, an online publication service provider must obtain the Online Publication Service License from the GAPPRFT. The term "online publication service" is defined as the provision of online publications to the public through information networks. The term "online publications" is defined as digital works characteristic of publishing such as editing, production or processing provided to the public through information networks, and primarily include:
The Online Publication Rules expressly prohibit the foreign invested enterprises from providing online publication services. In addition, if an online publication service provider intends to cooperate for an online
publication services project with foreign invested enterprises, overseas organizations or overseas individuals, it must report to the GAPPRFT and obtain an approval in advance. Also, the online publication service provider is prohibited from lending, leasing, selling or otherwise transferring the Online Publication Service License, or to allow any other online information service provider to provide online publication services in its name.
Regulations on Internet Drug Information Service
The State Food and Drug Administration, or the SFDA, promulgated the Administrative Measures on Internet Drug Information Service in July 2004 and certain implementing rules and notices thereafter. These measures set out regulations governing the classification, application, approval, content, qualifications and requirements for Internet drug information services. An ICP service operator that provides information regarding drugs or medical equipment must obtain an Internet Drug Information Service Qualification Certificate from the applicable provincial level counterpart of the SFDA.
Regulations on Internet News Publication
Publishing and disseminating news through the Internet are highly regulated in the PRC. On November 7, 2000, the State Council Information Office, or SCIO, and the MIIT jointly promulgated the Provisional Measures for Administrating Internet Websites Carrying on the News Publication Business, or Internet News Measures. These measures require an ICP operator (other than a government authorized news unit) to obtain the approval from SCIO to publish news on its website or disseminate news through the Internet. Furthermore, any disseminated news is required to be obtained from government-approved sources based on contracts between the ICP operator and these sources. The copies of such contracts must be filed with relevant government authorities.
On September 25, 2005, the SCIO and the MIIT jointly issued the Provisions on the Administration of Internet News Information Services, requiring Internet news information service organizations to provide services as approved by the SCIO, subject to annual inspection under the new provisions. These Provisions also provide that no Internet news information service organizations may take the form of a foreign invested enterprise, whether jointly or wholly owned by the foreign investment, and no cooperation between Internet news information service organizations and foreign invested enterprise is allowed before the SCIO completes the security evaluation.
Regulations on Internet Culture Activities
On February 17, 2011, the Ministry of Culture promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture Measures. The Internet Culture Measures require ICP operators engaging in "Internet culture activities" to obtain a permit from the Ministry of Culture. The term "Internet culture activities" includes, among other things, online dissemination of Internet cultural products (such as audio-video products, gaming products, performances of plays or programs, works of art and cartoons) and the production, reproduction, importation, publication and broadcasting of Internet cultural products.
On November 20, 2006, the Ministry of Culture issued Several Suggestions of the Ministry of Culture on the Development and Administration of the Internet Music, or the Suggestions, which became effective on November 20, 2006. The Suggestions, among other things, reiterate the requirement for the Internet service provider to obtain an Internet culture business permit to carry on any business relating to Internet music products. In addition, foreign investors are prohibited from operating Internet culture businesses. However, the laws and regulations on Internet music products are still evolving, and there have not been any provisions stipulating whether or how music video will be regulated by the Suggestions.
On August 18, 2009, the Ministry of Culture promulgated the Notice on Strengthening and Improving the Content Review of Online Music. According to this notice, only "Internet culture operating entities" approved by the Ministry of Culture may engage in the production, release, dissemination (including providing direct links to music products) and importation of online music products. The content of online music must be reviewed by or filed with the Ministry of Culture. Internet culture operating entities should establish a strict self-monitoring system of online music content and set up a special department in charge of such monitoring.
On October 23, 2015, the Ministry of Culture promulgated the Notice on Further Strengthening and Improving the Content Review of Online Music, which took effect on January 1, 2016. According to this notice, ICP operators are required to submit their content administrative system, review procedures, and work standards to the provincial culture administrative department where they are located for filing within a prescribed period.
Regulations on Producing Audio/Video Programs
On July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, effective as of August 20, 2004 and amended on August 28, 2015. These Measures provide that anyone who wishes to produce or operate radio or television programs must first obtain an operating permit.
On February 1, 2002, the State Council promulgated the Regulations for the Administration of Films, or the Film Regulations, effective as of February 1, 2002. The Film Regulations set forth the general regulatory guidelines for China's film industry and address practical issues with respect to production, censorship, distribution and screening. They also establish the SARFT as the sector's regulatory authority, and serve as the foundation for all other legislation promulgated in this area. The Film Regulations provide the framework for an industry-wide licensing system operated by the SARFT, under which separate permits (and permit application procedures) apply.
Regulation of Internet Security
The Decision in Relation to Protection of the Internet Security enacted by the Standing Committee of the National People's Congress of China on December 28, 2000 provides that the following activities conducted through the Internet are subject to criminal punishment:
The Administrative Measures on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public Security on December 16, 1997 and amended on January 8, 2011, prohibit the use of the Internet in a manner that would result in the leakage of State secrets or the spread of socially destabilizing content. The Provisions on Technological Measures for Internet Security Protection, or the Internet Security Protection Measures, promulgated on December 13, 2005 by Ministry of Public Security require all ICPs to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws and regulations. Under these measures, the value-added telecommunications services license holders must regularly update information security and content control systems for their websites and must also report any public dissemination of prohibited content to local public security authorities. If a value-added telecommunications services license holder violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.
The Communication Network Security Protection Administrative Measures, which was promulgated by the MIIT on January 21, 2010, require that all communication network operators including telecommunications services providers and Internet domain name service providers divide their own communication networks into units. Such communication network units shall be rated in accordance with degree of damage to national security, economic operation, social order and public interest assuming such units is damaged. The communication network operators must file the division and ratings of their communication network with MIIT or its local counterparts. If a communication network operator violates these measures, the MIIT or its local counterparts may order rectification or impose a fine up to RMB30,000 in case such violation is not duly rectified.
Internet security in China is also regulated and restricted from a national security standpoint. On July 1, 2015, the National People's Congress Standing Committee promulgated the New National Security Law which took effect on the same date replaced the former National Security Law promulgated in 1993. According to the New National Security Law, the state shall ensure that the information system and data in important areas are secure and controllable. In addition, according to the New National Security Law, the state shall establish national security review and supervision institutions and mechanisms, and conduct national security reviews of key technologies and IT products and services that affect or may affect national security. There are uncertainties on how the New National Security Law will be implemented in practice.
Regulation of Privacy Protection
Under the ICP Measures, ICPs are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes upon the lawful rights and interests of others. Depending on the nature of the violation, ICPs may face criminal charges or sanctions by PRC security authorities for such acts, and may be ordered to suspend temporarily their services or have their licenses revoked.
Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT on December 29, 2011, ICPs are also prohibited from collecting any user personal information or providing any such information to third parties without the consent of a user. ICPs must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for its services. ICPs are also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, ICPs must take remedial measures immediately and report any material leak to the telecommunications regulatory authority.
In addition, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National People's Congress on December 28, 2012 emphasizes the need to protect electronic information that contains individual identification information and other private data. The decision requires ICPs to establish and publish policies regarding the collection and use of personal electronic information and to take necessary measures to ensure the security of the information and to prevent leakage, damage or loss. Furthermore, MIIT's Rules on Protection of Personal Information of Telecommunications and Internet Users promulgated on July 16, 2013 contain detailed requirements on the use and collection of personal information as well as the security measures to be taken by ICPs.
The PRC government retains the power and authority to order ICPs to provide an Internet user's personal information if such user posts any prohibited content or engages in any illegal activities through the Internet.
Regulation of Consumer Protection
Our online and mobile commerce business is subject to a variety of consumer protection laws, including the PRC Consumer Rights and Interests Protection Law, as amended and effective as of March 15, 2014, and the Administrative Measures for Online Trading, both of which have provided stringent requirements and obligations on business operators, including Internet business operators and platform service providers like us. For example, consumers are entitled to return goods purchased online, subject to certain exceptions, within seven days upon receipt of such goods for no reason. To ensure that merchants and service providers comply with these laws and regulations, we, as platform operators, are required to implement rules governing transactions on our platform, monitor the information posted by merchants and service providers, and report any violations by such merchants or service providers to the relevant authorities. In addition, online marketplace platform providers may, pursuant to PRC consumer protection laws, be exposed to liabilities if the lawful rights and interests of consumers are infringed in connection with consumers' purchase of goods or acceptance of services on online marketplace platforms and the platform service providers fail to provide consumers with the contact information of the merchant or manufacturer. In addition, platform service providers may be jointly and severally liable with merchants and manufacturers if they are aware or should be aware that the merchant or manufacturer is using the
online platform to infringe upon the lawful rights and interests of consumers and fail to take measures necessary to prevent or stop such activity.
Failure to comply with these consumer protection laws could subject us to administrative sanctions, such as the issuance of a warning, confiscation of illegal income, imposition of a fine, an order to cease business operations, revocation of business licenses, as well as potential civil or criminal liabilities.
Regulation of Pricing
In China, the prices of a very small number of products and services are guided or fixed by the government. According to the Pricing Law, business operators must, as required by the government departments in charge of pricing, mark the prices explicitly and indicate the name, origin of production, specifications, and other related particulars clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated. Business operators must not commit the specified unlawful pricing activities, such as colluding with others to manipulate the market price, providing fraudulent discounted price information, using false or misleading prices to deceive consumers to transact, or conducting price discrimination against other business operators. Failure to comply with the Pricing Law or other rules or regulations on pricing may subject business operators to administrative sanctions such as warning, orders to cease unlawful activities, payment of compensation to consumers, confiscation of illegal gains, and/or fines. The business operators may be ordered to suspend business for rectification, or have their business licenses revoked if the circumstances are severe. Merchants on Tmall and Taobao Marketplace undertake the primary obligation under the Pricing Law. However, in some cases, we have been and may in the future be held liable and be subject to fines or other penalties if the authorities determine that, as the platform operator, our guidance for platform-wide promotional activities resulted in unlawful pricing activities by the merchants on our platforms or if the pricing information we provided for platform-wide promotional activities was determined to be untrue or misleading.
Regulation of Intellectual Property Rights
Patent. Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right.
Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain Name. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.
Regulation of Anti-counterfeiting
According to the Trademark Law of the PRC, counterfeit or unauthorized production of the label of another person's registered trademark, or sale of any label that is counterfeited or produced without authorization will be deemed as an infringement of the exclusive right to use a registered trademark. The infringing party will be ordered to cease infringement immediately, a fine may be imposed and the counterfeit goods will be confiscated. The infringing party may also be held liable for damages suffered by the owner of the intellectual property rights, which will be equal to the gains obtained by the infringing party or the losses suffered by such owner as a result of the infringement, including reasonable expenses incurred by such owner in connection with enforcing its rights.
Under the Tort Liability Law of the PRC, an Internet service provider may be subject to joint liability if it is aware that an Internet user is infringing upon the intellectual property rights of others through its Internet services, such as selling counterfeit products, and fails to take necessary measures to stop that activity. If an Internet service provider receives a notice from an infringed party regarding an infringement, the Internet service provider is required to take certain measures, including deleting, blocking and unlinking the infringing content, in a timely manner.
In addition, under the Administrative Measures for Online Trading issued by the SAIC on January 26, 2014, as an operator of an online trading platform, we must adopt measures to ensure safe online transactions, protect consumers' rights and prevent trademark infringement.
Tax Regulations
PRC Enterprise Income Tax
The PRC enterprise income tax, or EIT, is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1, 2008. The EIT Law generally imposes a uniform enterprise income tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises.
The EIT Law and its implementation rules permit certain High and New Technologies Enterprises, or HNTEs, to enjoy a reduced 15% enterprise income tax rate subject to these HNTEs meeting certain qualification criteria. In addition, the relevant EIT laws and regulations also provide that entities recognized as Software Enterprises are able to enjoy a tax holiday consisting of a 2-year-exemption commencing from their first profitable calendar year and a 50% reduction in ordinary tax rate for the following three calendar years, while entities qualified as Key Software Enterprises can enjoy a preferential EIT rate of 10%. A number of our PRC subsidiaries and operating entities enjoy these types of preferential tax treatment. See "Item 10. Additional Information — E. Taxation — People's Republic of China Taxation."
Uncertainties exist with respect to how the EIT Law applies to the tax residence status of Alibaba Group and our offshore subsidiaries. Under the EIT Law, an enterprise established outside of China with a "de facto management body" within China is considered a "resident enterprise," which means that it is treated in the same manner as a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define "de facto management body" as a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although Alibaba Group Holding Limited does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in Circular 82 to evaluate the tax residence status of Alibaba Group and our subsidiaries organized outside the PRC.
According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a "de facto management body" in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
We do not believe that we meet any of the conditions outlined in the immediately preceding paragraph. Alibaba Group Holding Limited and our offshore subsidiaries are incorporated outside the PRC. As a holding company, our key assets and records, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that have been deemed a PRC "resident enterprise" by the PRC tax authorities. Accordingly, we believe that Alibaba Group Holding Limited and our offshore subsidiaries should not be treated as a "resident enterprise" for PRC tax purposes if the criteria for "de facto management body" as set forth in Circular 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body" as applicable to our offshore entities, we will continue to monitor our tax status. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income."
In the event that Alibaba Group Holding Limited or any of our offshore subsidiaries is considered to be a PRC resident enterprise:
Under Bulletin 7 issued by the State Administration of Taxation on February 3, 2015, which replaced or supplemented certain previous rules under Circular 698, an "indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, "PRC taxable assets" include assets attributed to an establishment or a place of business in China, immoveable properties in China, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment or a place of business and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment or a place of business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the implementation details of Bulletin 7. If Bulletin 7 was determined by the tax authorities to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions might be required to spend valuable resources to comply with Bulletin 7 or to establish that the relevant transactions should not be taxed under Bulletin 7, which may materially and adversely affect us. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We and
our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment or a place of business of a non-PRC company, or other assets attributable to a PRC establishment of a non-PRC company."
Where the payers fail to withhold any or sufficient tax, the non-PRC residents, as the transferors, are required to declare and pay such taxes to the tax authorities on their own within the statutory time limit. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, and interest on those taxes.
PRC Business Tax and Value-Added Tax
Before August 2013 and pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technology development and transfer, such business tax may be exempted subject to approval by the relevant tax authorities.
In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In May and December 2013, April 2014 and March 2016, the Ministry of Finance and the State Administration of Taxation promulgated Circular 37, Circular 106, Circular 43 and Circular 36 to further expand the scope of services which are to be subject to Value-Added Tax, or VAT, instead of business tax. Pursuant to these tax rules, from August 1, 2013, a VAT was imposed to replace the business tax in certain service industries, including technology services and advertising services, and from May 1, 2016, VAT replaced business tax in all industries, on a nationwide basis. A VAT rate of 6% applies to revenue derived from the provision of certain services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided. Accordingly, although the 6% VAT rate is higher than the previously applicable 5% business tax rate, no materially different tax cost to us has resulted nor do we expect to result from the replacement of the business tax with a VAT on our services.
PRC Import Tax
Consumer goods imported through cross-border e-commerce platforms were originally classified as "personal baggage or postal articles" under the Notice on Pilot Bonded Area Import Pattern of Cross-Border Trade E-Commerce Services issued by PRC General Administration of Customs on March 4, 2014. A personal baggage or postal articles tax was levied on such goods before the online retailors could deliver the same to buyers. The personal baggage or postal articles tax were exempted if the payable amount was lower than RMB50. The rate of personal baggage or postal articles tax was respectively 10%, 20%, 30% and 50% for different categories of products imported. Under this tax pattern, a quota of RMB1,000 for each purchase order was imposed on online buyers, otherwise the imported goods were classified as normal goods, which are subject to value-added tax, consumption tax and tariff.
The above-mentioned pilot bonded area import pattern of cross-border e-commerce was abolished pursuant to the Notice on Tax Policies of Cross-Border E-commerce Retail Importation, effective on April 8, 2016, or the New Cross-Border E-commerce Tax Notice. The goods imported through cross-border e-commerce platforms are now treated as normal goods rather than "personal baggage or postal articles" and subject to the usual value-added tax, consumption tax and tariff. Normally, a 17% value-added tax will be levied on most products sold on the cross-border e-commerce platform and a 30% consumption tax will be levied on cosmetics and perfumes, while no consumption tax will be levied on skin care products, maternity and baby care products. However, the New Cross-Border E-commerce Tax Notice provides that, if the goods imported through cross-border e-commerce platforms are within the quota of RMB2,000 for each purchase order or RMB20,000 per year for each buyer, the payable amount for the value-added tax and the consumption tax will be reduced to 70% of the payable tax, and the tariff will be waived.
PRC Export Tax
According to the Notice on the Taxation Policies for Cross-border E-Commerce Retail Export, or the E-Commerce Export Taxation Notice, which was jointly issued by the Ministry of Finance and the State Administration of Taxation and took effect as of January 1, 2014, an e-commerce export enterprise may be exempt or refunded from consumption tax and VAT upon satisfaction of the following conditions:
Even if an e-commerce export enterprise does not satisfy the foregoing conditions, it may also be exempt from consumption tax and VAT if it meets the following requirements:
Third-party e-commerce platforms providing transaction services for e-commerce export enterprises are not eligible for a tax refund or exemption under the E-Commerce Export Taxation Notice.
Regulation of Foreign Exchange and Dividend Distribution
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Regulations on Foreign Exchange Administration of the PRC. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE's approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
Since SAFE Circular 142 has been in place for more than five years, SAFE decided to further reform the foreign exchange administration system in order to satisfy and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas on August 4, 2014. This circular suspends the application of SAFE Circular 142 in certain areas and allows a foreign-invested enterprise registered in such areas with a business scope including "investment" to use the RMB capital converted from foreign currency registered capital for equity investments within the PRC. On April 9, 2015, SAFE released the Notice on the Reform of the Administration Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, which came into force and superseded SAFE Circular 142 on June 1, 2015. Circular 19 allows foreign invested enterprises to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business operation and provides the procedures for foreign invested companies to use Renminbi converted from foreign currency-denominated capital for equity investment. Nevertheless, Circular 19 also reiterates the principle that Renminbi converted from foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Since Circular 19 was only recently promulgated, there are uncertainties on how it will be interpreted and implemented in practice.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. In February 2015, SAFE promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE Circular 13, the current foreign exchange procedures will be further simplified, and foreign exchange registrations of direct investment will be handled by the banks designated by the foreign exchange authority instead of SAFE and its branches. However, the foreign invested enterprises are still prohibited by SAFE Circular 13 to use the RMB converted from foreign currency-registered capital to extend entrustment loans, repay bank loans or inter-company loans.
We typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals of SAFE and other PRC government authorities as necessary.
SAFE Circular 37
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as "SAFE Circular 75" promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a "special purpose vehicle." SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share
transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. On February 13, 2015, SAFE released SAFE Circular 13, under which local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, from June 1, 2015. However, since the notice came into force recently, there exist substantial uncertainties with respect to its interpretation and implementation by governmental authorities and banks.
We have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and we have periodically filed SAFE Circular 75 reports prior to the promulgation of SAFE Circular 37, on behalf of certain employee shareholders whom we know are PRC residents. However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular 37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Share option rules
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers.
Regulation of dividend distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social Insurance Law and the Regulations on the Administration of Housing Funds, employers in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
Anti-monopoly Law
The PRC Anti-monopoly Law, which took effect on August 1, 2008, prohibits monopolistic conduct, such as entering into monopoly agreements, abuse of dominant market position and concentration of undertakings that have the effect of eliminating or restricting competition.
Monopoly Agreement
Competing business operators may not enter into monopoly agreements that eliminate or restrict competition, such as by boycotting transactions, fixing or changing the price of commodities, limiting the output of commodities, fixing the price of commodities for resale to third parties, among others, unless such agreement will satisfy the exemptions under the Anti-monopoly Law, such as improving technologies, increasing the efficiency and competitiveness of small and medium-sized undertakings, or safeguarding legitimate interests in cross-border trade and economic cooperation with foreign counterparts. Sanctions for violations include an order to cease the relevant activities, and confiscation of illegal gains and fines (from 1% to 10% of sales revenue from the previous year, or RMB500,000 if the intended monopoly agreement has not been performed).
Abuse of Dominant Market Position
A business operator with a dominant market position may not abuse its dominant market position to conduct acts, such as selling commodities at unfairly high prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, and refusing to trade with a trading party without any justifiable cause. Sanctions for violation of the prohibition on the abuse of dominant market position include an order to cease the relevant activities, confiscation of the illegal gains and fines (from 1% to 10% of sales revenue from the previous year).
Concentration of Undertakings
Where a concentration of undertakings reaches the declaration threshold stipulated by the State Council, a declaration must be approved by the anti-monopoly authority before the parties implement the concentration. Concentration refers to (1) a merger of undertakings; (2) acquiring control over other undertakings by acquiring equities or assets; or (3) acquisition of control over, or the possibility of exercising decisive influence on, an undertaking by contract or by any other means. If business operators fail to comply with the mandatory declaration requirement, the anti-monopoly authority is empowered to terminate and/or unwind the transaction, dispose of relevant assets, shares or businesses within certain periods and paidimpose fines of up to RMB500,000.
See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We may become the target of anti-monopoly and unfair competition claims, which may result in our being subject to fines as well as constraints on our business."
Anti-Terrorism Law
The PRC Anti-Terrorism Law, which was promulgated on December 27, 2015 and came into effect on January 1, 2016, imposes obligations on telecommunication business operators and Internet service providers to
provide technical interfaces and technical assistance in decryption and other efforts to public and national security authorities in terrorism prevention and investigation. Also, the Anti-Terrorism Law requires Internet service providers to implement network security and information and content monitoring systems and adopt technical security measures to prevent the dissemination of information containing terrorist or extremist content. Once such content is detected, Internet service providers shall cease the transmission of the information, keep the relevant records, delete the information and report to public and national security bodies. In addition, the Anti-Terrorism Law requires telecommunication business operators and Internet service providers to verify the identity of their clients, and to not provide services to anyone whose identity is unclear or who declines to verify his/her identity. However, the Anti-Terrorism Law does not further specify the required verification measures. Since the Anti-Terrorism Law was promulgated recently, there exist substantial uncertainties with respect to its interpretation and implementation by governmental authorities.
Regulation Applicable to Alipay
Regulation of Non-financial Institution Payment Services
According to the Administrative Measures for the Payment Services Provided by Non-financial Institutions, or the Payment Services Measures, promulgated by the PBOC on June 14, 2010 and effective as of September 1, 2010, a total merger considerationpayment institution, a non-financial institution providing monetary transfer services as an intermediary between payees and payers, including online payment, issuance and acceptance of prepaid cards or bank cards, and other payment services specified by the PBOC, is required to obtain a payment business license. Any non — financial institution or individual engaged in the payment business without such license may be ordered to cease its payment services and be subject to administrative sanctions and even criminal liabilities. Applications for payment business licenses are examined by the local branches of the PBOC and then submitted to the PBOC for approval. The registered capital of an applicant that engages in a nationwide payment business must be at least RMB100 million, while that of an applicant engaging in a payment business within a province must be at least RMB30 million.
A payment institution is required to conduct its business within the scope of business indicated in its payment business license, and may not undertake any business beyond that scope or outsource its payment business. No payment institution may transfer, lease or lend its payment business license.
On January 20, 2015, the SAFE promulgated the Guiding Opinions on the Pilot Services of Cross-Border Foreign Exchange Payment by Payment Institutions, or the Guiding Opinions, which replaced the previous guiding opinion issued by SAFE on February 1, 2013. Pursuant to the Guiding Opinions, a payment institution is required to obtain approval from the SAFE in order to engage in pilot cross-border foreign exchange payment services and may only provide cross-border foreign exchange payment services for trade in goods or trade in services with real and legitimate transaction background. The payment institution must also verify the real names and identity information of the customers involved in the cross-border transactions, maintain records of the relevant transactions and make monthly reports to the local branch of the SAFE.
In addition, on December 28, 2015, the PBOC promulgated the Administrative Measures for the Online Payment Business of Non-bank Payment Institutions, or the Online Payment Measures, which will come into effect on July 1, 2016. The Online Payment Measures classify online payment accounts into three categories and require online payment institutions to impose classified management based on the real name system with respect to different categories of online payment accounts. The Online Payment Measures require online payment institutions to conduct "know your client" checks and implement the real name system for payment accounts. In addition, a payment account can only be opened by a payment institution with Internet payment business license at the request of customers.
We rely on Alipay to provide payment services on our marketplaces and Alipay has obtained a payment business license from the PBOC as well as approval for cross-border foreign exchange payment services from the SAFE.
Anti-money Laundering Regulations
The PRC Anti-money Laundering Law, which became effective on January 1, 2007, sets forth the principal anti-money laundering requirements applicable to both financial and non-financial institutions with anti-money laundering obligations, such as Alipay, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, preservation of clients' identification information and transactions records, and reports on block transactions and suspicious transactions. The Payment Services Measures also require that the payment institution follow the rules associated with anti-money laundering and comply with their anti-money laundering obligations.
In addition, the PBOC promulgated the Administrative Measures for Payment Institutions Regarding Anti-money Laundering and Counter Terrorism Financing on March 5, 2012, or the Anti-money Laundering Measures, according to which the payment institution must establish and improve unified anti-money laundering internal control systems and file such systems with the local branch of the PBOC. The Anti-money Laundering Measures also require the payment institution to set up an anti-money laundering department or designate an internal department to be responsible for anti-money laundering and counter terrorism financing work.
Alipay is in the process of expanding its business internationally, and it may become subject to additional laws, rules and regulations of the jurisdictions in which it chooses to operate. These regulatory regimes may be complex and require extensive time and resources to ensure compliance.
C. Organizational Structure
We conduct our business operations across approximately 330 subsidiaries and other consolidated entities. The chart below summarizes our corporate legal structure and identifies the significant subsidiaries described in "— A. History and Development of the Company," as well as our other subsidiaries and variable interest entities that are material to our business and the number of their respective subsidiaries, as of March 31, 2016:
Weibo, a leading social media platform100 additional subsidiaries and consolidated entities incorporated in China and approximately 90 additional subsidiaries incorporated outside of China not pictured in the chart.
Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders
Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added telecommunications services, which include the operations of Internet content providers, or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in China, operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC through wholly-foreign owned enterprises, majority-owned entities and variable interest entities. The relevant variable interest entities, which are incorporated in the PRC and 100% owned by PRC citizens or by PRC entities owned by PRC citizens, where applicable, hold the ICP licenses and other regulated licenses and operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited. Specifically, our variable interest entities that are material to our business are Zhejiang Taobao Network Co., Ltd., Zhejiang Tmall Network Co., Ltd., Hangzhou Alibaba Advertising Co., Ltd., Hangzhou Ali Technology Co., Ltd. and Alibaba Cloud Computing Ltd. Each of these variable interest entities other than Zhejiang Taobao Network Co., Ltd. is listed80%-owned by Jack Ma, our lead founder, executive chairman and one of our principal shareholders, and 20%-owned by Simon Xie, one of our founders. Zhejiang Taobao Network Co., Ltd. is 90%-owned by Jack Ma and 10%-owned by Simon Xie. We have entered into certain contractual arrangements, as described in more detail
below, which collectively enable us to exercise effective control over the variable interest entities and realize substantially all of the economic risks and benefits arising from, the variable interest entities. As a result, we include the financial results of each of the variable interest entities in our consolidated financial statements in accordance with U.S. GAAP as if they were our wholly-owned subsidiaries.
Other than the ICP licenses and other licenses and approvals for businesses in which foreign ownership is restricted or prohibited held by our variable interest entities, we hold our material assets in, and conduct our material operations through, our wholly-foreign owned and majority-owned enterprises, which primarily provide technology and other services to our customers. We generate the significant majority of our revenue directly through our wholly-foreign owned enterprises, which directly capture the profits and associated cash flow from operations without having to rely on contractual arrangements to transfer such cash flow from the variable interest entities to the wholly-foreign owned enterprises.
The following diagram is a simplified illustration of the ownership structure and contractual arrangements that we typically have in place for our variable interest entities:
The following is a summary of the common contractual arrangements that provide us with effective control of our material variable interest entities and that enable us to receive substantially all of the economic benefits from their operations.
Contracts that Give Us Effective Control of the Variable Interest Entities
Loan agreements. Pursuant to the relevant loan agreement, the respective wholly-foreign owned enterprise has granted an interest-free loan to the relevant variable interest entity equity holders, which may only be used for the purpose of a capital contribution to the relevant variable interest entity or as may be otherwise agreed by the wholly-foreign owned enterprise. The wholly-foreign owned enterprise may require acceleration of repayment at its absolute discretion. When the variable interest entity equity holders make early repayment of the outstanding amount, the wholly-foreign owned enterprise or a third-party designated by it may purchase the equity interests in the variable interest entity at a price equal to the outstanding amount of the loan, subject to any applicable PRC laws, rules and regulations. The variable interest entity equity holders undertake not to enter into any prohibited transactions in relation to the variable interest entity, including the transfer of any business, material assets, intellectual property rights or equity interests in the variable interest entity to any third-party. The parties to the loan agreement for each of our material variable interest entities are Jack Ma and Simon Xie on the Nasdaq Global Select Market. In April 2013, weone hand,
and Taobao (China) Software Co., Ltd., Zhejiang Tmall Technology Co., Ltd., Alibaba (China) Technology Co., Ltd., Hangzhou Alimama Technology Co., Ltd. and Zhejiang Alibaba Cloud Computing Ltd., the respective wholly-foreign owned enterprise on the other hand.
Exclusive call option agreements. The variable interest entity equity holders have granted the wholly-foreign owned enterprise an exclusive call option to purchase their equity interest in the variable interest entity at an exercise price equal to the higher of (i) the registered capital in the variable interest entity; and (ii) the minimum price as permitted by applicable PRC laws. Each relevant variable interest entity has further granted the relevant wholly-foreign owned enterprise an exclusive call option to purchase its assets at an exercise price equal to the book value of the assets or the minimum price as permitted by applicable PRC law, whichever is higher. The wholly-foreign owned enterprise may nominate another entity or individual to purchase the equity interest or assets, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of the equity interest or assets pursuant to the call option. Each wholly-foreign owned enterprise is entitled to all dividends and other distributions declared by the variable interest entity, and the variable interest entity equity holders have agreed to give up their rights to receive any distributions or proceeds from the disposal of their equity interests in the variable interest entity which are in excess of the original registered capital that they contributed to the variable interest entity, and to pay any such distributions or premium to the wholly-foreign owned enterprise. The exclusive call option agreements remain in effect until the equity interest or assets that are the subject of such agreements are transferred to the wholly foreign owned enterprise. The parties to the exclusive call option agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise.
Proxy agreements. Pursuant to the relevant proxy agreement, each of the variable interest entity equity holders irrevocably authorizes any person designated by the wholly-foreign owned enterprise to exercise his rights as an equity holder of the variable interest entity, including the right to attend and vote at equity holders' meetings and appoint directors. The parties to the proxy agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise.
Equity pledge agreements. Pursuant to the relevant equity pledge agreement, the relevant variable interest entity equity holders have pledged all of their interests in the equity of the variable interest entity as a continuing first priority security interest in favor of the corresponding wholly-foreign owned enterprise to secure the outstanding amounts advanced under the relevant loan agreements described above and to secure the performance of obligations by the variable interest entity and/or its equity holders under the other structure contracts. Each wholly-foreign owned enterprise is entitled to exercise its right to dispose of the variable interest entity equity holders' pledged interests in the equity of the variable interest entity and has priority in receiving payment by the application of proceeds from the auction or sale of such pledged interests, in the event of any breach or default under the loan agreement or other structure contracts, if applicable. These equity pledge agreements remain in force for the duration of the relevant loan agreement and other structure contracts. The parties to the equity pledge agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise. All of the equity pledges relating to our material variable interest entities have been registered with the relevant office of the Administration for Industry and Commerce in China.
Contracts that Enable Us to Receive Substantially All of the Economic Benefits from the Variable Interest Entities
Exclusive technical services agreements. Each relevant variable interest entity has entered into an exclusive technical services agreement with the respective wholly-foreign owned enterprise, pursuant to formwhich the relevant wholly-foreign owned enterprise provides exclusive technical services to the variable interest entity. In exchange, the variable interest entity pays a strategic allianceservice fee to the wholly-foreign owned enterprise which typically amount to what
would be substantially all of the variable interest entity's pre-tax profit (absent the service fee), resulting in a transfer of substantially all of the profits from the variable interest entity to the wholly-foreign owned enterprise.
The exclusive call option agreements described above also entitle the wholly-foreign owned enterprise to all dividends and other distributions declared by the variable interest entity and to any distributions or proceeds from the disposal by the variable interest entity equity holders of their equity interests in the variable interest entity that are in excess of the original registered capital that they contributed to the variable interest entity.
In the opinion of Fangda Partners, our PRC legal counsel:
However, we have been further advised by our PRC legal counsel, Fangda Partners, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to jointly explore social commercethe opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our Internet-based business do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Corporate Structure."
D. Property, Plant and develop innovative marketing solutions.Equipment
As of March 31, 2016, we occupied facilities around the world with an aggregate gross floor area of office buildings owned by us totaling 421,445 square meters. We maintain offices in China, Dubai, France, Germany, Hong Kong, India, Italy, Korea, Taiwan, Turkey, Russia, Singapore, the United Kingdom and the United States. In addition, we invested US$586maintain data centers in China, Hong Kong, Singapore and the United States.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report and in particular, "Item 4. Information on the Company — B. Business Overview." This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Item 3. Key Information — D. Risk Factors" and elsewhere in this annual report. We have prepared our financial statements in accordance with U.S. GAAP. Our fiscal year ends on March 31 and references to fiscal years 2014, 2015 and 2016 are to the fiscal years ended March 31, 2014, 2015 and 2016, respectively.
Overview
We achieved significant growth and strong operating results in fiscal year 2016. Our total revenue increased by 45% from RMB52,504 million in fiscal year 2014 to RMB76,204 million in fiscal year 2015, and further increased by 33% to RMB101,143 million (US$15,686 million) in fiscal year 2016. Our net income increased by 4% from RMB23,403 million in fiscal year 2014 to RMB24,320 million in fiscal year 2015 and further increased by 193% to RMB71,289 million (US$11,056 million) in fiscal year 2016. Our GMV surpassed RMB3 trillion in fiscal year 2016. We believe our focus on long-term strategic priorities — globalization, rural expansion, building a world-class cloud computing business and creating a comprehensive media and entertainment platform — has laid a strong foundation for future growth.
We have experienced significant growth across various key metrics for our China retail marketplaces:
We have also experienced significant growth in our mobile monetization on our China retail marketplaces:
We primarily generate revenue from the businesses described below:
Revenue | Businesses | |
---|---|---|
China Commerce Retail | • Taobao Marketplace — Online shopping destination | |
• Tmall(1) — Brands and retail platform | ||
• Juhuasuan — Flash sale platform | ||
China Commerce Wholesale | • 1688.com — China wholesale marketplace | |
International Commerce Retail | • AliExpress — Global consumer marketplace | |
International Commerce Wholesale | • Alibaba.com — Global wholesale marketplace | |
Cloud Computing | • Alibaba Cloud — Cloud computing services provider |
See "Item 4. Information on the Company — B. Business Overview" for a detailed discussion of our business and our ecosystem.
Our Monetization Model
The revenue we generate on our retail marketplaces is highly correlated with the number and engagement of the consumers on our platforms, the myriad value propositions of branding, marketing, promotions, distribution and productivity enhancements we offer merchants and brands, and our data and technology capabilities. The revenue we generate on our wholesale marketplaces is largely driven by the number of paying members and the value of the wholesale marketplaces as a marketing and distribution platform. We primarily derive revenue from online marketing services, commissions, memberships and cloud computing services. In fiscal year 2016, revenue from P4P marketing services and display marketing services accounted for 53%, commissions accounted for 27%, memberships and value-added services accounted for 8%, and cloud computing services accounted for 3%, of our total revenue, respectively.
The pricing of our marketing services is primarily performance-based or impression-based. Performance-based marketing uses clicks or transactions as the measurement unit for performance. Impression-based marketing uses the number of impressions delivered to the user. The pricing of our marketing services is typically set by market-based bidding systems so that each marketer determines the price it is willing to pay for the services.
Marketers' willingness to pay and the amount they are willing to pay for our online marketing services is a function of the marketers' expected return on investment, which generally depends on the following factors:
China Commerce Retail. We generate revenue from our China retail marketplaces primarily through the monetization models described below. In fiscal year 2016, 75% of GMV on our China retail marketplaces was settled through Alipay. In fiscal year 2016, we generated 65% and 32% of our China commerce retail revenue from online marketing services and commissions, respectively.
Online marketing services.
Online marketing services primarily consist of:
For both P4P marketing and display marketing services, we generate a portion of our revenue through third-party marketing affiliates. Revenue from P4P and display marketing services provided through third- party marketing affiliates represented 6%, 3% and 3% of our total revenue in fiscal years 2014, 2015 and 2016, respectively, and this revenue is recognized on a gross basis.
Commissions on transactions. In addition to purchasing online marketing services, merchants also pay a commission based on a fully-diluted basis.percentage of transaction value generated on Tmall or from Juhuasuan. The commission percentages typically range from 0.4% to 5.0% depending on the product category. The commission rate we establish varies according to our estimate of the industry profit margins in specific product categories. For example, for categories that typically have lower gross margins, such as consumer electronics, we charge a lower commission rate, whereas for categories such as apparel, where gross margins are generally higher for the merchants, we charge a higher commission rate.
Storefront fees. Our revenue from storefront fees is primarily comprised of monthly subscription fees for Wangpu (), our storefront software that includes a suite of tools that assist merchants in upgrading, decorating and managing their storefronts.
Purchaser of services: | Taobao Marketplace | Tmall | Juhuasuan | |||
---|---|---|---|---|---|---|
Taobao Marketplace merchants | • P4P marketing fees • Display marketing fees • Taobaoke commissions • Storefront fees • Other fees* | • Not applicable | • Commissions • Placement fees | |||
Tmall merchants | • P4P marketing fees | • Commissions | • Commissions |
China Commerce Wholesale. We generate revenue from our China wholesale marketplace, 1688.com, primarily through:
International Commerce Retail. We generate revenue from our international retail marketplaces, primarily AliExpress, through commissions, which are typically 5% of transaction value. In the twelve months ended March 31, 2016, GMV on AliExpress settled through Alipay was US$5.4 billion. We also generate revenue on AliExpress from merchants who participate in the third-party affiliate marketing program and those who purchase P4P marketing services.
International Commerce Wholesale. We generate revenue from our global wholesale marketplace, Alibaba.com, primarily through:
Cloud Computing. We generate revenue from cloud computing services primarily from the time- and usage-based provision of cloud computing services, such as elastic computing, database, storage and CDN, large scale computing, security and management, and application services, as well as from web-hosting and domain name registration.
Others. We generate revenue from mobile Internet services provided by UCWeb, as well as other businesses such as AutoNavi, over-the-top TV services and YunOS. Other revenue also includes annual fees payable by Ant Financial Services to us, calculated at 2.5% of the daily average book balance of the SME loans generated by the SME loan business we transferred to Ant Financial Services upon the completion of the restructuring of our relationship with Ant Financial Services in early February 2015. Prior to this sale, other revenue also included interest income generated by the SME loan business.
Factors Affecting Our Results of Operations
Our Ability to Create Value for Our Users and Generate Revenue. Our ability to create value for our users and generate revenue is driven by the factors described below:
Operating Leverage of Our Marketplace Business Model. Our business model has significant operating leverage and our ecosystem enables us to realize structural cost savings. For example, Taobao Marketplace drives significant traffic to Tmall as Tmall product listings also appear on Taobao Marketplace search result pages. In addition, promotional slots purchased on Juhuasuan by Taobao Marketplace and Tmall merchants also drive consumers to Taobao Marketplace and Tmall storefronts, thereby enabling merchants to introduce consumers to additional product and service offerings beyond those featured on the particular Juhuasuan promotion and drive additional user traffic. This network effect allows for lower traffic acquisition costs across our marketplaces. In addition, due to the large number of consumers on our marketplaces, we are able to attract a large number of merchants, which in turn provides a strong source of customers for our online marketing and storefront services. Merchants purchase marketing services through a self-service platform on our China retail marketplaces. As a result, we do not rely on a field sales force to generate revenue for our China retail marketplaces.
Our Investment in User Base, Technology, People and Infrastructure. We have made, and will continue to make, significant investments in our platforms and ecosystem to attract consumers and merchants, enhance user experience and expand the capabilities and scope of our platforms. We expect our investments will include
developing and marketing new products and services, enhancing our cloud computing business, and YunOS, a cloud-based mobile operating system for Internet of Things devices, developing new ways to interact with consumers through our mobile media and entertainment assets, developing new software tools to attract additional consumers and merchants to our marketplaces as well as executing our globalization strategy. Our operating leverage and margin levels enable us to continue to invest in our people, particularly engineers, scientists and product management personnel, as well as in our underlying technology capabilities and infrastructure. In addition, as a result of our financial strength, we expect to invest in the above mentioned new and existing businesses which will lower our margins but deliver overall long-term growth.
Strategic Investments and Acquisitions. We have made, and intend to make, strategic investments and acquisitions to increase user acquisition and engagement, improve customer experience and expand our product, service, and content offerings. Our strategic investments and acquisitions may affect our future financial results, including our margins and our net income. For example, we expect that our recent acquisitions of Youku Tudou and a controlling stake in Lazada will have a negative effect on our financial results, at least in the short-term. In addition, some of our acquisitions and investments may not be successful, and we may incur impairment charges in the future.
Components of Results of Operations
Revenue
The following table sets forth the principal components of our revenue for the periods indicated:
| Year ended March 31, | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | |||||||||||||||||||
| RMB | % of revenue | RMB | % of revenue | RMB | US$ | % of revenue | |||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||
China commerce | ||||||||||||||||||||||
Retail | 42,832 | 82 | % | 59,732 | 78 | % | 80,033 | 12,412 | 79 | % | ||||||||||||
Wholesale | 2,300 | 4 | % | 3,205 | 4 | % | 4,288 | 665 | 4 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total China commerce | 45,132 | 86 | % | 62,937 | 82 | % | 84,321 | 13,077 | 83 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
International commerce | ||||||||||||||||||||||
Retail | 938 | 2 | % | 1,768 | 3 | % | 2,204 | 342 | 2 | % | ||||||||||||
Wholesale | 3,913 | 7 | % | 4,718 | 6 | % | 5,425 | 841 | 6 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total international commerce | 4,851 | 9 | % | 6,486 | 9 | % | 7,629 | 1,183 | 8 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Cloud computing | 773 | 2 | % | 1,271 | 2 | % | 3,019 | 468 | 3 | % | ||||||||||||
Others | 1,748 | 3 | % | 5,510 | 7 | % | 6,174 | 958 | 6 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total revenue | 52,504 | 100 | % | 76,204 | 100 | % | 101,143 | 15,686 | 100 | % | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
GMV | 1,677,587 | 2,443,721 | 3,092,385 |
We generate substantially all of our revenue from our retail and wholesale marketplaces. We also earn revenue from services associated with our cloud computing services and other revenue primarily from mobile Internet services provided by UCWeb. Substantially all of our revenue is attributable to our businesses in China. See "— Our Monetization Model" for additional information regarding our revenue.
Cost of Revenue
The principal components of our cost of revenue include: payment processing fees paid to Alipay or other financial institutions; traffic acquisition costs paid to third-party marketing affiliates either at a fixed price or on a
revenue sharing basis; expenses associated with the operation of our websites, such as bandwidth and co-location fees, and depreciation and maintenance expenses for our computers, servers, call centers and other equipment; salary, bonuses, benefits and share-based compensation expense relating to customer service and web operation personnel and payment processing consultants; logistics costs relating to fulfillment services provided to us by our affiliate Cainiao Network, primarily related to Tmall Supermarket; rebates and subsidies mainly relating to our new business initiatives; business taxes and related surcharges; and allowance for doubtful accounts in relation to the micro loans and VAT receivables.
Product Development Expenses
Product development expenses primarily include salaries, bonuses, benefits and share-based compensation expense for our employees engaged in the development, maintenance and enhancement of the infrastructure, applications, operating systems, software, databases and networks for our marketplaces, mobile products and service platforms. In addition, product development expenses include royalty fees paid to Yahoo pursuant to the Yahoo TIPLA. This royalty fee arrangement was terminated upon completion of our initial public offering in AprilSeptember 2014. We expense all of our product development costs as they are incurred.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of online and offline advertising expenses, promotion expenses, sales commissions paid for membership acquisition for our wholesale marketplaces, and salaries, bonuses, benefits and share-based compensation expense for our employees engaged in sales and marketing functions.
General and Administrative Expenses
General and administrative expenses consist mainly of salaries, bonuses, benefits and share-based compensation expense for our management and administrative employees, professional services fees, office facilities, other support overhead costs and charitable contributions. In fiscal year 2014, we acquired additionalthese expenses included an equity-settled donation expense of RMB1,269 million relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai. As there are no vesting conditions attached to the above share options, equity-settled donation expense of Weibo for an aggregate purchase price of US$449RMB1,269 million pursuantwas recognized in full. See note 9 to our optionconsolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report for further information on this expense.
Interest and Investment Income, Net
Interest and investment income, net consists of interest income, investment gain or loss related to increase our treasury management activities and gain or loss on deemed disposals, disposals and revaluation of our long term equity investments. Our interest and investment income, net became more significant in fiscal year 2015 as a result of a net gain of RMB6,535 million recognized with respect to the revaluation of previously held equity interests, relating primarily to the step acquisitions of UCWeb, OneTouch and AutoNavi. In fiscal year 2016, we also recognized a deemed disposal gain of RMB24,734 million (US$3,836 million) arising from the deconsolidation of Alibaba Pictures and a gain of RMB18,603 million (US$2,885 million) from the revaluation of our previously held equity interest in WeiboAlibaba Health.
Interest Expense
Our interest expense is comprised of interest payments and amortization of upfront fees and incidental charges associated with our bank borrowings and unsecured senior notes issued in November 2014 to approximately 30%refinance our previous syndicated loan arrangements. In addition, we obtained a US$3.0 billion revolving credit facility in August 2014 and a five-year term loan facility of US$3.0 billion in March 2016, which has been subsequently upsized to US$4.0 billion, both of which we have not yet drawn as of March 31, 2016.
Other Income, Net
Other income, net primarily consists of royalty fees and software technology service fees paid by Alipay, government grants as well as exchange gain or loss. Alipay pays us royalty fees and software technology service fees pursuant to an intellectual property and software technology services agreement, as amended in August 2014, or the amended Alipay IPLA. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Share and Asset Purchase Agreement — Alipay Intellectual Property License and Software Technology Services Agreement" for further information on the arrangements between us and Alipay. Government grants primarily relate to grants by central and local governments in connection with our contributions to technology development and investments in local business districts. These grants may not be recurring in nature, and we recognize such income when the grants are received and no further conditions need to be met. Exchange gain or loss, arising from our operations and treasury management activities, recognized in our income statement is largely a result of depreciation or appreciation of RMB, respectively. The amount is also partly impacted by such currency movements on our hedging activities related to the portion that is deemed ineffective from an accounting perspective.
Income Tax Expense
Our income tax expense is comprised primarily of current tax expense, mainly attributable to certain profitable subsidiaries in China, and deferred tax expense, mainly including withholding tax on dividends to be distributed by our major subsidiaries operating in China.
Taxation
Cayman Islands Profits Tax
Under Cayman Islands law, our company is not subject to income, corporation or capital gains tax, and no withholding tax is imposed upon the payment of dividends.
Hong Kong Profits Tax
Our company's subsidiaries incorporated in Hong Kong were subject to Hong Kong profits tax rate of 16.5% in fiscal years 2014, 2015 and 2016.
PRC Income Tax
Under the PRC Enterprise Income Tax Law, or EIT Law, the standard enterprise income tax rate is 25%. Entities qualifying as High and New Technology Enterprises enjoy a preferential tax rate of 15%. Entities recognized as Software Enterprises are exempt from the EIT for two years beginning from their first profitable calendar year and are entitled to a 50% reduction in EIT for the following three calendar years. Furthermore, entities recognized as key software enterprises within the PRC national plan enjoy a preferential EIT rate of 10%.
Certain subsidiaries received the above preferential tax treatments during the calendar years 2013, 2014, 2015 and 2016. One of our major subsidiaries in China, Zhejiang Tmall Technology Co. Ltd., which is a wholly foreign-owned enterprise primarily involved in the operation of Tmall, is currently in its fifth profitable year and was subject to an EIT rate of 12.5% (or 50% of the standard statutory rate) in calendar years 2014, 2015 and 2016, and to an EIT rate of 15% thereafter for so long as the subsidiary continues to qualify as a High and New Technology Enterprise. Two of our subsidiaries in China, Taobao (China) Software Co. Ltd. and Alibaba (China) Technology Co. Ltd., which are also wholly foreign owned enterprises primarily involved in the operations of Taobao Marketplace and wholesale marketplaces respectively, were recognized as key software enterprises in the calendar years of 2012, 2013 and 2014 and they were subject to an EIT rate of 10%. In respect of the calendar years of 2015 and 2016, Key Software Enterprise status has not yet been awarded up to the date of this annual
report and accordingly an EIT rate of 15% is used for the accounting of taxation during such periods. Key Software Enterprise status is subject to review by the relevant authorities every two years and the timing of annual review and notification by the relevant authorities may vary from year to year. The related tax adjustments in relation to the change in applicable EIT rate will be accounted for in the period prospectively in which Key Software Enterprise status is recognized.
VAT and Other Levies
Our major PRC subsidiaries are subject to VAT on revenue earned for most services under a national VAT reform program. In general, the applicable VAT rate on the revenue earned for services is 6% with companies entitled to credit VAT paid on certain purchases against VAT on sales. Revenue is recognized net of VAT in our consolidated income statement.
PRC Withholding Tax
Pursuant to the EIT Law, a 10% withholding tax is generally levied on dividends declared by companies in China to their non-resident enterprise investors. A lower withholding tax rate of 5% is applicable for direct foreign investors incorporated in Hong Kong with at least a 25% equity interest in the PRC company and who meet the relevant conditions or requirements pursuant to the tax arrangement between the PRC and Hong Kong. As the equity holders of our major subsidiaries in China are qualified Hong Kong incorporated companies, our deferred tax liabilities for distributable earnings are calculated based on a fully-diluted basis. All5% withholding tax. As of March 31, 2016, we have fully accrued the withholding tax on the earnings distributable by all of our subsidiaries in China, except for those being reserved for permanent reinvestment in China of RMB13.6 billion (US$2.1 billion).
Share-based Compensation
We have various equity incentive plans pursuant to which the employees, consultants and directors of our company, our affiliates and certain other companies are granted options or awarded RSUs to acquire our ordinary shares. We believe share-based awards are vital to attract, incentivize and retain our employees and consultants. In addition to on-hire grants for new recruits above a specific job level, we also make performance and promotion grants on an annual basis to our top performing employees. RSUs and share options granted in the above categories are generally subject to a four-year vesting schedule. Depending on the nature and the purpose of the preferred shares we heldgrant, share options and RSUs generally vest 25% upon the first anniversary of the vesting commencement date or 50% upon the second anniversary of the vesting commencement date, and thereafter 25% every year. Starting in Weibofiscal year 2015, RSUs and share options granted to our senior management members as performance grants were automatically converted into ordinary sharessubject to a six-year pro rata vesting schedule. We believe share-based awards are the appropriate tool to align the interests of Weibothe grantees with those of our shareholders.
In addition, Junhan, a major equity holder of Ant Financial Services, granted certain share-based awards similar to share appreciation awards linked to the valuation of Ant Financial Services to a significant number of our employees. These share-based awards have vesting schedules that are conditioned upon completionthe fulfillment of Weibo'srequisite services to us, and such awards will be settled in cash by Junhan upon disposal by our employees. We have no obligation to reimburse Junhan, Ant Financial Services or its subsidiaries for the cost associated with these awards. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transaction — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Equity-based Award Arrangements."
We recognized share-based compensation expense of RMB2,844 million, RMB13,028 million and RMB16,082 million (US$2,494 million) in fiscal years 2014, 2015 and 2016, respectively, representing 5%, 17% and 16% of our revenue in those respective periods. The following table sets forth an analysis of share-based compensation expense by function for the periods indicated.
| Year ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||||
| RMB | RMB | RMB | US$ | |||||||||
| (in millions) | ||||||||||||
Cost of revenue | 1,154 | 4,176 | 4,003 | 621 | |||||||||
Product development expenses | 795 | 3,876 | 5,703 | 885 | |||||||||
Sales and marketing expenses | 189 | 1,235 | 1,963 | 304 | |||||||||
General and administrative expenses | 706 | 3,741 | 4,413 | 684 | |||||||||
| | | | | | | | | | | | | |
Total | 2,844 | 13,028 | 16,082 | 2,494 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Share-based compensation expense increased significantly in fiscal years 2015 and 2016 as compared to fiscal year 2014 due to performance-based and retention grants of share-based awards to our employees and senior management members prior to our initial public offering.offering as well as the increase in average fair market value of the awards granted. In addition, as a result of "mark-to-market" accounting required under U.S. GAAP, the increase in share-based compensation expense also reflected the re-measurement charge relating to our share-based awards granted to the employees of Ant Financial Services and share-based awards of Ant Financial Services granted to our employees by Junhan. The following table sets forth an analysis of share-based compensation expense by type of awards:
| Year ended March 31, | ||||||||||||
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| 2014 | 2015 | 2016 | ||||||||||
| RMB | RMB | RMB | US$ | |||||||||
| (in millions) | ||||||||||||
Alibaba Group share-based awards granted to: | |||||||||||||
— Our employees | 2,017 | 6,977 | 9,687 | 1,502 | |||||||||
— Ant Financial Services employees and other consultants(1) | 827 | 2,263 | 889 | 138 | |||||||||
Ant Financial Services share-based awards granted to our employees(1) | — | 3,788 | 5,506 | 854 | |||||||||
| | | | | | | | | | | | | |
Total share-based compensation expense | 2,844 | 13,028 | 16,082 | 2,494 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The expense arising from Ant Financial Services' share-based awards granted to our employees represents a non-cash charge that will not result in any economic costs or equity dilution to our shareholders. It is the view of Jack Ma, our executive chairman, who controls Ant Financial Services, that the grant of these equity awards to our employees will benefit us because of the strategic importance of Ant Financial Services as a payment service provider to us and our significant participation in the profit and value accretion of Ant Financial Services through our agreements with Ant Financial Services.
We expect that our share-based compensation expense will continue to be affected by the change in fair value of our shares, our subsidiaries' share-based awards (including Youku Tudou and Lazada) and the quantity of awards we grant to our employees and consultants in the future. Furthermore, our share-based compensation expense will also be affected by the anticipated increase in fair value of share-based awards of Ant Financial Services. As a result of these factors, we expect that our share-based compensation expense will likely increase. See "— Critical Accounting Policies and Estimates — Share-based Compensation Expense and Valuation of the Underlying Awards" for additional information regarding our share-based compensation expense.
Recent Investment, Acquisition and Strategic Alliance Activities
In addition to organic growth, we have made, or have entered into agreements to make, strategic investments, acquisitions and alliances that are intended to further our strategic objectives. The financial results for these strategic transactions that were completed are reflected in our operating results beginning with the period of their respective completion. The investments in which we did not obtain control are accounted for under the equity method if we have significant influence over the investees through investment in common stock or in-substance common stock, or otherwise under the cost method or accounted for as investment securities based on our accounting policies over different categories of investments and merger and acquisition activities. For the details of our accounting policies for each category of our investments, see notes 2(d), 2(s) and 2(t) to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report.
Our investment and acquisition strategy focuses on three objectives:
We take a deliberate and staged approach to our investment and acquisition strategy. In some cases, we may begin with an initial minority investment followed by business cooperation. We have chosen to make minority investments in some circumstances instead of full acquisitions for one or more of the following reasons: (i) the investee has strong management, where we allow them to have operating independence and potential upside tied to their business in order to retain them; (ii) the investee does not fit within our core business operations but can generate strategic synergies through an equity relationship; and/or (iii) the investee demonstrates clear strategic value to us but capital or integration risk in the near term suggests a deliberate and phased-in approach. Where the business results, cooperation and the overall relationship established with the management of the investee company show increasing value to our ongoing business strategy, we may increase our investment or acquire the investee company completely. Examples of this type of approach include our investments in UCWeb, AutoNavi and Youku Tudou, where the period from initial investment to eventual acquisition spanned more than one fiscal year.
We have funded our strategic acquisitions and investments primarily from cash generated from our operations and through debt and equity financing. Our debt financing primarily consists of unsecured senior notes and bank borrowings. We have issued an aggregate of US$8.0 billion unsecured senior notes. We have entered into a five-year term loan facility of US$4.0 billion, of which $3.0 billion was drawn down subsequent to March 31, 2016. We have also entered into a US$3.0 billion revolving credit facility, which we have not yet drawn. Going forward, we expect to fund additional investments through cash generated from our operations and through debt and equity financing when opportunities arise in the future. Although we expect our margins to be negatively affected by acquisitions of target companies with lower or negative margins, such as our recent acquisitions of Youku Tudou and a controlling stake in Lazada, we do not expect our investment activities to have any significant negative impact on our liquidity or operations. We believe acquired businesses operating at a loss do not detract from the total value of our company because they bring clear strategic value to us in the long run. However, there can be no assurance that our future financial results would not be materially and adversely affected if our strategic investments and acquisitions are not successful. See "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — Increased investments in our business, strategic acquisitions and investments as well as our focus on long-term performance and maintaining the health of our ecosystem may negatively affect our margins and our net income" and "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We face risks relating to our acquisitions, investments and alliances."
Our significant recent strategic investments and acquisitions (including those that are under definitive agreement but have not closed) in fiscal year 2016 and the period through the date of this annual report are set forth below.
Local Services
Meizu Technology CorporationKoubei Holding Limited, or Meizu, oneKoubei (), a joint venture that we set up together with Ant Financial Services during fiscal year 2016. Koubei integrates the convenience aspects of China's leading smartphone manufacturers. In February 2015,mobile commerce and big data to provide consumers with information and promotional benefits from local restaurants in China. As of March 31, 2016, we completed an investmentinvested a total cash amount of US$590RMB3,000 million forand also injected certain related businesses into Koubei. We and Ant Financial Services each hold a minority49.6% equity interest in Meizu.
Offline CommerceKoubei, while an unrelated third-party affiliated with a major Chinese restaurant chain holds a small minority equity interest. Through Koubei, we participate in the restaurant and local establishment sector in a "closed loop" manner, which is characterized by the "online-to-offline" interaction of users obtaining information and receiving promotional offers, mostly through a mobile device, and then visiting the physical establishment to enjoy the services while making on-location payment with Alipay.
IntimeRajax Holding, or Ele.me (), one of the largest mobile food ordering and delivery services in China, covering over 300 cities as of March 31, 2016. In March 2016, we and Ant Financial Services completed a company that is listed onportion of the Hong Kong Stock Exchange and is primarily engaged in the business of managing and operating department stores and shopping malls in China. In July 2014, we completed our subscription for newly issued ordinaryconvertible preferred shares representing approximately 9.9%in Ele.me for a total combined investment amount of US$1,250 million, of which our total commitment is US$900 million. Our effective equity interest in Intime and convertible bonds which upon conversion would increaseEle.me will be approximately 22% on a fully-diluted basis once the full investment amount is completed. Ele.me complements our equity interestinvestment in Intime to approximately 26%. We paid the total purchase price of approximately HK$5,368 million upon the closing of the above-mentioned transactions. In July 2014, we established a joint venture with Intime,Koubei in which we paid approximately US$13 million for an 80.1% equity interest in the joint venture, to develop an offline commerce business in China relating to shopping malls, department stores and supermarkets.
Koubei. In June 2015, we announced that we will establish a joint venture under the brand name Koubei with Ant Financial Services, aimed at capturing opportunities within China's local services, market, with an initial focusfocusing on the food and beverage market. We will transfer our food ordering and delivery businesscharacterized by high-frequency usage and last-mile logistics within a city.
Xiaoju Kuaizhi Inc., or Didi Chuxing (), the leading transportation network company that provides vehicles and taxis for hire in China via smartphone applications. We have an existing equity stake of 10% in the fully-diluted equity of Didi Chuxing, which is the resulting company of a merger between Didi Chuxing and Kuaidi Dache, a taxi hailing company in which we currently operate underhad an investment. We account for our stake in Didi Chuxing as a cost method equity investment, in which we have an aggregate investment cost of US$445 million. As of the Taodiandian branddate of this annual report, we have committed to this joint venture.invest a further US$200 million and Ant Financial Services will transferis expected to invest US$200 million in the preferred shares of Didi Chuxing. In connection with this joint venture its offline merchant resources. In addition, Ant Financial Servicesadditional equity investment, we have signed a cooperation agreement with Didi Chuxing relating to the adoption of navigation and us will each invest RMB3 billion in this joint venture.map services provided by AutoNavi to the riders and drivers of Didi Chuxing's services, thereby further increasing the user base and usage of AutoNavi's services.
Digital Entertainment
Youku Tudou, Inc., one of China'sor Youku Tudou, a leading Internet television companiesmulti-screen entertainment and media company in China that iswas previously listed on the New York Stock Exchange. In May 2014, we, through a holding company, completed an investment ininvested US$1,090 million to purchase Class A ordinary shares of Youku Tudou, representing an effective equity interest of 16.5% on a fully-diluted basis. TheWe made this investment on the same terms together with a Yunfeng Fund, which invested US$132 million for an approximately 2% equity interest. In April 2016, we completed an acquisition of all of the issued and outstanding shares include newly issued Class A ordinary shares and Class A ordinary shares purchased from an existing shareholder, atof Youku Tudou that we or the Yunfeng Fund did not already own for a purchase pricetotal cash consideration of US$1.6944 per Class A ordinary share, corresponding to US$30.50 per American depositary share. We appointed one director to Youku Tudou's board of directors and we paid4.4 billion. Following the total investment amount of US$1,090 million upon the closingcompletion of the transaction.transaction, Youku Tudou became our consolidated subsidiary, with the Yunfeng Fund holding an approximately 2% minority interest. The management of Youku Tudou has a right for an option to purchase up to 15% of its equity. Youku Tudou is a core part of our strategy to offer digital entertainment to consumers in our ecosystem, thereby strengthening user engagement as well as enabling a new marketing channel for the merchants in our ecosystem. Further, Youku Tudou creates additional revenue sources for us from advertising and membership subscriptions.
Alibaba Pictures Group Limited (formerly known as ChinaVision), or Alibaba Pictures, a companyproducer of movies and television programs in China that is listed on the Hong Kong Stock Exchange and primarily engaged in production and distribution of films and television programs.Exchange. In June 2014, as partwe acquired control of our entertainment strategy, we completedAlibaba Pictures by completing an investment in newly issued ordinary shares representing an approximately 60% of the issued share capital ofequity interest in Alibaba Pictures. We paid thePictures for a total purchase pricecash consideration of HK$6,244 million (RMB4,955 million)million. In June 2015, Alibaba Pictures placed newly issued ordinary shares to unrelated third-party investors with aggregate gross proceeds of HK$12,179 million. Our equity interest in Alibaba Pictures was therefore diluted to 49.5% upon the closingcompletion of the transaction. As part of our integration strategy,placing. Accordingly, we made a number of changes atdeconsolidated the board and operating management levelsfinancial results of Alibaba Pictures including appointingstarting from June 2015, and recognized a new chief executive officer with significant experiencegain of RMB24,734 million based on revaluation of our remaining equity interest in the film industry and a chief financial officer who is a former audit partner of one of the Big Four accounting firms.Alibaba Pictures. In addition, we appointed our former chief risk officer as chairman of Alibaba Pictures and two new audit committee members from the financial and accounting industry. On August 14, 2014, Alibaba Pictures announced under Hong Kong Stock Exchange rules that there may be insufficient provision for impairments of certain assets and possible non-compliant accounting treatments for accounting periods prior to the completion of our investment. At the time of the acquisition, we already made certain provisions to the value of assets that we acquired with a corresponding adjustment to goodwill for the
purpose of ourPictures completed its purchase price allocation in the course of preparing our consolidated financial statements as of March 31, 2015. We have concluded that the provisions made are adequate based on Alibaba Pictures' announcement of the results of its investigation, and the issues referred to in Alibaba Pictures' August 14 announcement did not materially affect our overall financial position. In April 2015, we delivered a non-binding proposal for a possible business injection of our online movie ticketing business and financing and investment platform for the production of moviesmovie and other media content. There is no certainty that the possible business injection will proceed, and if it does proceed, there is no certainty on what terms the possible business injection would be implemented or that the conditions to its implementation would be satisfied. In addition,content for a cash consideration of US$350 million plus certain reimbursement amounts in December 2015. With these transactions, Alibaba Pictures entered intohas created a placing agreementcomprehensive platform that integrates valuable assets in relation to the placing of certain new ordinary shares. The aggregate proceeds from such placing amounted to approximately HK$12,179 million (RMB9,647 million). Our equity interest in Alibaba Pictures was diluted from 59.4% to 49.5% upon completion of this transaction in June 2015.production and distribution value chain for movies and TV dramas.
Wasu Media Holding Co., Ltd., or Wasu, a company listed on the Shenzhen Stock Exchange and engaged in the business of digital media broadcasting and distribution in China. In April 2015, Simon Xie, who is one of our founders and an equity holder in certain of our variable interest entities, was granted a financing with an aggregate principal of up to RMB6.9 billion by a major financial institution in the PRC, which was used to fund a minority investment in Wasu via a PRC limited partnership. A company controlled by Jack Ma serves as one of the general partners of the limited partnership. Yuzhu Shi, the founder, chairman and a principal shareholder of Giant Interactive, a China-based online game company that was previously listed on the New York Stock Exchange, and an entrepreneur with significant experience in and knowledge of the media industry in China, serves as the other general partner. Jack, through his control of one of the general partners, and Mr. Shi, as the other general partner and the executive partner, jointly control this PRC limited partnership. The interest of the general partner controlled by Jack in the limited partnership is limited to the return of its RMB10,000 contributed capital. We expect that these arrangements will facilitate our entering into strategic business arrangements with Wasu to enhance our entertainment strategy. The financing is secured by a pledge of Wasu shares acquired by the PRC limited partnership and a pledge of certain wealth management products we purchased. In addition, we entered into a loan agreement with a principal amount of up to RMB2.0 billion with Simon Xie in April 2015 to finance the repayment by Simon of the interest under the above-mentioned financing. Our loan to Mr. Xie will be made at an interest rate equal to SHIBOR as specified by us and is repayable in five years. The loan is secured by a pledge of Mr. Xie's limited partnership interest in the limited partnership, and will beis available for draw-down starting from January 1, 2016. We2016 but it has not yet been drawn. These arrangements have enteredfacilitated our entering into strategic cooperation agreementsbusiness arrangements with a major shareholder of Wasu in order to enhance our capabilities and profile in the entertainment sector in China.strategy.
Pharmaceuticals and Medical ProductsHealthcare
Alibaba Health Information Technology Limited (formerly known as CITIC21), or Alibaba Health, a company that is listed on the Hong Kong Stock Exchange and is primarily engaged in the business of developing the technology for product identification, authentication and tracking system for pharmaceutical and medical products in China. We believeChina that healthcare will be an important retail marketplace category inis listed on the future.Hong Kong Stock Exchange. In April 2014, we completed an acquisition of newly issued ordinary shares representing an effective equity interest of approximately 38% in Alibaba Health. We paid theHealth for a total purchase price of HK$932 million upon the closing of the transaction. In April 2015,million. Subsequent to March 31, 2016, we and Alibaba Health entered into ana services agreement pursuant tounder which we agreed to transfer the operations of our Tmall online pharmacy business to Alibaba Health in consideration for newly issued shares and convertible bonds of Alibaba Health. The transaction is subject to customary closing conditions. Upon the closing of this transaction, our effective equity ownership of Alibaba Health will increaseprovide outsourced services in relation to approximately 53% (or 54.6% assuming the full conversion of the convertible bonds upon maturity) andproduct categories related to Tmall's online pharmacy business. Alibaba Health is expectedthe flagship vehicle for us to becomeexecute our consolidated subsidiary.data-driven healthcare strategy.
Logistics
Zhejiang Cainiao Supply Chain Management Co., Ltd. and other related businesses through ourWe have made investments in a number of logistics-related companies as part of our strategy to enhance the customer experience in our core commerce business through predictable, speedy and high quality logistics services. Below is a description of the major investments in this area.
Cainiao Smart Logistics Network Limited, or Cainiao Network, Technology Co. Ltd., which we refera logistics data platform that leverages a network of logistics partners' capacity and capabilities to as Cainiao Logistics (formerly referred to as China Smart Logistics), an operatorfulfill the logistics needs of a nationwide logistics infrastructure and information system.our core commerce business. In May 2013, we joinedtook part in establishing Cainiao Network together with other partnersparties with significant operational experience in logistics, retail and logistics services businessesreal estate in China to formChina. In March 2016, Cainiao Network completed a joint venture to build and operate Cainiao
Logistics. Othernew equity partnersfinancing round, after which our aggregate investment in Cainiao Logistics include five major express delivery companiesNetwork increased to RMB7.0 billion. Currently our equity interest in China that provide services on our China retail marketplaces, as well as firms specializing in real estate development. We now own 48% of the joint venture and have subscribed for our proportionate share of the joint venture's RMB5,000 million registered capital, or RMB2,400 million.Cainiao Network is approximately 47%. See "Item 4. Information on the Company — B. Business Overview — Other Major Elements of Our Ecosystem — Logistics."
Haier Electronics Group Co., Ltd., or Haier, a company that is listed on the Hong Kong Stock Exchange and principally engaged in the research, development, manufacture and sale of electrical appliances, especially large electricalhome appliances such as refrigerators and air conditioners. In March 2014, as part of our strategy for providing better delivery and installation services to our buyers of electrical appliances,consumers, we completed an acquisition of ordinary shares representing an approximately 2% equity interest in Haier, an acquisition of a 9.9% equity interest in a wholly-owned subsidiary
of Haier whichthat is engaged in the logistics business in China, or RRS, and a subscription for a convertible and exchangeable bond which is either convertible into an approximately 2.6% equity interest in Haier or exchangeable into an approximately 24% equity interest in the wholly-owned subsidiary of Haier engaged in logistics business in China, subject to the receipt of certain regulatory approvals.RRS. We paid thea total purchase price of HK$2,821 million upon the closing of the transactions. Our investment in Haier and RRS has enabled our China retail marketplaces to gain a competitive advantage in the large home appliance category through high quality delivery, installation and after-sale services.
YTO Express (Logistics) Co., Ltd., or YTO Express, one of the leading express courier companies in China. In May 2015, we invested RMB1,500 million in YTO Express representing an equity interest of 12% in the company. YTO Express is one of the fifteen strategic express courier partners participating in the data platform of Cainiao Network to fulfill orders from our core commerce business. We invested in YTO Express so that we can leverage our shareholding relationship to establish delivery service standards and new service offerings for online shopping. Once implemented and tested, such standards and offerings may be rolled out to other delivery partners of Cainiao Network, enhancing the overall consumer experience. In January 2016, a company listed on the Shanghai Stock Exchange filed an application to purchase all of the equity interest in YTO Express through an asset swap and share issue, resulting in a reverse takeover of that company by YTO Express. The completion of the reverse takeover is subject to the approval by the shareholders of that company and certain regulatory authorities.
Singapore Post LimitedBest Logistics Technologies Ltd., or Best Logistics, a provider of comprehensive supply-chain solutions and services including express delivery, freight delivery, inventory management, warehouse fulfillment, software development, financing, business consulting to cross-border logistics services. Since fiscal year 2009, we have participated in several rounds of equity financing of Best Logistics, including one in January 2015, and have acquired an aggregate of approximately 22% equity interest in Best Logistics for an aggregate investment cost of US$256 million. In 2016, Cainiao Network also participated in a round of equity financing of Best Logistics in which it invested US$165 million for an approximately 5% equity interest in Best Logistics.
E-commerce and Related Services
Suning Commerce Group Co., Ltd., or SingPost,Suning, one of the largest consumer electronics retail chains in China with over 1,600 retail stores and over 60 national postal service provider in Singapore and a leading providerregional distribution centers as of e-commerce and logistics solutions in the Asia-Pacific regionDecember 2015 that is listed on the SingaporeShenzhen Stock Exchange. In July 2014,August 2015, we entered into definitive agreements to establish a comprehensive collaboration with Suning. Under our agreements, we will invest RMB28.2 billion for 19.99% of the enlarged equity capital of Suning. These transactions are expected to be completed during the quarter ending June 30, 2016. We have formed a strategic alliance with Suning to build on synergies in e-commerce, logistics and incremental business through joint omni-channel initiatives. We believe these transactions will bring significant strategic benefits, including improved product selection, competitive pricing, and better customer experience through reliable delivery and after-sale services.
International Expansion
Lazada Group S.A., or Lazada, a company that operates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, with local language websites and mobile apps in each of the six markets. In April 2016, we completed ouran acquisition of a controlling stake in Lazada for a total cash consideration of US$1.0 billion. Lazada offers third-party brands and merchants a marketplace solution with simple and direct access to consumers in these six countries through one retail channel. Lazada also sells products owned by its retail operations. It has developed its own logistics infrastructure with warehouses and a last-mile delivery fleet to offer quick and reliable delivery to its customers. We intend that Lazada will be our vehicle for expansion into the Southeast Asia consumer market, including potential cross-border opportunities introducing Chinese merchants and international brands to Southeast Asian consumers.
Others
Beijing Shiji Information Technology Co., Ltd., or Shiji, a developer and provider of hotel information management system software, system integration and technical service that is listed on Shenzhen Stock Exchange. In November 2015, we completed an investment in newly issued ordinary shares, representing approximately 13%
equity interest in SingPost, which consistsShiji for a total cash consideration of RMB2,389 million. Our investment in and strategic alliance with Shiji enhances the customer experience in our online travel business, Alitrip, as the alliance improves our capability to integrate real time information, such as rooms availability and special promotional offers, from participating hotels on the Alitrip platform.
AGTech Holdings Limited, or AGTech, an integrated lottery technology and services company in China that is listed on the Hong Kong Growth Enterprise Market. In March 2016, we and Ant Financial Services agreed to subscribe for newly issued ordinary shares and existing ordinary shares held in treasury by SingPost, representing approximately 10.32%convertible bonds of AGTech for a total investment amount of HK$2,388 million, of which our total commitment is HK$1,433 million. Upon the completion of the issued share capitaltransaction, AGTech will become our consolidated subsidiary. The completion of SingPost.this transaction is subject to a number of customary closing conditions including the approval by shareholders of AGTech and certain regulatory authorities. We paidintend that AGTech will be our vehicle for participating in the total purchase price of approximately S$313 million upon the closing of the transaction.lottery business in China.
2014 Restructuring of Our Relationship with Ant Financial Services and Alipay
On August 12, 2014, we entered into a share and asset purchase agreement, or the 2014 SAPA, and entered into or amended certain ancillary agreements including an amendment and restatement of the Alipay IPLA. Pursuant to these agreements, we restructured our relationships with Ant Financial Services and Alipay, its wholly-owned subsidiary, Alipay, and terminated the 2011 framework agreement.
Pursuant to the 2014 SAPA, we sold certain equity interests and assets primarily relating to the SME loan business and related services or the transferred business, to Ant Financial Services for an aggregate cash consideration of RMB3,219 million (US$519 million). In addition, we entered into software system use and service agreements with entities operating the SME loans business relating to the know-how and related intellectual property that we have agreed to sell together with the SME loan business and related services to Ant Financial Services.million. In calendar years 2015 to 2017, we will receive an annual fee equal to 2.5% of the average daily book balance of the micro loans made by such entities.SME loans. In calendar years 2018 to 2021, we will receive an annual fee equal to the amount paid for the calendar year 2017, or collectively the SME annual fee.
In connection with the 2014 SAPA, we also entered into thean amended intellectual property license agreement with Alipay, or amended Alipay IPLA, pursuant to which we license certain intellectual property and provide certain software technology services related to Alipay's current operationsAlipay and the SME loan business. Under the amended Alipay IPLA, we receive royalty streams and a service fee, or collectively the profit share payments, paid at least annually, amounting to the sum of an expense reimbursement plus 37.5% of the consolidated pre-tax income of Ant Financial Services, subject to certain adjustments.
Pursuant to the terms of the 2014 SAPA, in the event of an initial public offering of Ant Financial Services or Alipay at an implied equity value exceeding US$25 billion which results in gross proceeds of at least US$22.0 billion or a qualified IPO,(a "Qualified IPO"), if our total ownership of equity interests in Ant Financial Services has not reached 33%, we would be entitled at our election to either receive a one-time payment equal to 37.5% of the equity value of Ant Financial Services as determined immediately prior to such qualifiedQualified IPO. There is no cap on the maximum value of such liquidity event payment. If we acquire equity interests in Ant Financial Services in an aggregate amount less than 33%, the percentage of Ant Financial Services' equity value used to calculate such liquidity event payment will be adjustedreduced proportionately.
In lieu of receiving such liquidity event payment, we may elect to continue to receive the profit share payment in perpetuity, subject to the receipt of regulatory approvals. In connection with a Qualified IPO and if we so elect, Ant Financial Services must use its commercially reasonable efforts to obtain the required approvals for continued payments under the amended Alipay IPLA. If such approvals are not obtained, Ant Financial Services will pay the liquidity event payment as described above to us.
The 2014 SAPA provides for future potential equity issuances to us by Ant Financial Services. In the event that Ant Financial Services applies for and receives certain PRC regulatory approvals in the future, Ant Financial Services will issue and we will purchase newly issued equity interests in Ant Financial Services up to a 33% equity interest, or such lesser equity interest as may be permitted by the regulatory approvals. If the liquidity event payment described above has not become payable upon a Qualified IPO of Ant Financial Services, our right to acquire equity interests up to the full 33% equity interest will continue after such Qualified IPO. However, the maximum equity interest that we are entitled to acquire will be reduced in proportion to any dilutive equity issuances by Ant Financial Services in and following such Qualified IPO. If we acquire an equity interest in Ant Financial Services pursuant to this arrangement which is below 33%, the liquidity event payment amount and the
profit sharing arrangement under the Alipay IPLA will be proportionately reduced based on the amount of equity interests acquired by us.
For additional details of the new and amended agreements, see "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries."
Acquired Intangible Assets and Goodwill
When we make an acquisition, consideration that exceeds the book value of the acquired assets are allocated to acquired intangible assets and goodwill, respectively. We have and will continue to incur amortization expenses as we amortize acquired intangible assets over their estimated useful life.life on a straight-line basis. We do not amortize our goodwill. We test intangible assets and goodwill periodically for impairment, and any such impairment may materially and adversely affect our financial condition and results of operations. Some of our acquisitions and investments may not be successful, and we may incur impairment charges in the future. For additional information, see "— Critical Accounting Policies and Estimates — Impairment Assessment on Goodwill and Intangible Assets" and "Item 3. Key Information — D. Risk Factors — Risks Related to Our Business and Industry — We face risks relating to our acquisitions, investments and alliances."
Key Financial Information of Selected Equity Method Investees
Our investments in the following companies are accounted for under the equity method. Consistent with our accounting policies for investments in equity method investees, we record our share of results of the following companies on a one quarter in arrears basis within share of results of equity investees in the consolidated income statements.
Cainiao Network
The following table is a summary of key unaudited financial information of Cainiao Network Technology Co., Ltd.*:
Income statement data:
| Twelve months ended December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2015 | |||||
| RMB | RMB | |||||
| (in millions) | ||||||
Revenue | 941 | 3,099 | |||||
Net loss | (183 | ) | (617 | ) |
Balance sheet data:
| As of December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2014 | 2015 | |||||
| RMB | RMB | |||||
| (in millions) | ||||||
Total assets | 5,951 | 5,929 | |||||
Total liabilities | 2,642 | 1,761 | |||||
Total equity | 3,309 | 4,168 |
We recorded our share of the net loss of Cainiao Network Technology Co., Ltd. of RMB90 million and RMB295 million (US$46 million) in fiscal years 2015 and 2016, respectively. We also have commercial arrangements conducted on an arm's length basis with Cainiao Network to receive certain logistics services, primarily related to Tmall Supermarket, which are recorded in our cost of revenue. For additional details of the related party transactions with Cainiao Network, see "Item 7. Major Shareholders and Related Party Transactions — B. Related Party transactions — Transactions with Cainiao Network". Our logistics service costs paid or payable to Cainiao Network accounted for approximately 60% of its revenue for the twelve months ended December 31, 2015.
Koubei
The following table is a summary of key unaudited financial information of Koubei:
Income statement data:
From the date of incorporation to December 31, 2015 | ||||
---|---|---|---|---|
RMB | ||||
(in millions) | ||||
Revenue | 31 | |||
Net loss | (1,735 | ) |
Balance sheet data:
As of December 31, 2015 | ||||
---|---|---|---|---|
RMB | ||||
(in millions) | ||||
Total assets | 1,731 | |||
Total liabilities | 445 | |||
Total equity | 1,286 |
We recorded our share of the net loss of Koubei of RMB867 million (US$135 million) in fiscal year 2016.
Alibaba Pictures
The following table is a summary of key unaudited financial information of Alibaba Pictures:
Income statement data:
From the date of deconsolidation to December 31, 2015 | ||||
---|---|---|---|---|
RMB | ||||
(in millions) | ||||
Revenue | 254 | |||
Net income | 544 |
Balance sheet data:
As of December 31, 2015 | ||||
---|---|---|---|---|
RMB | ||||
(in millions) | ||||
Total assets | 18,976 | |||
Total liabilities | 2,782 | |||
Total equity | 16,194 |
We recorded our share of the net income of Alibaba Pictures of RMB268 million (US$42 million) in fiscal year 2016. We also disposed of our online movie ticketing business and financing and investment platform for production of movie and other media content to Alibaba Pictures during fiscal year 2016 at a cash consideration of US$350 million (RMB2,259 million) plus certain reimbursement amounts. We recognized a disposal gain of RMB2,214 million (US$343 million) in interest and investment income, net in our consolidated income statement for fiscal year 2016.
Results of Operations
The following table sets out our consolidated results of operations for the periods indicated:
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | 2014 | 2015 | 2016 | ||||||||||||||||||||
| RMB | RMB | RMB | US$ | RMB | RMB | RMB | US$ | ||||||||||||||||||
| (in millions, except per share data) | (in millions, except per share data) | ||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||
China commerce | 29,167 | 45,132 | 62,937 | 10,153 | 45,132 | 62,937 | 84,321 | 13,077 | ||||||||||||||||||
International commerce | 4,160 | 4,851 | 6,486 | 1,046 | 4,851 | 6,486 | 7,629 | 1,183 | ||||||||||||||||||
Cloud computing and Internet infrastructure | 650 | 773 | 1,271 | 205 | ||||||||||||||||||||||
Cloud computing | 773 | 1,271 | 3,019 | 468 | ||||||||||||||||||||||
Others | 540 | 1,748 | 5,510 | 889 | 1,748 | 5,510 | 6,174 | 958 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Total | 34,517 | 52,504 | 76,204 | 12,293 | 52,504 | 76,204 | 101,143 | 15,686 | ||||||||||||||||||
Cost of revenue | (9,719 | ) | (13,369 | ) | (23,834 | ) | (3,845 | ) | (13,369 | ) | (23,834 | ) | (34,355 | ) | (5,328 | ) | ||||||||||
Product development expenses | (3,753 | ) | (5,093 | ) | (10,658 | ) | (1,720 | ) | (5,093 | ) | (10,658 | ) | (13,788 | ) | (2,138 | ) | ||||||||||
Sales and marketing expenses | (3,613 | ) | (4,545 | ) | (8,513 | ) | (1,373 | ) | (4,545 | ) | (8,513 | ) | (11,307 | ) | (1,753 | ) | ||||||||||
General and administrative expenses | (2,889 | ) | (4,218 | ) | (7,800 | ) | (1,258 | ) | (4,218 | ) | (7,800 | ) | (9,205 | ) | (1,428 | ) | ||||||||||
Amortization of intangible assets | (130 | ) | (315 | ) | (2,089 | ) | (337 | ) | (315 | ) | (2,089 | ) | (2,931 | ) | (455 | ) | ||||||||||
Impairment of goodwill and intangible assets | (175 | ) | (44 | ) | (175 | ) | (28 | ) | ||||||||||||||||||
Yahoo TIPLA amendment payment | (3,487 | ) | — | — | — | |||||||||||||||||||||
Impairment of goodwill | (44 | ) | (175 | ) | (455 | ) | (71 | ) | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Income from operations | 10,751 | 24,920 | 23,135 | 3,732 | 24,920 | 23,135 | 29,102 | 4,513 | ||||||||||||||||||
Interest and investment income, net | 39 | 1,648 | 9,455 | 1,525 | 1,648 | 9,455 | 52,254 | 8,104 | ||||||||||||||||||
Interest expense | (1,572 | ) | (2,195 | ) | (2,750 | ) | (443 | ) | (2,195 | ) | (2,750 | ) | (1,946 | ) | (301 | ) | ||||||||||
Other income, net | 894 | 2,429 | 2,486 | 401 | 2,429 | 2,486 | 2,058 | 319 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Income before income tax and share of results of equity investees | 10,112 | 26,802 | 32,326 | 5,215 | 26,802 | 32,326 | 81,468 | 12,635 | ||||||||||||||||||
Income tax expenses | (1,457 | ) | (3,196 | ) | (6,416 | ) | (1,035 | ) | (3,196 | ) | (6,416 | ) | (8,449 | ) | (1,310 | ) | ||||||||||
Share of results of equity investees | (6 | ) | (203 | ) | (1,590 | ) | (257 | ) | (203 | ) | (1,590 | ) | (1,730 | ) | (269 | ) | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Net income | 8,649 | 23,403 | 24,320 | 3,923 | 23,403 | 24,320 | 71,289 | 11,056 | ||||||||||||||||||
Net income attributable to noncontrolling interests | (117 | ) | (88 | ) | (59 | ) | (9 | ) | ||||||||||||||||||
Net (income) loss attributable to noncontrolling interests | (88 | ) | (59 | ) | 171 | 27 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Net income attributable to Alibaba Group Holding Limited | 8,532 | 23,315 | 24,261 | 3,914 | 23,315 | 24,261 | 71,460 | 11,083 | ||||||||||||||||||
Accretion of convertible preference shares | (17 | ) | (31 | ) | (15 | ) | (2 | ) | (31 | ) | (15 | ) | — | — | ||||||||||||
Dividends accrued on convertible preference shares | (111 | ) | (208 | ) | (97 | ) | (16 | ) | (208 | ) | (97 | ) | — | — | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Net income attributable to ordinary shareholders | 8,404 | 23,076 | 24,149 | 3,896 | 23,076 | 24,149 | 71,460 | 11,083 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||
| | | | | | | | | | | | | | |||||||||||||
Earnings per share/ADS attributable to ordinary shareholders: | ||||||||||||||||||||||||||
Basic | 3.66 | 10.61 | 10.33 | 1.67 | 10.61 | 10.33 | 29.07 | 4.51 | ||||||||||||||||||
Diluted | 3.57 | 10.00 | 9.70 | 1.56 | 10.00 | 9.70 | 27.89 | 4.33 |
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | 2014 | 2015 | 2016 | ||||||||||||||
| % | % | % | % | % | % | ||||||||||||||
| (as percentage of revenue) | (as percentage of revenue) | ||||||||||||||||||
Revenue | ||||||||||||||||||||
China commerce | 84 | 86 | 82 | 86 | 82 | 83 | ||||||||||||||
International commerce | 12 | 9 | 9 | 9 | 9 | 8 | ||||||||||||||
Cloud computing and Internet infrastructure | 2 | 2 | 2 | |||||||||||||||||
Cloud computing | 2 | 2 | 3 | |||||||||||||||||
Others | 2 | 3 | 7 | 3 | 7 | 6 | ||||||||||||||
| | | | | | | | | | | | | | | | | | |||
Total | 100 | 100 | 100 | 100 | 100 | 100 | ||||||||||||||
Cost of revenue | (28 | ) | (25 | ) | (31 | ) | (25 | ) | (31 | ) | (34 | ) | ||||||||
Product development expenses | (11 | ) | (10 | ) | (14 | ) | (10 | ) | (14 | ) | (14 | ) | ||||||||
Sales and marketing expenses | (11 | ) | (9 | ) | (11 | ) | (9 | ) | (11 | ) | (11 | ) | ||||||||
General and administrative expenses | (8 | ) | (8 | ) | (10 | ) | (8 | ) | (10 | ) | (9 | ) | ||||||||
Amortization of intangible assets | — | (1 | ) | (3 | ) | (1 | ) | (3 | ) | (3 | ) | |||||||||
Impairment of goodwill and intangible assets | (1 | ) | — | (1 | ) | |||||||||||||||
Yahoo TIPLA amendment payment | (10 | ) | — | — | ||||||||||||||||
Impairment of goodwill | — | (1 | ) | — | ||||||||||||||||
| | | | | | | | | | | | | | | | | | |||
Income from operations | 31 | 47 | 30 | 47 | 30 | 29 | ||||||||||||||
Interest and investment income, net | — | 3 | 13 | 3 | 13 | 52 | ||||||||||||||
Interest expense | (5 | ) | (4 | ) | (4 | ) | (4 | ) | (4 | ) | (2 | ) | ||||||||
Other income, net | 3 | 5 | 3 | 5 | 3 | 2 | ||||||||||||||
| | | | | | | | | | | | | | | | | | |||
Income before income tax and share of results of equity investees | 29 | 51 | 42 | 51 | 42 | 81 | ||||||||||||||
Income tax expenses | (4 | ) | (6 | ) | (8 | ) | (6 | ) | (8 | ) | (8 | ) | ||||||||
Share of results of equity investees | — | — | (2 | ) | — | (2 | ) | (2 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | |||
Net income | 25 | 45 | 32 | 45 | 32 | 71 | ||||||||||||||
Net income attributable to noncontrolling interests | (1 | ) | (1 | ) | — | (1 | ) | — | — | |||||||||||
| | | | | | | | | | | | | | | | | | |||
Net income attributable to Alibaba Group Holding Limited | 24 | 44 | 32 | 44 | 32 | 71 | ||||||||||||||
Accretion of convertible preference shares | — | — | — | — | — | — | ||||||||||||||
Dividends accrued on convertible preference shares | — | — | — | — | — | — | ||||||||||||||
| | | | | | | | | | | | | | | | | | |||
Net income attributable to ordinary shareholders | 24 | 44 | 32 | 44 | 32 | 71 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | ||
| | | | | | | | | | |
Comparison of Fiscal Years 20142015 and 20152016
Revenue
| Year ended March 31, | | Year ended March 31, | | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | 2015 | 2016 | | ||||||||||||||||||||
| RMB | RMB | US$ | % Change | RMB | RMB | US$ | % Change | ||||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | ||||||||||||||||||||||||
China commerce | 45,132 | 62,937 | 10,153 | 39% | 62,937 | 84,321 | 13,077 | 34% | ||||||||||||||||||
International commerce | 4,851 | 6,486 | 1,046 | 34% | 6,486 | 7,629 | 1,183 | 18% | ||||||||||||||||||
Cloud computing and Internet infrastructure | 773 | 1,271 | 205 | 64% | ||||||||||||||||||||||
Cloud computing | 1,271 | 3,019 | 468 | 138% | ||||||||||||||||||||||
Others | 1,748 | 5,510 | 889 | 215% | 5,510 | 6,174 | 958 | 12% | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||
Total revenue | 52,504 | 76,204 | 12,293 | 45% | 76,204 | 101,143 | 15,686 | 33% | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | |
Total revenue increased by 45%33%, from RMB52,504RMB76,204 million in fiscal year 20142015 to RMB76,204RMB101,143 million (US$12,29315,686 million) in fiscal year 2015.2016. The increase was mainly driven by the continued rapid growth of our China commerce retail business. Our revenue growth rate will likely decline as our revenue grows to higher levels.
China Commerce
| Year ended March 31, | | Year ended March 31, | | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | 2015 | 2016 | | ||||||||||||||||||||
| RMB | RMB | US$ | % Change | RMB | RMB | US$ | % Change | ||||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | ||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||
China commerce retail business | ||||||||||||||||||||||||||
Online marketing services | 29,729 | 37,509 | 6,051 | 26% | 37,509 | 52,396 | 8,126 | 40% | ||||||||||||||||||
Commission | 12,023 | 21,201 | 3,420 | 76% | 21,201 | 25,829 | 4,006 | 22% | ||||||||||||||||||
Others(1) | 1,080 | 1,022 | 165 | (5% | ) | 1,022 | 1,808 | 280 | 77% | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||
42,832 | 59,732 | 9,636 | 39% | 59,732 | 80,033 | 12,412 | 34% | |||||||||||||||||||
China commerce wholesale business | 2,300 | 3,205 | 517 | 39% | 3,205 | 4,288 | 665 | 34% | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||
Total | 45,132 | 62,937 | 10,153 | 39% | 62,937 | 84,321 | 13,077 | 34% | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | |
Revenue from our China commerce retail business increased by 39%34% from RMB42,832RMB59,732 million in fiscal year 20142015 to RMB59,732RMB80,033 million (US$9,63612,412 million) in fiscal year 2015.2016.
Revenue growth during this period reflected an increase of 46%27% in GMV transacted on these marketplaces including a 36%and an increase in the monetization rate. GMV transacted on Taobao Marketplace increased by 18% from RMB1,173RMB1,597 billion in fiscal year 20142015 to RMB1,597RMB1,877 billion (US$258295 billion) in fiscal year 20152016 and a 68% increase in GMV transacted on Tmall increased by 43% from RMB505RMB847 billion in fiscal year 20142015 to RMB847RMB1,215 billion (US$136190 billion) in fiscal year 2015.2016. The overall increase in total GMV transacted on these marketplaces was primarily driven by a 37%21% increase in the number of buyers and, to a lesser extent, by a moderate increase in the average level of their spending. The rapid increasegrowth in GMV transacted on Tmall in particular was attributable to the increase in the number of buyers making purchases on Tmall, reflecting consumer preferences for branded products and a premium shopping experience and the beneficial impact of promotional events, and increases in the average level of spending of buyers and the beneficial impact of promotional events.buyers. Our monetization rate during this period decreasedincreased from 2.55% in fiscal year 2014 to 2.44% in fiscal year 2015 to 2.59% in fiscal year 2016, mainly as a result of the higher percentage of total GMV contributed by mobile GMV, which has a lower monetization rate compared to the non-mobile monetization rate.
Mobile revenue from our China commerce retail business in fiscal year 2015 was RMB17,840 million (US$2,878 million), an increase of 514% compared to RMB2,905 million in fiscal year 2014, representing 30%accelerated growth of our China commerce retail business revenue in fiscal year 2015, compared to 7% in fiscal year 2014. The increase in mobile revenue from our China commerce retail business was primarily due to an increase in GMV generated on mobile devices and also to an increase in the mobile monetization rate.online marketing services revenue.
Online marketing services revenue increased by 26%40% from RMB29,729RMB37,509 million in fiscal year 20142015 to RMB37,509RMB52,396 million (US$6,0518,126 million) in fiscal year 2015, reflecting GMV2016. The growth of 46% from RMB1,678 billion in fiscal year 2014 to RMB2,444 billion (US$394 billion) in fiscal year 2015. The lower growth rate of online marketing services revenue relative to the GMV growth rate reflected the ongoing shift of consumer engagement from personal computers to mobile devices, as we monetize mobile GMV at a lower rate than GMV transacted on personal computer interfaces because merchants allocated a smaller proportion of their budget to purchase online marketing services on mobile relative to the GMV generated on mobile. As a result, mobile GMV accounted for 19% and 41% of total GMV in fiscal years 2014 and 2015, respectively, while mobile revenue accounted for 7% and 30% of China commerce retail business revenue, respectively, during those periods. This lower but increasing
level of mobile monetization reflected our focus on prioritizing mobile user activity and engagement over monetization and the fact that we increased our efforts to promote online marketing services for mobile interfaces beginning in the three months ended December 31, 2013. The increase in online marketing services revenue during this period was primarily driven by our focus on high-quality merchants and on delivering a 55%broader value proposition to our merchants. This resulted in higher marketing spend by our merchants as we optimized online marketing efficiency and added new online marketing inventory on both mobile and PC interfaces, leading to a 44% increase in the number of clicks attributable to our P4P marketing services. Thisservices, and a 1% increase was partially offset by a 21% decrease in the cost-per-click paid by our merchants, as a result of the higher percentage of total clicks generated on mobile devices, which have a lower cost-per-click compared to cost-per-click on personal computers. Our strong momentum in mobile and commitment to improving user experience may slow the growth rate of our online marketing services revenue in the near term, but we believe our approach will create significant value for both our users and our business in the longer term.merchants. To a lesser extent, our online marketing services revenue during this period was also positively impacted by an increase in the CPM of our display marketing services, which was partially offset by a decrease in the number of impressions displayed.
Commission revenue increased by 76%22% from RMB12,023RMB21,201 million in fiscal year 20142015 to RMB21,201RMB25,829 million (US$3,4204,006 million) in fiscal year 2015, primarily due2016. The lower year-over-year commission revenue growth relative to a 68%the 43% increase in GMV transacted on Tmall during the same period as well as an increase of RMB989 million in lottery commission income from Taobao marketplace, which was mainly due to significantlya result of (i) suspension of our online lottery business on Taobao Marketplace (which had a higher activity since the World Cup soccer competition in the summer of 2014 before we suspendedmonetization rate than our lottery businessoverall monetization rate) in late February 2015 around the same time as the other major online lottery platforms in China in response to regulatory requirements. The published commission rates we charge by category as well as our blended commission rate remained relatively stable over this period, and accordingly, the increase in revenue from commissions during this period was principallyrequirements, (ii) a result of increased GMV transacted rather than any changedecrease in the pricing charged on Juhuasuan as an investment to acquire more high-quality merchants and (iii) impact from changes in category mix. Excluding the effect of commission rates. As Tmall GMVthe online lottery business, our revenue would have increased at a higher rate than Taobao Marketplace GMV, commission revenue grew at a faster rate than online marketing services revenue because we charge commissions on Tmall. Commission revenueby 31% in fiscal year 2016 from transactions on Tmall is generated from both personal computer and mobile transactions, and accordinglyfiscal year 2015. Due to the ongoing shift of consumeruser engagement towardstoward mobile devices, did not negatively affectcategories such as virtual goods on which we charge a lower commission rate, are seeing higher growth than other categories. As a result of the above, commission revenue increased at a lower rate than the Tmall GMV.
Mobile revenue from our China commerce retail business increased by 182% from RMB17,840 million in fiscal year 2015 to RMB50,337 million in fiscal year 2016, representing 63% of our China commerce retail business
revenue in fiscal year 2016, compared to 30% in fiscal year 2015. The increase in mobile revenue from our China commerce retail business was primarily due to an increase in GMV transactedgenerated and better monetization of traffic on Tmall.mobile devices. Mobile monetization rate improved to 2.51% in fiscal year 2016 from 1.79% in fiscal year 2015.
Revenue from our China commerce wholesale business increased by 39%34% from RMB2,300RMB3,205 million in fiscal year 20142015 to RMB3,205RMB4,288 million (US$517665 million) in fiscal year 2015.2016. The increase in revenue was due to an increase in average revenue from paying members and an increase in average revenue from paying members.
International Commerce
| Year ended March 31, | | Year ended March 31, | | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | 2015 | 2016 | | ||||||||||||||||||||
| RMB | RMB | US$ | % Change | RMB | RMB | US$ | % Change | ||||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | ||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||
International commerce retail business | 938 | 1,768 | 285 | 88% | 1,768 | 2,204 | 342 | 25% | ||||||||||||||||||
International commerce wholesale business | 3,913 | 4,718 | 761 | 21% | 4,718 | 5,425 | 841 | 15% | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Total | 4,851 | 6,486 | 1,046 | 34% | 6,486 | 7,629 | 1,183 | 18% | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||
| | | | | | | | | | | | | |
Revenue from our international commerce retail business increased by 88%25% from RMB938RMB1,768 million in fiscal year 20142015 to RMB1,768RMB2,204 million (US$285342 million) in fiscal year 2015.2016. The main reason for this increase was an increase in GMV transacted on AliExpress, primarily fromdue to the increasing number of buyers,consumers, particularly in Russia, Brazil andSpain, the United States.States and France.
Revenue from our international commerce wholesale business increased by 21%15% from RMB3,913 million in fiscal year 2014, of which 88% was from membership fees and value-added services and 12% was from online marketing services, to RMB4,718 million (US$761 million) in fiscal year 2015, of which 85%69% was from membership fees and online marketing services and 31% was from value-added services, and 15%to RMB5,425 million (US$841 million) in fiscal year 2016, of which 67% was from membership fees and online marketing services and 33% was from value-added services. The increase in revenue was due to growth in revenue generated by the import/export related services provided by One Touch and, to a lesser extent, an increase in online marketing service revenue from China wholesale suppliers.
Cloud Computing Business
Revenue from our cloud computing business in fiscal year 2016 was RMB3,019 million (US$468 million), an increase of 138% compared to RMB1,271 million in fiscal year 2015, driven by the continued growth of our cloud computing business. The growth was primarily due to an increase in the number of paying memberscustomers and also to an increase in average revenue from paying members.
Tabletheir usage of Contentsand spending on our cloud computing services including more complex offerings, such as our content delivery network and database services.
Other Revenue
Other revenue in fiscal year 2016 was RMB6,174 million (US$958 million), an increase of 12% compared to RMB5,510 million in fiscal year 2015. This result included the effect of an increase in revenue from mobile Internet services provided by UCWeb, and revenue from AutoNavi, over-the-top TV services and YunOS and a decrease in revenue related to the SME loan business that we transferred to Ant Financial Services in February 2015. Revenue from mobile Internet services, AutoNavi, over-the-top TV services and YunOS increased by 86% year-over-year.
Cost of Revenue
| Year ended March 31, | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | | ||||||||||
| RMB | RMB | US$ | % Change | |||||||||
| (in millions, except percentages) | ||||||||||||
Cost of revenue | 23,834 | 34,355 | 5,328 | 44 | % | ||||||||
Percentage of revenue | 31 | % | 34 | % | |||||||||
Shared-based compensation expense included in cost of revenue | 4,176 | 4,003 | 621 | (4 | )% | ||||||||
Percentage of revenue | 5 | % | 4 | % | |||||||||
Cost of revenue excluding share-based compensation expense | 19,658 | 30,352 | 4,707 | 54 | % | ||||||||
Percentage of revenue | 26 | % | 30 | % |
Our cost of revenue increased by 44% from RMB23,834 million in fiscal year 2015 to RMB34,355 million (US$5,328 million) in fiscal year 2016. This increase was primarily due to an increase of RMB2,278 million (US$353 million) in bandwidth and co-location fees and depreciation expenses as a result of our investments in our cloud computing business and our data platform, increases of RMB2,146 million (US$333 million) in costs associated with our new business initiatives (mainly our mobile operating system, over-the-top TV services and entertainment), an increase of RMB1,865 million (US$289 million) in traffic acquisition costs as a result of the expansion of our third-party affiliate marketing ecosystem and an increase of RMB1,564 million (US$243 million) in logistics costs mainly relating to fulfillment services provided to us by our affiliate Cainiao Network, which amounted to RMB2,370 million (US$368 million), or 2% of our revenue, in fiscal year 2016, primarily related to Tmall Supermarket. Without the effect of share-based compensation expense, cost of revenue as a percentage of revenue would have increased from 26% in fiscal year 2015 to 30% in fiscal year 2016, primarily due to increase in costs associated with our new business initiatives and an increase in logistics costs, as discussed above. As we continue to invest in new and acquired businesses, customer service initiatives and infrastructure, we expect our cost of revenue will increase in absolute dollar amounts and will likely increase as a percentage of revenues.
Product Development Expenses
| Year ended March 31, | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | | ||||||||||
| RMB | RMB | US$ | % Change | |||||||||
| (in millions, except percentages) | ||||||||||||
Product of development expenses | 10,658 | 13,788 | 2,138 | 29 | % | ||||||||
Percentage of revenue | 14 | % | 14 | % | |||||||||
Shared-based compensation expense included in product development expenses | 3,876 | 5,703 | 885 | 47 | % | ||||||||
Percentage of revenue | 5 | % | 6 | % | |||||||||
Product development expenses excluding share-based compensation expense | 6,782 | 8,085 | 1,253 | 19 | % | ||||||||
Percentage of revenue | 9 | % | 8 | % |
Our product development expenses increased by 29% from RMB10,658 million in fiscal year 2015 to RMB13,788 million (US$2,138 million) in fiscal year 2016. The increase was largely due to an increase of RMB3,114 million (US$483 million) in payroll and benefits expenses including share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above), partially offset by a decrease in the royalty fee paid to Yahoo, which terminated by contract upon the completion of our initial public
offering in September 2014. Without the effect of share-based compensation expense, product development expenses as a percentage of revenue would have decreased from 9% in fiscal year 2015 to 8% in fiscal year 2016 due to a decrease in royalty fees paid to Yahoo. We expect our product development expenses will increase in absolute amounts and may over time increase as a percentage of revenues.
Sales and Marketing Expenses
| Year ended March 31, | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | | ||||||||||
| RMB | RMB | US$ | % Change | |||||||||
| (in millions, except percentages) | ||||||||||||
Sales and marketing expenses | 8,513 | 11,307 | 1,753 | 33 | % | ||||||||
Percentage of revenue | 11 | % | 11 | % | |||||||||
Shared-based compensation expense included in sales and marketing expenses | 1,235 | 1,963 | 304 | 59 | % | ||||||||
Percentage of revenue | 2 | % | 2 | % | |||||||||
Sales and marketing expenses excluding share-based compensation expense | 7,278 | 9,344 | 1,449 | 28 | % | ||||||||
Percentage of revenue | 9 | % | 9 | % |
Our sales and marketing expenses increased by 33% from RMB8,513 million in fiscal year 2015 to RMB11,307 million (US$1,753 million) in fiscal year 2016. The increase was due primarily to an increase in advertising and promotional spending mainly focused on strengthening consumer connection to our Taobao and Tmall brands, especially in top tier cities, as well as to promote our new businesses initiatives, such as Alitrip and DingTalk, during fiscal year 2016. The increase was also due to an increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above). Without the effect of share-based compensation expense, sales and marketing expenses as a percentage of revenue would have remained stable at 9% in both fiscal year 2015 and fiscal year 2016. We expect our sales and marketing expenses will increase in absolute amounts and may increase as a percentage of revenues as we continue to invest in marketing and promotion.
General and Administrative Expenses
| Year ended March 31, | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | | ||||||||||
| RMB | RMB | US$ | % Change | |||||||||
| (in millions, except percentages) | ||||||||||||
General and administrative expenses | 7,800 | 9,205 | 1,428 | 18 | % | ||||||||
Percentage of revenue | 10 | % | 9 | % | |||||||||
Shared-based compensation expense included in general and administrative expenses | 3,741 | 4,413 | 684 | 18 | % | ||||||||
Percentage of revenue | 5 | % | 4 | % | |||||||||
General and administrative excluding share-based compensation expense | 4,059 | 4,792 | 744 | 18 | % | ||||||||
Percentage of revenue | 5 | % | 5 | % |
Our general and administrative expenses increased by 18% from RMB7,800 million in fiscal year 2015 to RMB9,205 million (US$1,428 million) in fiscal year 2016. The increase was primarily due to a significant increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above), as well as an increase of RMB353 million (US$55 million) in professional services fees.
Without the effect of share-based compensation expense, general and administrative expenses as a percentage of revenue in fiscal year 2016 would have remained stable at 5% in both fiscal year 2015 and fiscal year 2016.
Amortization of Intangible Assets
| Year ended March 31, | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | | ||||||||||
| RMB | RMB | US$ | % Change | |||||||||
| (in millions, except percentages) | ||||||||||||
Amortization of intangible assets | 2,089 | 2,931 | 455 | 40 | % | ||||||||
Percentage of revenue | 3 | % | 3 | % |
Amortization of intangible assets increased by 40% from RMB2,089 million in fiscal year 2015 to RMB2,931 million (US$455 million) in fiscal year 2016. This increase was due to an increase in intangible assets recognized arising from our strategic acquisitions and investments. Because of the recent major acquisitions we will consolidate, such as Youku Tudou and our controlling stake in Lazada, we expect that our amortization of intangible assets will increase in the future.
Income from Operations and Operating Margin
| Year ended March 31, | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | | ||||||||||
| RMB | RMB | US$ | % Change | |||||||||
| (in millions, except percentages) | ||||||||||||
Income from operations | 23,135 | 29,102 | 4,513 | 26 | % | ||||||||
Percentage of revenue | 30 | % | 29 | % |
Our income from operations increased by 26% from RMB23,135 million, or 30% of revenue in fiscal year 2015 to RMB29,102 million (US$4,513 million), or 29% of revenue, in fiscal year 2016. The decrease in our operating margin was primarily attributable to investments in new business initiatives, such as our mobile operating systems, over-the-top TV services and entertainment, and also to an increase in logistics costs, as discussed above.
Interest and Investment Income, Net
Our net interest and investment income increased significantly from RMB9,455 million in fiscal year 2015 to RMB52,254 million (US$8,104 million) in fiscal year 2016. The increase was primarily due to a non-cash deemed disposal gain of RMB24,734 million (US$3,836 million) arising from the deconsolidation of Alibaba Pictures, a non-cash gain of RMB18,603 million (US$2,885 million) from the revaluation of our previously held equity interest in Alibaba Health when we obtained control over Alibaba Health in fiscal year 2016, as well as gains arising from disposals of certain investments and businesses. See note 4 to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report for further information.
Interest Expense
Our interest expense decreased by 29% from RMB2,750 million in fiscal year 2015 to RMB1,946 million (US$301 million) in fiscal year 2016. Interest expense in fiscal year 2015 included an one-time charge for financing-related fees of RMB830 million as a result of the early repayment of our US$8.0 billion bank borrowings with proceeds from our issuance of US$8.0 billion senior unsecured notes.
Other Income, Net
Our other income, net decreased by 17% from RMB2,486 million in fiscal year 2015 to RMB2,058 million (US$319 million) in fiscal year 2016. The decrease was primarily due to a decrease in income recognized in respect of royalty fees and software technology services fees from Ant Financial Services, which were RMB1,122 million
(US$174 million) in fiscal year 2016, compared to RMB1,667 million in fiscal year 2015. Such decrease in income recognized primarily resulted from increased marketing and promotion activities of Ant Financial Services to drive its user growth and engagement, causing a decrease in its consolidated pre-tax income.
Income Tax Expenses
Our income tax expenses increased by 32% from RMB6,416 million in fiscal year 2015 to RMB8,449 million (US$1,310 million) in fiscal year 2016. The increase in income tax expenses was primarily due to the increase in taxable income from our operations in China. Our effective tax rate decreased to 10% in fiscal year 2016 from 20% in fiscal year 2015, primarily due to the non-cash gains relating to the deconsolidation of Alibaba Pictures and consolidation of Alibaba Health, as discussed in "Interest and Investment Income, Net" above, which are not taxable for income tax purposes. Excluding the above gains and other non-taxable or non-deductible items, our effective tax rate remains stable.
Share of Results of Equity Investees
Share of losses of equity investees in fiscal year 2016 was RMB1,730 million (US$269 million), an increase of 9% compared to RMB1,590 million in fiscal year 2015. Share of results of equity investee in fiscal year 2016 consisted of the following:
| Year ended March 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||||
| RMB | RMB | US$ | |||||||
| (in millions) | |||||||||
Share of results of equity investees: | ||||||||||
Koubei | — | (867 | ) | (135 | ) | |||||
Youku Tudou | (99 | ) | (391 | ) | (61 | ) | ||||
Cainiao Network | (90 | ) | (295 | ) | (46 | ) | ||||
Others | (275 | ) | 62 | 10 | ||||||
Dilution gains | — | 827 | 128 | |||||||
Impairment | (438 | ) | — | — | ||||||
Others | (688 | ) | (1,066 | ) | (165 | ) | ||||
| | | | | | | | | | |
(1,590 | ) | (1,730 | ) | (269 | ) | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The increase in share of losses of equity investees in fiscal year 2016 compared to fiscal year 2015 was primarily due to our share of losses of Koubei, Youku Tudou and Cainiao Network, partially offset by accounting gains related to dilution of our ownership interest in Cainiao Network and Evergrande FC, as these investees each raised capital at a higher valuation in fiscal year 2016. We established Koubei as a joint venture with Ant Financial Services in September 2015. Our share of Koubei's loss in fiscal year 2016 represents Koubei's high investments and promotional spending during its start-up stage. We expect such share of loss to decrease in the future.
Net Income
As a result of the foregoing, our net income increased by 193% from RMB24,320 million in fiscal year 2015 to RMB71,289 million (US$11,056 million) in fiscal year 2016.
Comparison of Fiscal Years 2014 and 2015
Revenue
| Year ended March 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
China commerce | 45,132 | 62,937 | 39 | % | ||||||
International commerce | 4,851 | 6,486 | 34 | % | ||||||
Cloud computing | 773 | 1,271 | 64 | % | ||||||
Others | 1,748 | 5,510 | 215 | % | ||||||
| | | | | | | | | | |
Total revenue | 52,504 | 76,204 | 45 | % | ||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total revenue increased by 45%, from RMB52,504 million in fiscal year 2014 to RMB76,204 million in fiscal year 2015. The increase was mainly driven by the continued rapid growth of our China commerce retail business. Our revenue growth rate will likely decline as our revenue grows to higher levels.
China Commerce
| Year ended March 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
Revenue | ||||||||||
China commerce retail business | ||||||||||
Online marketing services | 29,729 | 37,509 | 26 | % | ||||||
Commission | 12,023 | 21,201 | 76 | % | ||||||
Others(1) | 1,080 | 1,022 | (5 | )% | ||||||
| | | | | | | | | | |
42,832 | 59,732 | 39 | % | |||||||
China commerce wholesale business | 2,300 | 3,205 | 39 | % | ||||||
| | | | | | | | | | |
Total | 45,132 | 62,937 | 39 | % | ||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Revenue from our China commerce retail business increased by 39% from RMB42,832 million in fiscal year 2014 to RMB59,732 million in fiscal year 2015.
Revenue growth during this period reflected an increase of 46% in GMV transacted on these marketplaces, including a 36% increase in GMV transacted on Taobao Marketplace from RMB1,173 billion in fiscal year 2014 to RMB1,597 billion in fiscal year 2015 and a 68% increase in GMV transacted on Tmall from RMB505 billion in fiscal year 2014 to RMB847 billion in fiscal year 2015. The overall increase in total GMV transacted on these marketplaces was primarily driven by a 37% increase in the number of consumers and, to a lesser extent, by a moderate increase in the average level of their spending. The rapid increase in GMV transacted on Tmall in particular was attributable to the increase in the number of consumers making purchases on Tmall, reflecting consumer preferences for branded products and a premium shopping experience, increases in the average level of spending of consumers and the beneficial impact of promotional events. Our monetization rate during this period decreased from 2.55% in fiscal year 2014 to 2.44% in fiscal year 2015, mainly as a result of the higher percentage of total GMV contributed by mobile GMV, which has a lower monetization rate compared to the non-mobile monetization rate.
Mobile revenue from our China commerce retail business in fiscal year 2015 was RMB17,840 million, an increase of 514% compared to RMB2,905 million in fiscal year 2014, representing 30% of our China commerce retail business revenue in fiscal year 2015, compared to 7% in fiscal year 2014. The increase in mobile revenue from our China commerce retail business was primarily due to an increase in GMV generated on mobile devices and also to an increase in the mobile monetization rate.
Online marketing services revenue increased by 26% from RMB29,729 million in fiscal year 2014 to RMB37,509 million in fiscal year 2015, reflecting GMV growth of 46% from RMB1,678 billion in fiscal year 2014 to RMB2,444 billion in fiscal year 2015. The lower growth rate of online marketing services revenue relative to the GMV growth rate reflected the ongoing shift of consumer engagement from personal computers to mobile devices, as we monetize mobile GMV at a lower rate than GMV transacted on personal computer interfaces because merchants allocated a smaller proportion of their budget to purchase online marketing services on mobile relative to the GMV generated on mobile. As a result, mobile GMV accounted for 19% and 41% of total GMV in fiscal years 2014 and 2015, respectively, while mobile revenue accounted for 7% and 30% of China commerce retail business revenue, respectively, during those periods. This lower but increasing level of mobile monetization reflected our focus on prioritizing mobile user activity and engagement over monetization and the fact that we increased our efforts to promote online marketing services for mobile interfaces beginning in the three months ended December 31, 2013. The increase in online marketing services revenue during this period was primarily driven by a 55% increase in the number of clicks attributable to our P4P marketing services. This increase was partially offset by a 21% decrease in the cost-per-click paid by our merchants, as a result of the higher percentage of total clicks generated on mobile devices, which have a lower cost-per-click compared to cost-per-click on personal computers. Our strong momentum in mobile and commitment to improving user experience may slow the growth rate of our online marketing services revenue in the near term, but we believe our approach will create significant value for both our users and our business in the longer term. To a lesser extent, our online marketing services revenue during this period was also positively impacted by an increase in the CPM of our display marketing services, which was partially offset by a decrease in the number of impressions displayed.
Commission revenue increased by 76% from RMB12,023 million in fiscal year 2014 to RMB21,201 million in fiscal year 2015, primarily due to a 68% increase in GMV transacted on Tmall during the same period as well as an increase of RMB989 million in lottery commission income from Taobao marketplace, which was mainly due to significantly higher activity since the World Cup soccer competition in the summer of 2014 before we suspended our lottery business in late February 2015, around the same time as the other major online lottery platforms in China in response to regulatory requirements. The published commission rates we charge by category as well as our blended commission rate remained relatively stable over this period, and accordingly, the increase in revenue from commissions during this period was principally a result of increased GMV transacted rather than any change in the pricing of commission rates. As Tmall GMV increased at a higher rate than Taobao Marketplace GMV, commission revenue grew at a faster rate than online marketing services revenue because we charge commissions on Tmall. Commission revenue from transactions on Tmall is generated from both personal computer and mobile transactions, and accordingly the ongoing shift of consumer engagement towards mobile devices did not negatively affect commission revenue from GMV transacted on Tmall.
Revenue from our China commerce wholesale business increased by 39% from RMB2,300 million in fiscal year 2014 to RMB3,205 million in fiscal year 2015. The increase in revenue was due to an increase in paying members and an increase in average revenue from paying members.
International Commerce
| Year ended March 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
Revenue | ||||||||||
International commerce retail business | 938 | 1,768 | 88 | % | ||||||
International commerce wholesale business | 3,913 | 4,718 | 21 | % | ||||||
| | | | | | | | | | |
Total | 4,851 | 6,486 | 34 | % | ||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Revenue from our international commerce retail business increased by 88% from RMB938 million in fiscal year 2014 to RMB1,768 million in fiscal year 2015. The main reason for this increase was an increase in GMV transacted on AliExpress, primarily from the increasing number of buyers, particularly in Russia, Brazil and the United States.
Revenue from our international commerce wholesale business increased by 21% from RMB3,913 million in fiscal year 2014, of which 88% was from membership fees and value-added services and 12% was from online marketing services, to RMB4,718 million in fiscal year 2015, of which 85% was from membership fees and value-added services and 15% was from online marketing services. The increase in revenue was due to an increase in the number of paying members and an increase in average revenue from paying members.
Other revenue
Other revenue in fiscal year 2015 was RMB5,510 million, (US$889 million), an increase of 215% compared to RMB1,748 million in fiscal year 2014. This increase was primarily due to the consolidation of revenue from acquired businesses (mainly UCWeb and AutoNavi) in a total amount of RMB2,489 million, (US$402 million), and an increase in interest income generated by the SME loan business before this business was transferred to Ant Financial Services upon the completion of the restructuring of our relationship with Ant Financial Services in early February 2015.
Cost of Revenue
| Year ended March 31, | | Year ended March 31, | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | 2014 | 2015 | | |||||||||||||||||
| RMB | RMB | US$ | % Change | RMB | RMB | % Change | ||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||
Cost of revenue | 13,369 | 23,834 | 3,845 | 78% | 13,369 | 23,834 | 78 | % | |||||||||||||||
Percentage of revenue | 25% | 31% | 25 | % | 31 | % |
Our cost of revenue increased by 78% from RMB13,369 million in fiscal year 2014 to RMB23,834 million (US$3,845 million) in fiscal year 2015. This increase was primarily due to increases of RMB4,183 million in payroll and benefits expense mainly resulting from an increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above), an increase of RMB1,653 million in bandwidth and co-location fees and depreciation expenses as a result of our investments in our cloud computing business and our data platform, an increase of RMB1,487 million in payment processing fees resulting from an increase in GMV transacted on our retail marketplaces and an increase of RMB951 million in traffic acquisition costs as a result of the expansion of our third-party affiliate marketing ecosystem. As we continue to invest in our business, customer service initiatives and infrastructure, we expect our cost of revenue will increase in absolute dollar amounts and will likely increase as a percentage of revenues.
Product Development Expenses
| Year ended March 31, | | Year ended March 31, | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | 2014 | 2015 | | |||||||||||||||||
| RMB | RMB | US$ | % Change | RMB | RMB | % Change | ||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||
Product development expenses | 5,093 | 10,658 | 1,720 | 109% | 5,093 | 10,658 | 109 | % | |||||||||||||||
Percentage of revenue | 10% | 14% | 10 | % | 14 | % |
Our product development expenses increased by 109% from RMB5,093 million in fiscal year 2014 to RMB10,658 million (US$1,720 million) in fiscal year 2015. The increase was largely due to an increase of RMB5,465 million in payroll and benefits expenses including share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above), partially offset by a decrease in the royalty fee paid to Yahoo, which terminated by contract upon the completion of our initial public offering in September 2014. We expect our product development expenses will increase in absolute amounts and may over time increase as a percentage of revenues.
Sales and Marketing Expenses
| Year ended March 31, | | Year ended March 31, | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | 2014 | 2015 | | |||||||||||||||||
| RMB | RMB | US$ | % Change | RMB | RMB | % Change | ||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||
Sales and marketing expenses | 4,545 | 8,513 | 1,373 | 87% | 4,545 | 8,513 | 87% | ||||||||||||||||
Percentage of revenue | 9% | 11% | 9 | % | 11 | % |
Our sales and marketing expenses increased by 87% from RMB4,545 million in fiscal year 2014 to RMB8,513 million (US$1,373 million) in fiscal year 2015. The increase was due primarily to the consolidation of marketing expenses of acquired businesses (mainly UCWeb and AutoNavi), and also to an increase in advertising and promotional spending mainly focused on strengthening consumer connection to our Taobao and Tmall brands, especially in lower tier cities, as well as to promote our new businesses initiatives (e.g., offline commerce) during fiscal year 2015. The increase was also due to an increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above). We expect our sales and marketing expenses will increase in absolute amounts and may increase as a percentage of revenues as we continue to invest in marketing and promotion.
General and Administrative Expenses
| Year ended March 31, | | Year ended March 31, | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | 2014 | 2015 | | |||||||||||||||||
| RMB | RMB | US$ | % Change | RMB | RMB | % Change | ||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||
General and administrative expenses | 4,218 | 7,800 | 1,258 | 85% | 4,218 | 7,800 | 85% | ||||||||||||||||
Percentage of revenue | 8% | 10% | 8 | % | 10 | % |
Our general and administrative expenses increased by 85% from RMB4,218 million in fiscal year 2014 to RMB7,800 million (US$1,258 million) in fiscal year 2015. The increase was primarily due to a significant increase in share-based compensation expense (an effect that we expect will continue, as discussed in "Share-based Compensation" above). Our general and administrative expenses in fiscal year 2014 included a one-time equity-settled donation expense of RMB1,269 million relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit
organization. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Equity SettledEquity-settled Donation Relating to Our Ordinary Shares."
Income from Operations and Operating Margin
| Year ended March 31, | | Year ended March 31, | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | | 2014 | 2015 | | |||||||||||||||||
| RMB | RMB | US$ | % Change | RMB | RMB | % Change | ||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||
Income from operations | 24,920 | 23,135 | 3,732 | (7% | ) | 24,920 | 23,135 | (7% | ) | ||||||||||||||
Percentage of revenue | 47% | 30% | 47% | 30% |
Our income from operations decreased by 7% from RMB24,920 million in fiscal year 2014 to RMB23,135 million (US$3,732 million) in fiscal year 2015. Although our revenue increased by 45% year-over-year, income from operations decreased, due primarily to a significant increase in share-based compensation expense from RMB2,844 million in fiscal year 2014 to RMB13,028 million (US$2,102 million) in fiscal year 2015, and also to other factors affecting cost and expenses as discussed above.
Our operating margin decreased from 47% in fiscal year 2014 to 30% in fiscal year 2015. The decrease was primarily attributable to increase in share-based compensation expense, which amounted to 17% and 5% as a
percentage of revenue in fiscal year 2015 and fiscal year 2014, respectively, the consolidation of acquired businesses with lower overall margins than our margins, mainly UCWeb and AutoNavi, as well as investments in new business initiatives, such as cloud computing, entertainment, mobile operating system and offline commerce.
Interest and Investment Income, Net
Our net interest and investment income increased significantly from RMB1,648 million in fiscal year 2014 to RMB9,455 million (US$1,525 million) in fiscal year 2015. The increase was primarily due to a net gain of RMB6,535 million (US$1,054 million) recognized with respect to the revaluation of previously held equity interests, relating primarily to the step acquisitions of UCWeb, OneTouch and AutoNavi. The increase was also due to an increase in interest income as a result of higher cash balance during the period, which in turn was due primarily to the proceeds from our initial public offering in September 2014 and also to an increase in operating cash flow.
Interest Expense
Our interest expense increased by 25% from RMB2,195 million in fiscal year 2014 to RMB2,750 million (US$443 million) in fiscal year 2015. The increase was primarily due to an increase in average debt outstanding, with debt outstanding during fiscal year 2014 primarily reflecting a loan of US$5.0 billion drawn down under a US$8.0 billion credit facility, and debt outstanding during fiscal year 2015 primarily reflecting an additional US$3.0 billion drawn down under the same credit facility in April 2014, which was refinanced by the US$8.0 billion unsecured senior notes issued in November 2014.
Other Income, Net
Our other income, net increased by 2% from RMB2,429 million in fiscal year 2014 to RMB2,486 million (US$401 million) in fiscal year 2015.
Income Tax Expenses
Our income tax expenses increased by 101% from RMB3,196 million in fiscal year 2014 to RMB6,416 million (US$1,035 million) in fiscal year 2015. The increase was due primarily to the expiration of an EIT exemption period for one of our major subsidiaries, upon which the subsidiary is no longer exempt from paying EIT but is subject to an EIT rate of 12.5% (or 50% of the statutory EIT rate) in calendar year 2014. The increase in income tax expenses was also due to the increase in taxable income from our operations in China. Our effective tax rate increased to 19.8%20% in fiscal
year 2015 from 11.9%12% in fiscal year 2014, due primarily to the expiration of the EIT exemption as discussed above, and to the increase in share-based compensation expense, which is not deductible for income tax purposes.
Net Income
As a result of the foregoing, our net income increased by 4% from RMB23,403 million in fiscal year 2014 to RMB24,320 million (US$3,923 million) in fiscal year 2015.
Comparison of Fiscal Years 2013 and 2014
Revenue
| Year ended March 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
China commerce | 29,167 | 45,132 | 55% | |||||||
International commerce | 4,160 | 4,851 | 17% | |||||||
Cloud computing and Internet infrastructure | 650 | 773 | 19% | |||||||
Others | 540 | 1,748 | 224% | |||||||
| | | | | | | | | | |
Total revenue | 34,517 | 52,504 | 52% | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
Total revenue increased by 52%, from RMB34,517 million in fiscal year 2013 to RMB52,504 million in fiscal year 2014. The increase was mainly driven by the continued rapid growth of our China commerce retail business. Our revenue growth rate will likely decline as our revenue grows to higher levels.
China Commerce
| Year ended March 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
Revenue | ||||||||||
China commerce retail business | ||||||||||
Online marketing services | 19,697 | 29,729 | 51% | |||||||
Commission | 6,161 | 12,023 | 95% | |||||||
Others(1) | 1,112 | 1,080 | (3% | ) | ||||||
| | | | | | | | | | |
26,970 | 42,832 | 59% | ||||||||
China commerce wholesale business | 2,197 | 2,300 | 5% | |||||||
| | | | | | | | | | |
Total | 29,167 | 45,132 | 55% | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
Revenue from our China commerce retail business increased by 59% from RMB26,970 million in fiscal year 2013 to RMB42,832 million in fiscal year 2014.
Revenue growth during this period occurred in the context of and reflected an increase of 56% in GMV transacted on these marketplaces, including a 42% increase in GMV transacted on Taobao Marketplace from RMB824 billion in fiscal year 2013 to RMB1,173 billion in fiscal year 2014 and a near-doubling of GMV transacted on Tmall from RMB253 billion in fiscal year 2013 to RMB505 billion in fiscal year 2014. The overall increase in total GMV transacted on these marketplaces was primarily driven by a 48% increase in the number of buyers and, to a lesser extent, by a moderate increase in the level of their spending. The rapid increase in GMV transacted on Tmall in particular was attributable to the increase in the number of buyers making purchases on Tmall, reflecting consumer preferences for branded products and a premium shopping experience, increases in the level of spending of buyers and the beneficial impact of promotional events. Revenue growth during this period was also positively affected by an increase in monetization rate from 2.50% in fiscal year 2013 to 2.55% in fiscal year 2014, reflecting the higher GMV contribution from Tmall as a portion of total GMV and accordingly higher
growth in commission revenue, and was partially offset by a higher proportion of mobile GMV which we are currently monetizing at a lower rate than GMV through personal computer interfaces.
Online marketing services revenue increased by 51% from RMB19,697 million in fiscal year 2013 to RMB29,729 million in fiscal year 2014, consistent with GMV growth of 56% from RMB1,077 billion in fiscal year 2013 to RMB1,678 billion in fiscal year 2014. The slightly lower growth rate of online marketing services revenue relative to the GMV growth rate reflected the ongoing shift of consumer engagement from personal computers to mobile devices, as we monetize mobile GMV at a lower rate than GMV transacted on personal computer interfaces because merchants allocated a smaller proportion of their budget to purchase online marketing services on mobile relative to the GMV generated on mobile. As a result, mobile GMV accounted for 7% and 19% of total GMV in fiscal years 2013 and 2014, respectively, while mobile revenue accounted for 1% and 7% of China commerce retail business revenue, respectively, during those periods. This lower but increasing level of mobile monetization reflected our focus on prioritizing mobile user activity and engagement over monetization and the fact that we increased our efforts to promote online marketing services for mobile interfaces beginning in the three months ended December 31, 2013. The increase in online marketing services revenue during this period was primarily driven by a 35% increase in the number of clicks attributable to our P4P marketing services and a 15% increase in the cost-per-click paid by our merchants, reflecting increased demand from our merchants, which drove up pricing due to the bid-based nature of the mechanism used by merchants to purchase such services. To a lesser extent, our online marketing services revenue during this period was also positively impacted by an increase in the number of impressions displayed through our display marketing services.
Commission revenue increased by 95% from RMB6,161 million in fiscal year 2013 to RMB12,023 million in fiscal year 2014, primarily due to the near-doubling of GMV transacted on Tmall during the same period. The published commission rates we charge by category as well as our blended commission rate remained relatively stable over this period, and accordingly, the increase in revenue from commissions during this period was principally a result of increased GMV transacted rather than any change in the pricing of commission rates. As Tmall GMV increased at a higher rate than Taobao Marketplace GMV, commission revenue grew at a faster rate than online marketing services revenue because we charge commissions on Tmall. Commission revenue from transactions on Tmall is generated from both personal computer and mobile transactions, and accordingly the ongoing shift of consumer engagement towards mobile devices did not negatively affect commission revenue from GMV transacted on Tmall.
Revenue from our China commerce wholesale business increased by 5% from RMB2,197 million in fiscal year 2013 to RMB2,300 million in fiscal year 2014. The modest increase in revenue was due to a slight increase in paying members, reflecting our transition to a transaction platform that does not emphasize growing paying members.
International Commerce
| Year ended March 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
Revenue | ||||||||||
International commerce retail business | 392 | 938 | 139% | |||||||
International commerce wholesale business | 3,768 | 3,913 | 4% | |||||||
| | | | | | | | | | |
Total | 4,160 | 4,851 | 17% | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
Revenue from our international commerce retail business increased by 139% from RMB392 million in fiscal year 2013 to RMB938 million in fiscal year 2014. The main reason for this increase was an increase in GMV
transacted on AliExpress, primarily from the increasing number of buyers, particularly in Brazil, Russia and the United States.
Revenue from our international commerce wholesale business increased by 4% from RMB3,768 million in fiscal year 2013, of which 90% was from membership fees and value-added services and 10% was from online marketing services, to RMB3,913 million in fiscal year 2014, of which 88% was from membership fees and value-added services and 12% was from online marketing services. The modest increase in revenue was due to a slight increase in the number of paying members reflecting the slow growth of China exports.
Cost of Revenue
| Year ended March 31, | | ||||||||
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| 2013 | 2014 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
Cost of revenue | 9,719 | 13,369 | 38% | |||||||
Percentage of revenue | 28% | 25% |
Our cost of revenue increased from RMB9,719 million in fiscal year 2013 to RMB13,369 million in fiscal year 2014. This increase was primarily due to increases of RMB1,337 million in payroll and benefits expense mainly resulting from an increase in share-based compensation expense which primarily related to the re-measurement to fair value of share-based awards granted to Alipay employees (these awards are re-measured to fair value at each period end), an increase of RMB1,081 million in bandwidth and co-location fees mainly as a result of increased user traffic on our websites as well as depreciation expenses related to equipment acquired in anticipation of increases in user traffic, an increase of RMB864 million in payment processing fees resulting from an increase in GMV transacted on our retail marketplaces and an increase of RMB497 million in traffic acquisition costs from RMB1,582 million in fiscal year 2013 to RMB2,079 million in fiscal year 2014 as a result of the expansion of our use of third-party marketing affiliate programs to drive additional user traffic to our marketplaces, partially offset by a decrease of RMB750 million in business tax resulting from the replacement of business tax with VAT, which is netted against revenue. We expect our cost of revenue will increase in absolute dollar amounts and will likely increase as a percentage of revenues as we continue to invest in our business, customer service initiatives and infrastructure.
Product Development Expenses
| Year ended March 31, | | ||||||||
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| 2013 | 2014 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
Product development expenses | 3,753 | 5,093 | 36% | |||||||
Percentage of revenue | 11% | 10% |
Our product development expenses increased by 36% from RMB3,753 million in fiscal year 2013 to RMB5,093 million in fiscal year 2014. The increase was largely due to an increase of RMB1,135 million in payroll and benefits expenses mainly resulting from an increase in product development headcount as we continue to focus on new and existing product development, and an increase in share-based compensation expense related to increased headcount. The increase was also due to an increase of RMB156 million in the royalty fee paid to Yahoo driven by the increase in our revenue and partially offset by a decrease in the royalty fee rate pursuant to the amended Yahoo TIPLA in September 2012. Following completion of our initial public offering, we will no longer pay royalty fees to Yahoo. We expect our product development expenses will increase in absolute amounts and may over time increase as a percentage of revenues.
Sales and Marketing Expenses
| Year ended March 31, | | ||||||||
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| 2013 | 2014 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
Sales and marketing expenses | 3,613 | 4,545 | 26% | |||||||
Percentage of revenue | 11% | 9% |
Our sales and marketing expenses increased by 26% from RMB3,613 million in fiscal year 2013 to RMB4,545 million in fiscal year 2014. The increase was primarily due to an increase in advertising and promotional spending, which included an increase of RMB165 million from RMB367 million to RMB532 million in online advertising expenses, mainly to promote our China retail marketplaces and mobile commerce. We expect our sales and marketing expenses will increase in absolute amounts and may increase as a percentage of revenues as we continue to invest in marketing and promotion.
General and Administrative Expenses
| Year ended March 31, | | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
General and administrative expenses | 2,889 | 4,218 | 46% | |||||||
Percentage of revenue | 8% | 8% |
Our general and administrative expenses increased by 46% from RMB2,889 million in fiscal year 2013 to RMB4,218 million in fiscal year 2014. The increase was primarily due to a one-time equity-settled donation expense of RMB1,269 million in fiscal year 2014 relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai. The increase was also due to an increase of RMB145 million in professional services fees.
Yahoo TIPLA Amendment Payment
We entered into the Yahoo TIPLA in October 2005, pursuant to which we pay royalty fees to Yahoo. We and Yahoo amended the then existing TIPLA in September 2012, pursuant to which we made a lump sum payment to Yahoo in the amount of US$550 million in fiscal year 2013.
Income from Operations and Operating Margin
| Year ended March 31, | | ||||||||
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| 2013 | 2014 | | |||||||
| RMB | RMB | % Change | |||||||
| (in millions, except percentages) | |||||||||
Income from operations | 10,751 | 24,920 | 132% | |||||||
Percentage of revenue | 31% | 47% |
Our income from operations increased by 132% from RMB10,751 million in fiscal year 2013 to RMB24,920 million in fiscal year 2014. The increase was primarily due to the overall growth in our revenue and due to our revenue growing faster than the increases in our cost of revenue and expenses during the same period. Our income from operations in fiscal years 2013 and 2014 were affected by one-time expense items consisting of the Yahoo TIPLA amendment payment and an equity-settled donation expense, respectively.
Our operating margin increased from 31% in fiscal year 2013 (taking into account the one-time Yahoo TIPLA amendment payment, which amounted to 10% as a percentage of revenue) to 47% in fiscal year 2014 (taking into account the one-time equity-settled donation expense, which amounted to 2% as a percentage of revenue). The increase was primarily attributable to increases in our revenue without a corresponding significant increase in costs as we continued to benefit from the ongoing network effects of our online marketplaces and a highly scalable business model, as well as the effects of tax reform in China that replaced the business tax with VAT.
Interest and Investment Income, Net
Our net interest and investment income increased significantly from RMB39 million in fiscal year 2013 to RMB1,648 million in fiscal year 2014. The increase was primarily due to an increase of RMB755 million in interest income as a result of higher interest rates and cash balances during the period, a decrease of RMB243 million in foreign exchange loss due to an exchange gain arising from a foreign currency denominated deposit held by us and an increase of RMB308 million of gain from our disposal of investments.
Interest Expense
Our interest expense increased by 40% from RMB1,572 million in fiscal year 2013 to RMB2,195 million in fiscal year 2014, primarily due to an increase of RMB677 million in professional fees and upfront fees in connection with the refinancing of our US$4.0 billion credit facilities and an increase of RMB122 million in bank interest expense resulting from a higher average loan amount outstanding during the period following entry into our US$8.0 billion credit facility in April 2013, of which US$5.0 billion was immediately drawn down, partially offset by a lower overall interest rate during that period. The increase was also partially offset by a decrease of RMB175 million in dividends paid on redeemable preference shares issued to Yahoo in September 2012, which we redeemed in May 2013.
Other Income, Net
Our other income, net increased by 172% from RMB894 million in fiscal year 2013 to RMB2,429 million in fiscal year 2014, primarily due to an increase in royalty fees and software technology service fees received from Alipay as a result of an increase in the volume of transactions processed by, and the pre-tax income of, Alipay.
Income Tax Expenses
Our income tax expenses increased by 119% from RMB1,457 million in fiscal year 2013 to RMB3,196 million in fiscal year 2014, primarily due to the increase in taxable profit from our operations in China. While the PRC EIT law imposes a unified enterprise income tax rate of 25% for both domestic enterprises and foreign invested enterprises, a number of our operating entities have enjoyed various tax incentives, such as the preferential tax rate of 15% granted to entities qualifying as High and New Technology Enterprises and a preferential tax rate of 10% granted to entities qualifying as key software enterprises. Our effective tax rate was 14.4% and 11.9% in fiscal year 2013 and 2014, respectively. The one-time Yahoo TIPLA amendment payment made in fiscal year 2013 did not reduce our taxable income and we were not able to use it to offset our taxable income.
Net Income
As a result of the foregoing, our net income increased significantly from RMB8,649 million in fiscal year 2013 to RMB23,403 million in fiscal year 2014. Net income in fiscal year 2013 was also reduced by the one-time Yahoo TIPLA amendment payment.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest mainly represents the net income of Alibaba.com attributable to its public shareholders prior to its privatization in June 2012. Net income attributable to noncontrolling interest decreased by 25% from RMB117 million in fiscal year 2013 to RMB88 million in fiscal year 2014, as there was no further net income attributable to noncontrolling interests related to Alibaba.com after the completion of its privatization.
B. Liquidity and Capital Resources
Liquidity and Capital Resources
We fund our operations primarilyand strategic investments from cash generated from our operations.operations and through debt and equity financing. We generated RMB26,379 million, RMB41,217 million and RMB56,836 million (US$8,815 million) of cash from operating activities for fiscal years 2014, 2015 and 2016, respectively. As of March 31, 2015,2016, we had cash and cash equivalents and short-term investments of RMB108,193RMB106,818 million (US$17,45316,566 million) and RMB14,148RMB4,700 million (US$2,282729 million), respectively. Short-term investments mainly consist primarily of investments in fixed deposits with maturities between three months and one year and investments in money market funds or other investments whereby we have the intention to redeem within one year.
In November 2014, we issued unsecured senior notes, including floating rate and fixed rate notes, with varying maturities for an aggregate principal amount of US$8.0 billion. Interest on the unsecured senior notes are payable in arrears, quarterly for the floating rate notes and semiannually for the fixed-rate notes. We used the proceeds from the issuance of the unsecured senior notes to refinance our US$8.0 credit facility.previous syndicated loan arrangements in the same amount. We are not subject to any financial covenant or other significant covenants or restrictions under the unsecured senior notes. In December 2015, we completed an exchange offer to exchange our outstanding unsecured senior notes for unsecured senior notes that have been registered under the Securities Act. See note 21 to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report for further information.
In August 2014, we entered into a revolving loan facility agreement with certain financial institutions for an amount of US$3.0 billion which has not yet been drawn down. The interest rate for this credit facility is calculated based on LIBOR plus 120 basis points. This loan facility is reserved for future general corporate purposes.
In March 2016, we signed a five-year US$3.0 billion syndicated loan agreement with a group of eight lead arrangers which has been subsequently drawn down in April 2016. The loan was upsized from US$3.0 billion to US$4.0 billion in May 2016 through a general syndication, of which the upsized portion has not yet been drawn down. The loan has a five-year bullet maturity and is priced at 110 basis points over LIBOR. The use of proceeds of the loan is for general corporate and working capital purposes (including funding our acquisitions).
As of March 31, 2016, we also had other bank borrowings of RMB6,175 million (US$957 million), primarily used for the construction of corporate campuses and office facilities and other working capital purposes. See note 20 to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report for further information.
The following table sets out a summary of our cash flows for the periods indicated.
| Year ended March 31, | ||||||||||||
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| 2013 | 2014 | 2015 | ||||||||||
| RMB | RMB | RMB | US$ | |||||||||
| (in millions) | ||||||||||||
Net cash provided by operating activities | 14,476 | 26,379 | 41,217 | 6,649 | |||||||||
Net cash provided by (used in) investing activities | 545 | (32,997 | ) | (53,454 | ) | (8,623 | ) | ||||||
Net cash (used in) provided by financing activities | (1,406 | ) | 9,364 | 87,497 | 14,114 |
| Year ended March 31, | ||||||||||||
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| 2014 | 2015 | 2016 | ||||||||||
| RMB | RMB | RMB | US$ | |||||||||
| (in millions) | ||||||||||||
Net cash provided by operating activities | 26,379 | 41,217 | 56,836 | 8,815 | |||||||||
Net cash used in investing activities | (32,997 | ) | (53,454 | ) | (42,831 | ) | (6,643 | ) | |||||
Net cash provided by (used in) financing activities | 9,364 | 87,497 | (15,846 | ) | (2,457 | ) |
We believe that our current levels of cash and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next twelve months. However, we may need additional cash resources in the
future if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions, which may include investing in technology, our underlying technical infrastructure, including data management and analytics solutions, or related talent. If we determine that our cash requirements exceed our amounts of cash on hand or if we decide to further optimize our capital structure, we may seek to issue additional debt or equity securities or obtain credit facilities or other sources of funding.
Cash Provided by Operating Activities
Cash provided by operating activities in fiscal year 20152016 was RMB41,217RMB56,836 million (US$6,6498,815 million) and primarily consisted of net income of RMB24,320RMB71,289 million (US$3,92311,056 million), as adjusted for non-cash items and the effects of changes in working capital and other activities. Adjustments for non-cash items primarily included a deemed disposal gain of RMB24,734 million (US$3,836 million) arising from the deconsolidation of Alibaba Pictures, a gain of RMB18,603 million (US$2,885 million) from the revaluation of our previously held equity interest related to Alibaba Health, RMB16,082 million (US$2,494 million) of share-based compensation expense, RMB3,770 million (US$584 million) of depreciation and amortization of property and equipment and land use rights, a gain of RMB3,089 million (US$479 million) from disposals of equity investees and RMB2,931 million (US$455 million) of amortization of intangible assets. Changes in working capital and other activities primarily consisted of an increase of RMB8,104 million (US$1,257 million) in accrued expenses, accounts payable and other current liabilities as a result of the growth of our business and an increase of RMB2,350 million (US$364 million) in deferred revenue and customer advances, partially offset by an increase of RMB4,012 million (US$622 million) in prepayment, receivables and other assets.
Cash provided by operating activities in fiscal year 2015 was RMB41,217 million and primarily consisted of net income of RMB24,320 million, as adjusted for non-cash items and the effects of changes in working capital and other activities. Adjustments for non-cash items primarily included RMB13,028 million (US$2,102 million) of share-based compensation expense, a net gain from our step acquisitions arising from revaluation of previously held equity interests totaling RMB6,535 million, (US$1,054 million), RMB2,326 million (US$375 million) of depreciation and amortization of property and equipment and land use rights, RMB2,089 million (US$337 million) of amortization of intangible assets and RMB1,659 million (US$268 million) of deferred income taxes. Changes in working capital and other activities primarily consisted of an increase of RMB10,578RMB11,415 million (US$1,706 million) in accrued expenses, accounts payable and other current liabilities as a result of the growth of our business and an increase of RMB2,490 million (US$402 million) in merchant deposits, which relate to merchants operating on Tmall, partially offset by an increase of RMB11,674RMB13,927 million (US$1,883 million)in prepayments, receivables and other assets, as a result of the increase in loan receivables relating to the SME loan business before we transferred this business to Ant Financial Services. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — 2014 Restructuring of Our Relationship with Ant Financial Services and Alipay."
Cash provided by operating activities in fiscal year 2014 was RMB26,379 million and primarily consisted of net income of RMB23,403 million, as adjusted for non-cash items and the effects of changes in working capital and other activities. Adjustment for non-cash items primarily included RMB2,844 million of share-based compensation
expense, RMB1,269 million of equity-settled donation expense, RMB1,466 million of deferred income taxes and RMB1,339 million of depreciation and amortization expenses. Changes in working capital and other activities primarily consisted of an increase of RMB9,175RMB12,742 million in prepayments, receivables and other assets due to the increase in loan receivables as a result of the continued growth of our SME loan business, and an increase of RMB3,567 million in prepayments, receivables and other assets as a result of the growth of our business, partially offset by an increase of RMB3,992RMB5,336 million in accrued expenses, accounts payable and other current liabilities as a result of the growth of our business and an increase of RMB1,628 million in merchant deposits, which relate to merchants operating on Tmall.
Cash provided by operating activities in fiscal year 2013 was RMB14,476 million and primarily consisted of net income of RMB8,649 million, as adjusted for non-cash items and the effects of changes in working capital and other activities. Adjustment for non-cash items primarily included RMB1,259 million of share-based compensation expense and RMB805 million of depreciation and amortization expenses. Changes in working capital and other activities primarily consisted of an increase of RMB3,657 million in accrued expenses and other current liabilities as a result of the growth of our business and an increase of RMB2,338 million in merchant deposits, which relate to merchants operating on Tmall, partially offset by an increase of RMB2,828 million in loan receivables as a result of the growth of our SME loan business.
Cash Provided by (Used in)Used in Investing Activities
Cash used in investing activities was RMB42,831 million (US$6,643 million) in fiscal year 2016 and was primarily attributable to RMB54,483 million (US$8,449 million) in acquisition of available-for-sale, held-to-maturity securities and equity investments mainly held for strategic purposes, including Ele.me, Koubei, Magic Leap, CMC
and Cainiao Network, and cash paid for business combinations, net of cash acquired, acquisition of equipment, intangible assets and construction in progress of RMB10,845 million (US$1,682 million) primarily in connection with the purchase of computer equipment and the continued expansion of our corporate campuses, partially offset by proceeds from disposal of subsidiaries, equity investees, available-for-sale securities and held-to-maturity securities of RMB17,088 million (US$2,650 million) and net decrease in short-term investments of RMB4,619 million (US$716 million).
Cash used in investing activities was RMB53,454 million (US$8,623 million) in fiscal year 2015 and was primarily attributable to RMB35,231 million (US$5,684 million) in acquisition of available-for-sale, held-to-maturity investment securities and equity investments mainly held for strategic purposes, including Youku Tudou, Intime, Meizu, Weibo and SingPost, RMB10,255 million (US$1,654 million) in cash paid for business combinations, net of cash acquired, including AutoNavi, UCWeb and OneTouch and acquisitions of equipment, intangible assets and construction in progress of RMB7,705 million (US$1,243 million) primarily in connection with the purchase of computer equipment and the continued expansion of our corporate campus.
Cash used in investing activities was RMB32,997 million in fiscal year 2014 and was primarily attributable to RMB16,468 million in equity investments mainly held for strategic purposes, including UCWeb, Weibo and AutoNavi, a net increase in short-term investments of RMB8,304 million and acquisitions of land use rights, construction in progress and other property, equipment and intangible assets of RMB4,776 million primarily in connection with the continued expansion of our corporate campuses and the purchase of computer equipment.
Cash providedProvided by investing(Used in) Financing Activities
Cash used in financing activities was RMB545RMB15,846 million (US$2,457 million) in fiscal year 20132016, and was primarily attributable to a net decreasecash used in short-term investmentsshare repurchase of RMB2,589RMB19,795 million and a net decrease in restricted cash of RMB334 million. The net decrease in restricted cash was mainly attributable to the release of restricted cash of RMB1,177 million from an escrow account following the completion of the Alibaba.com privatization in June 2012 and a release of RMB1,000 million in deposits for a one-time consumer protection program offered by Tmall that we funded in fiscal year 2012, which was(US$3,070 million), partially offset by net proceeds from borrowings of RMB2,478 million (US$384 million). See "Item 16E. Purchases of Equity Securities by the increase in restricted cash of RMB1,884 millionIssuer and Affiliated Purchasers" for our debt servicing reserve account required by our US$4.0 billion credit facilities drawn in fiscal year 2013. These amounts were partially offset by payments for acquisitions of land use rights, construction in progress and other property, equipment and intangible assets of RMB2,503 million primarily in connection with the expansion of our corporate campuses and the purchase of computer equipment.
Cash (Used in) Provided by Financing Activitiesfurther information.
Cash provided by financing activities was RMB87,497 million (US$14,114 million) in fiscal year 2015, and was primarily attributable to the issuance of ordinary shares of RMB61,831 million (US$9,974 million) in connection with our initial public offering in September 2014 and the additional drawdown of US$3.0 billion under our US$8.0 billion credit facilityprevious syndicated loan arrangement in April 2014, which was refinanced with the proceeds from the US$8.0 billion unsecured senior notes issued in November 2014.
Cash provided by financing activities was RMB9,364 million in fiscal year 2014, and was primarily attributable to a drawdown of RMB29,947 million, or US$5.0 billion, from our US$8.0 billion credit facility,
RMB24,788 million of which was used for the refinancing of the US$4.0 billion credit facilities drawn in fiscal year 2013 and the payment of accrued and unpaid interest, and RMB5,131 million of which was used to redeem the Yahoo preference shares and the accrued and unpaid dividends thereon,previous syndicated loan arrangement, as well as a net increase of RMB7,166 million in secured borrowings underlying our transfers of micro loans to third-party financial institutions.
Cash used in financing activities was RMB1,406 million in fiscal year 2013 and was primarily attributable to the repurchase of our ordinary shares from Yahoo of RMB40,111 million and the privatization of Alibaba.com of RMB15,134 million. These amounts were partially offset by a drawdown of RMB24,463 million from our US$4.0 billion credit facilities, proceeds from the issuance of ordinary shares to third-party investors and through the exercise of options by our employees totaling RMB16,792 million, proceeds from the issuance of convertible preference shares issued to third-party investors of RMB10,542 million and a net increase of RMB2,098 million in secured borrowings underlying our transfers of micro loans to third-party financial institutions.
Capital Expenditures
Our capital expenditures have been incurred primarily in relation to (1) the acquisition of land use rights and construction of corporate campuses and office facilities in Hangzhou, Beijing, Guangzhou and ShenzhenShenzhen; and (2) the acquisition of computer equipment relating to the operation of our websites, furniture and office equipment and leasehold improvements for our office facilities. In fiscal years 2013, 2014, 2015 and 2015,2016, our capital expenditures totaled RMB2,503 million, RMB4,776 million, and RMB7,705 million and RMB10,845 million (US$1,2431,682 million), respectively.
Holding Company Structure
We are a holding company with no operationsoperation other than ownership of operating subsidiaries in Hong Kong, China and elsewhere that own and operate our marketplaces and other businesses as well as a portfolio of intellectual property rights. As a result, we rely on dividends and other distributions paid by our operating subsidiaries, including funds to pay dividends to our shareholders or to service our outstanding debts. If our operating subsidiaries incur additional debt on their own behalf in the future, the instruments governing the debt may restrict the ability of our operating subsidiaries to pay dividends or make other distributions to us. In addition,
applicable PRC law permits payment of dividends to us by our operating subsidiaries in China only out of their net income, if any, determined in accordance with PRC accounting standards and regulations. Moreover, our operating subsidiaries in China are also required to set aside a portion of their net income, if any, each year to fund general reserves for appropriations until such reserve has reached 50% of the related subsidiary's registered capital. These reserves are not distributable as cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary. As of March 31, 2015,2016, these restricted assets totaled RMB26,902RMB39,116 million (US$4,3406,066 million). See note 2324 to our consolidated financial statements for the years ended March 31, 2013, 2014, 2015 and 20152016 included elsewhere in this annual report.
Our holding company structure differs from some of our peers in that we hold our material assets and operations, except for ICP and other licenses for regulated activities as well as certain equity investments in restricted businesses, in our wholly-foreign owned enterprises and most of our revenue is generated directly by the wholly-foreign owned enterprises. As revenue is generated directly by our wholly-foreign owned enterprises, the wholly-foreign owned enterprises directly capture the profits and associated cash flow from operations, without having to rely on contractual arrangements to transfer such cash flow from the variable interest entities to the wholly-foreign owned enterprises. In fiscal years 2013, 2014, 2015 and 2015,2016, the significant majority of our revenues were generated by our wholly-foreign owned enterprises in China. See "Item 4. Information on the Company — C. Organizational Structure — Our History and Corporate Structure" for a description of these contractual arrangements and the structure of our company.
Inflation
Inflation in China has not materially impacted our results of operations in recent years. According to the National Bureau of Statistics of China, the year-over-year increase in the consumer price index in calendar years 2012, 2013, 2014 and 20142015 was 2.6%, 2.6%2.0% and 2.0%1.4%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher inflation rates in China.
Critical Accounting Policies and Estimates
Our significant accounting policies are set forth in note 2 to our audited consolidated financial statements included elsewhere in this annual report. The preparation of our consolidated financial statements requires our management to make estimates and assumptions that affect the amount reported in consolidated financial statements. These estimates and assumptions are periodically re-evaluated by management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ significantly from those estimates and assumptions. We have identified the following accounting policies as the most critical to an understanding of our financial position and results of operations, because the application of these policies requires significant and complex management estimates, assumptions and judgment, and the reporting of materially different amounts could result if different estimates or assumptions were used or different judgments were made.
Principles of Consolidation
A subsidiary is an entity in which (i) we directly or indirectly control more than 50% of the voting power; or (ii) we have the power to appoint or remove the majority of the members of the board of directors or to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee pursuant to a statute or under an agreement among the shareholders or equity holders. However, there are situations in which consolidation is required even though these usual conditions of consolidation do not apply. Generally, this occurs when an entity holds an interest in another business enterprise that was achieved through arrangements that do not involve voting interests, which results in a disproportionate relationship between such entity's voting interests in, and its exposure to the economic risks and potential rewards of, the other business enterprise. This disproportionate relationship results in what is known as a variable interest, and the entity in which we have the variable interest is referred to as a "VIE." We consolidate a VIE if we are determined to be
the primary beneficiary of the VIE. The primary beneficiary has both (i) the power to direct the activities of the VIE that most significantly impact the entity's economic performance, and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
For the entities that we invested in or associated with but in which the usual conditions of consolidation mentioned above do not apply, we continuously reassess whether these entities possess any of the characteristic of a VIE and whether we are the primary beneficiary.
We consolidate our subsidiaries and the VIEs of which we are the primary beneficiary. On a periodic basis, we reconsider the initial determination of whether a legal entity is a consolidated entity upon certain events listed in ASC 810-10-35-4 occurred and also continuously reconsider whether we are the primary beneficiaries of our affiliated entities as facts and circumstances change.
Recognition of Revenue
Revenue principally represents online marketing services revenue, commissions on transactions, membership and cloud computing revenue. Revenue comprises the fair value of the consideration received or receivable for the provision of services in our ordinary course activities and is recorded net of VAT. Consistent with the criteria of ASC 605 "Revenue Recognition," we recognize revenue when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been provided, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
The application of various accounting principles related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, complex arrangements with non-standard terms and conditions may require significant contract interpretation to determine the appropriate accounting treatment, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting. Other significant judgments include determining whether we are acting as the principal or the agent from an accounting perspective in a transaction and whether separate contracts are considered part of a single arrangement.transaction.
For multiple element arrangements with customers, which primarily relate to the sale of membership packages and online marketing services on our international wholesale marketplace, the arrangement consideration is allocated at the inception of the arrangement to each element based on their relative fair values for revenue recognition purposes. The consideration is allocated to each element using vendor-specific objective evidence or third-party evidence of the standalone selling price for each deliverable, or if neither type of evidence is available, using management's best estimate of selling price. Significant judgment is required in assessing the fair values of these elements by considering standalone selling price and other observable data. Changes in the estimated fair values may cause the revenue recognized for each element to change but not the total amount of revenue allocated to a contract. We periodically re-assess the fair value of the elements as a result of changes in market conditions. These multiple element arrangements are currently not significant to our operations. Revenue recognition for P4P marketing service and display marketing on our marketplaces does not require our management to exercise significant judgment or estimate.
For other arrangements, we apply significant judgment in determining whether we are acting as the principal or agent in a transaction; we record P4P marketing services revenue and display marketing revenue generated through third-party marketing affiliate programs on a gross basis,basis; and revenue relating to the Taobaoke program generated through third-party marketing affiliate partners' websites where we do not take inventory risks on a net basis. In addition, revenue generated from certain platforms in which we operate as a primary obligor is reported on a gross basis while such revenue was insignificant for each of the periods presented. Generally, when we are primarily obligated in a transaction and are subject to inventory risk or have latitude in establishing prices, or have several but not all of these indicators,
we record revenue on a gross basis. We record the net amount as revenue share earned if we are not primarily obligated and do not have inventory risk or latitude in establishing prices. In addition, we also assess whether separate contracts are treated as a single transaction. These judgments could have significant implications on the amount of revenue recognized by us.we recognize.
Share-based Compensation Expense and Valuation of the Underlying EquityAwards
Granting of share options, restricted shares and RSUs relating to our ordinary shares
We account for various types of share-based awards granted to the employees, consultants and directors of our company, our affiliates and certain other companies, such as Alipay,Ant Financial Services, in accordance with the authoritative guidance on share-based compensation expense. Under the fair value recognition provision of such guidance, compensation for share-based awards granted, including share options, restricted shares and RSUs, is measured at the grant date, or at future vesting date in the case of consultants or other grantees, based on the fair value of the awards and is recognized as expense over the requisite service period, which is generally the vesting period of the respective award, on an accelerated attribution method. Therefore, inIn the case of share-based awards to non-employees, the fair value of the unvested portion is re-measured each period, with the resulting difference, if any, recognized as expense during the period the related services are rendered. Under the accelerated attribution method, each vesting installment of a graded vesting award is treated as a separate share-based award, and accordingly each vesting installment is separately measured and attributed to expense, resulting in accelerated recognition of share-based compensation expense.
Share-based compensation expense is recorded net of estimated forfeitures in our consolidated income statement and as such is recorded for only those share-based awards that we expect to vest. We estimate the forfeiture rate based on historical forfeitures of equity awards and adjust the rate to reflect changes in facts and circumstances, if any. We revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.
Determining the fair value of share-based awards requires significant judgment. We estimated the fair value of our share options using the Black-Scholes option-valuation model, which requires inputs such as the fair value of our ordinary shares, risk-free interest rate, expected dividend yield, expected life and expected volatility on the following assumptions:
circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
The fair value of restricted shares and RSUs is determined based on the fair value of our ordinary shares.
Prior to our initial public offering in September 2014, in the absence of a public trading market, the determination of the fair value of our ordinary shares by the administrators was made with reference to the price at which we had recently sold our ordinary shares to third partythird-party investors, or other representative private share
sale transactions entered into on an arms-length basis known to us. If such references were not available, the valuations of our ordinary shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants' Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, and with the assistance of an independent appraisal firm from time to time. The assumptions we use in the valuation model are based on future expectations combined with management judgment, with inputs of numerous objective and subjective factors such as our operating and financial performance, expected growth rates, expected profit margins and the market performance of industry peers, to determine the fair value of our ordinary shares.
In order to determine the fair value of our ordinary shares underlying each share-based award grant, we first determined our business enterprise value, or BEV, and then allocated the BEV to each element of our capital structure (convertible preference shares and ordinary shares) using a hybrid method comprising the probability-weighted expected return method and the option pricing method. In our case, two scenarios were assumed, namely: (i) the redemption scenario, in which the option pricing method was adopted to allocate the value between convertible preference shares and ordinary shares, and (ii) the mandatory conversion scenario, in which equity value was allocated to convertible preference shares and ordinary shares on an as-if converted basis. Increasing probability was assigned to the mandatory conversion scenario during fiscal year 2014 and the subsequent periods in light of preparations for our initial public offering.
Starting from JanuaryBefore April 2014, our BEV was estimated using a combination of two generally accepted approaches: the market approach using the guideline company method, or GCM, and the income approach using the discounted cash flow method, or DCF. The market approach considers valuation metrics based on trading multiples of a selected industry peer group of companies. The DCF method estimates enterprise value based on the estimated present value of future net cash flows that the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as terminal value. The estimated present value is calculated using a discount rate based on the guideline companies' weighted average cost of capital, which accounts for the time value of money and the appropriate degree of risks inherent in the business. The GCM and DCF methods are then weighted equally in determining our BEV.
In addition to the GCM and DCF methods, starting from April 2014, the market transaction method, or MTM, was also adopted. MTM considers recent transactions of secondary shares by our existing shareholders, which indicate the equity value of the underlying business being evaluated. We assigned a 50% weight to MTM and the remaining 50% weight equally to GCM and DCF.
Subsequent to our initial public offering in September 2014, the market price of our publicly traded ADSs is used as an indicator of fair value of our ordinary shares.
If the fair value of the underlying equity and any of the assumptions used in the Black-Scholes model changes significantly, share-based compensation expense for future awards may differ materially compared with the awards granted previously.
Subscription of rights to acquire our restricted shares
We offered selected partners of the Alibaba Partnership and they have subscribed for rights to acquire our restricted shares. These rights are not subject to any vesting conditions and entitle the holders to purchase restricted shares at a price of US$14.50 per share during a four year period. Upon the exercise of such rights, the underlying ordinary shares may not be transferred for a period of eight years from the date of subscription of the
relevant rights. The fair value of the rights was determined by the Black-Scholes option-valuation model. A discount for post-vesting sales restriction was applied to arrive at the estimated value of the restricted shares for the determination of the fair value of the rights. Share-based compensation expense equivalent to the entire fair value of these rights less the initial subscription price was recorded in the period of subscription.
Share-based awards relating to Ant Financial Services
Junhan made grants of certain share-based awards similar to share appreciation awards linked to the valuation of Ant Financial Services to mosta substantial number of our employees. The vesting of such awards is conditional upon the fulfillment of requisite services to us, and such awards will be settled in cash by Junhan upon their disposal by the holders. Junhan has the right to repurchase the vested awards from the holders upon an initial public offering of Ant Financial Services or the termination of the employment of the employees with us at a price to be determined based on the then fair market value of Ant Financial Services. We have no obligation to reimburse Junhan, Ant Financial Services or its subsidiaries for the cost associated with these awards. The cost relating to such share-based awards is recognized by us as a shareholder contribution as the awards will ultimately be settled in cash by Junhan. The awards are accounted for as financial derivatives and initially measured at their fair value, and the related share-based compensation expense will be recognized over the requisite service period. Subsequent changes in the fair value of the awards are recorded in the consolidated income statements through the date on which the underlying awards are settled by Junhan. See note 8(d) to our consolidated financial statements for the years ended March 31, 2014, 2015 and 2016 included elsewhere in this annual report. The fair values of the underlying equity are primarily determined by reference to the BEV of Ant Financial Services which areis based on the contemporaneous valuation reports or recent financing transactions. Given that the determination of the BEV of Ant Financial Services requires the judgments and is beyond our control, the magnitude of the related accounting impact is unpredictable and may affect our consolidated income statement significantly.
As of March 31, 2015,2016, the total unamortized share-based compensation expense related to our(i) ordinary shares of us and our subsidiaries and (ii) awards linked to the valuation of Ant Financial Services that we expect to recognize was RMB12,515RMB13,709 million or US$2,038(US$2,120 million) and RMB2,542 million with a weighted-average remaining requisite service period of 2.3 years.2.1 years and 1.7 years, respectively. To the extent the actual forfeiture rate is different from what we have anticipated, share-based compensation expense related to these awards will be different from our expectations. Furthermore, share-based compensation expense will be affected by changes in the fair value of our shares, as certain share-based awards were granted to non-employees where the unvested portions of the awards are re-measured at each reporting date through the vesting dates in the future. As of March 31, 2015,2016, share-based awards granted to non-employees included 605,340384,116 share options and 6,447,7155,880,443 RSUs. In addition, share-based compensation expense will also be affected by changes in the fair value of awards granted to our employees by Junhan, which is controlled by Jack Ma. Ant Financial Services has informed us that they expect Junhan will also issue additional share-based awards to our employees from time to time in the future. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transaction — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — Ownership of Ant Financial Services and Alipay." The expenses associated with these awards will be recognized across the functions in which the award recipients are employed and may continue to be significant in future periods. These awards are similar to share appreciation awards linked to the valuation of Ant Financial Services and accounted for as financial derivatives. See note 8(d) to our consolidated financial statements for the years ended March 31, 2013, 2014 and 2015 included elsewhere in this annual report.
Equity-settled Donation Expense
In October 2013, we granted options to acquire 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai, subject to irrevocable instructions to designate and transfer these share options to the separate charitable trusts to be established by them. 35,000,000 and 15,000,000 of these share options have been transferred to the separate charitable trusts established by Jack Ma and Joe.Joe Tsai, respectively. These share options were approved by our board of directors and the options are not subject to any vesting condition and are exercisable for a period of four years starting from the grant date. The exercise price of these options is US$25.00 per share based on a fair market value appraisal process. For each of the eight years beginning one year after the date of listing of our ordinary shares on a recognized stock exchange, the charitable trusts are permitted to sell only up to
6,250,000 ordinary shares (or one-eighth of the total number of ordinary shares subject to the options) per year excluding such number of unsold ordinary shares carried forward from previous years. The fair value of the share options was determined using the Black-Scholes option valuation model, which requires inputs such as the fair value of the underlying restricted shares, risk-free interest rate, expected dividend yield, expected life and expected volatility. As we do not have a history of granting such options for
charity purposes, the expected life was estimated to be the exercisable period of the options. To determine the fair value of the restricted shares, discounts for post-vesting sales restrictions were applied to the fair value of our ordinary shares depending on the duration of the restriction period of each particular tranche. We have determined the fair value of these options based on the methodology described above, with the assistance of an independent appraisal firm. As there are no vesting conditions attached to the above share options, equity-settled donation expense of RMB1,269 million was recognized in full and recorded in general and administrative expenses during fiscal year 2014.
The considerations, assumptions and valuations of ordinary shares as well as assumptions for risk-free interest rate, expected dividend yield and expected volatility used to calculate the equity-based donation expense are the same as those used in connection with our share-based awards during the corresponding period. See "— Share-based Compensation Expense and Valuation of Our Ordinary Shares.the Underlying Awards."
Recognition of Income Taxes and Deferred Tax Assets/Liabilities
We are mainly subject to income tax in China, but are also subject to taxation on profit arising in or derived from the tax jurisdiction where our subsidiaries are domiciled and operate outside China. Income taxes are assessed and determined on an entity basis. There are transactions (including entitlement to preferential tax treatment and deductibility of expenses) where the ultimate tax determination is uncertain until the final tax position is confirmed by relevant tax authorities. In addition, we recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes could be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred income tax is recognized for all temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available in the future against which the temporary differences, the carry forward of unused tax credits and unused tax losses could be utilized. Deferred income tax is provided in full, using the liability method. The deferred tax assets recognized are mainly related to the temporary differences arising from accrued expenses which are not deductible until paid under the applicable PRC tax laws. We have also recognized deferred tax liabilities on the undistributed earnings generated by our subsidiaries in China, which are subject to withholding taxes when they are remitted offshoreresolve to distribute dividends to us. As of March 31, 2015,2016, we have fully accrued the amounts accrued in deferred tax liabilities relating to such withholding tax on dividends were determined on the basis that 100%earnings distributable by all of the distributable reserves of the majorour subsidiaries operating in China, will not beexcept for those undistributed earnings that we intend to invest indefinitely reinvested in China. A change in our judgment as to whether we will reinvest the profits in China indefinitely will impactof RMB13.6 billion. If our intent changes or if these funds are in fact distributed outside China, we would be required to accrue or pay the deferredwithholding tax liabilities toon some or all of these undistributed earnings and our effective tax rate would be provided in the future.adversely affected.
Fair Value Determination Related to the Accounting for Business Combinations
A component of our growth strategy has been to acquire and integrate complementary businesses into our ecosystem. We complete business combinations from time to time which require us to perform purchase price allocations. In order to recognize the fair value of assets acquired and liabilities assumed, mainly consisting of intangible assets and goodwill, as well as the fair value of any contingent consideration to be recognized, we use valuation techniques such as discounted cash flow analysis and ratio analysis in comparison to comparable companies in similar industries under the income approach, market approach and cost approach. Major factors considered include historical financial results and assumptions including future growth rates, an estimate of weighted average cost of capital and the effect of expected changes in regulation. Most of the valuations of our acquired businesses have been performed by independent valuation specialists under our management's supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are
based on reasonable assumptions and estimates that market participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates.
Fair Value Determination Related to Financial Instruments Accounted for at Fair Value
We have a significant amount of investments and liabilities that are classified as Level 2 and Level 3 according to ASC 820 "Fair Value Measurement." The valuations for the investments and liabilities classified as Level 2 relating to financial derivatives, and interest rate swaps and forward exchange contracts are provided by independent third parties such as the custodian banks. The valuation for the investments and liabilities classified as Level 3 relating to convertible bonds accounted for under the fair value option, contingent consideration and put liability in relation to investments and acquisitions are determined based on unobservable inputs, such as historical financial results and assumptions about future growth rates, which require significant judgment to determine the future outcome of such contingencies.
Impairment Assessment on Goodwill and Intangible Assets
We test annually, or whenever events or circumstances indicate that the carrying value of assets exceeds the recoverable amounts, whether goodwill and intangible assets have suffered any impairment in accordance with the accounting policy stated in note 2 to our audited consolidated financial statements included elsewhere in this annual report. For the impairment assessment on goodwill, we have elected to perform a qualitative assessment to determine whether the two-step impairment testing of goodwill is necessary. In this assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.
For the quantitative assessment of goodwill impairment, we identify the reporting units and compare the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required.
If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit's goodwill. For intangible assets, we perform an impairment assessment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. These assessments primarily use cash flow projections based on financial forecasts prepared by management and an estimated terminal value. The expected growth in revenues and operating margin, timing of future capital expenditures, an estimate of weighted average cost of capital and terminal growth rate are based on actual and prior year performance and market development expectations. The periods of the financial forecasts generally range from three to five years or a longer period if necessary. Judgment is required to determine key assumptions adopted in the cash flow projections and changes to key assumptions can significantly affect these cash flow projections and the results of the impairment tests.
Impairment of Investments in Equity Investees
We continually review our investments in equity investees to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors that we consider include the length of time that the fair value of the investment is below its carrying value; post-balance sheet date fair value of the investment; the financial condition, operating performance, strategic collaboration with and the prospects of the investee; the economic or technological environment in which the investee operates; and other entity specific information such as recent financing rounds completed by the investee companies. Fair value of the listed securities is subject to volatility and may be materially affected by market fluctuations. Judgment is required to determine the weighting and impact of the aforementioned factors and changes to such determination can significantly affect the results of the impairment tests.
Depreciation and Amortization
The costs of property and equipment and intangible assets are charged ratably as depreciation and amortization expenses, respectively, over the estimated useful lives of the respective assets using the straight-line
method. We periodically review changes in technology and industry conditions, asset retirement activity and residual values to determine adjustments to estimated remaining useful lives and depreciation and amortization rates. Actual economic lives may differ from estimated useful lives. Periodic reviews could result in a change in estimated useful lives and therefore depreciation and amortization expenses in future periods.
Allowance for Doubtful Accounts Relating to Micro LoansLoan and VAT Receivables
We record allowances for doubtful accounts primarily on the micro loans and VAT receivables according to our best estimate of the losses inherent in the outstanding loan portfolio of loans.and VAT receivables. The loancredit periods extended by us to the merchants relating to micro loans generally range from 7 days to 360 days.days and the collection periods for the VAT receivables generally range from three to six months. We estimate the allowances by multiplying pre-determined percentages to the outstanding loan amounts based on the aging of the loans. Given that substantially all borrowers of the micro loans are merchants on our marketplaces, we are able to monitor the transaction history of these merchants and other operating data accumulated on our platforms, and assess the general financial health of these borrowers. VAT receivables mainly represent VAT receivables from relevant PRC tax authorities arising from OneTouch's VAT refund service. We monitor the aging of the VAT receivables and assess the collectability of these VAT receivables. Judgment is required to determine the percentages used to determine the allowance amounts and whether such amounts are adequate to cover potential bad debts, and periodic reviews are performed to ensure such percentages continue to reflect our best estimate of the inherent losses based on our assessment of the merchants' ability to repay the loans.loans or the collectability of the VAT receivables. The micro loans and the allowance for doubtful accounts relating to micro loans balances were insignificant as of March 31, 20152016 because we disposed substantially all of certain equity interestssuch business and assets primarily relating to the micro loans business and related services and upon the completion of the restructuring of our relationship with Ant Financial Services during the year ended March 31, 2015. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries — 2014 Restructuring of Our Relationship with Ant Financial Services and Alipay."
Recent Accounting Pronouncements
In AprilMay 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, ("ASU") 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity's operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. The new guidance is effective prospectively for us for all new disposals of components and new classification as held for sale beginning April 1, 2015. The revised guidance will not have a material effect on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU, 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in "Topic 605, Revenue Recognition""Revenue Recognition (Topic 605)" and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. In April 2016, the FASB issued ASU 2016-10 to clarify ASU 2014-09 on identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The new guidance is effective retrospectively for us for the year ending March 31, 2019 and the interim reporting periods during the year ending March 31, 2019, with early application permitted only for the annual reporting period ending June 30, 2017, with early application not permitted.March 31, 2018 and the interim reporting periods during the year ending March 31, 2018. We are evaluating the existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements.
In January 2015, the FASB issued ASU 2015-01, "Income Statement-ExtraordinaryStatement — Extraordinary and Unusual Items," which eliminates the concept of extraordinary and unusual items from U.S. GAAP. The new guidance is effective prospectively for us for the year end ending March 31, 2017 and interim reporting periods during the year ending March 31, 2017. Early adoption is permitted. The revised guidance will not have a material effect on our financial position, results of operations or cash flows.
Table We are evaluating the effects, if any, of Contentsthe adoption of this revised guidance on our financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810) — Amendments to the Consolidation Analysis," which amends the criteria for determining which entities are considered VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. The guidance is effective for us for the year
ending March 31, 20162017 and interim reporting periods during the year ending March 31, 2016.2017. The guidance may be applied retrospectively or through a cumulative effect adjustment to equity as of the beginning of the year of adoption. Early application is permitted, including adoption in an interim period. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs relating to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective retrospectively for us for the year end ending March 31, 2017 and interim reporting periods during the year ending March 31, 2017. Early adoption is permitted. TheWe are evaluating the effects, if any, of the adoption of this revised guidance willon our financial position, results of operations or cash flows. At this time, we do not expect this accounting standard update to have a material effectimpact on the financial statements.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805) — Simplifying the Accounting for Measurement-Period Adjustments," which eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance is effective prospectively for us for the year end ending March 31, 2017 and interim reporting periods during the year ending March 31, 2017. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows. At this time, we do not expect this accounting standard update to have a material impact on the financial statements.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10) — Recognition and Measurement of Financial Assets and Financial Liabilities," which amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. The new guidance is effective for us for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early adoption is permitted only for certain provisions. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new ASC 842 "Leases" to replace the previous ASC 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09. The new guidance is effective for us for the year ending March 31, 2020 and interim reporting periods during the year ending March 31, 2020. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-05 "Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships," which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC 815 "Derivatives and hedging," does not, in and of itself, require dedesignation of that hedging relationship provided that all other
hedge accounting criteria continue to be met. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-06 "Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments" to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-07 "Simplifying the Transition to the Equity Method of Accounting," to simplify the accounting for equity method investments, which eliminates the requirement in ASC 323 "Investments — equity method and joint ventures" that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting," to simplify the accounting for employee share-based payment transactions, including the income tax consequences, classification of excess tax benefits on the statement of cash flows, introduction of accounting policy election on forfeitures, and the change of the threshold of share withholding by employer for settlement of employees' tax without causing the award to be liability classified. The new guidance is effective for us for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. We are evaluating the effects, if any, of the adoption of this revised guidance on our financial position, results of operations or cash flows.
C. Research and Development, Patents and Licenses, etc.
Research and Development
We have built our core technology for our e-commerce and cloud computing businesses in-house. As of March 31, 2015,2016, we employed a team of over 12,000 engineers who work on technologies ranging from hardware, operating system optimization, distributed system, software middleware, database, machine learning18,000 research and artificial intelligence.development personnel engaged in building our technology platform and developing new online and mobile products. We recruit top and experienced talentstalent locally and oversea, and we have advanced training programs designed specifically for new campus hires.
In fiscal years 2013, 2014 and 2015, our product development expenses were RMB3,753 million, RMB5,093 million and RMB10,658 million (US$1,720 million), respectively. Our product development expenses consist primarily of staff costs, share-based compensation expense and other related incidental expenses that are directly attributable to the development, maintenance and enhancement of the infrastructure, applications, operating systems, software, database and network for our marketplaces, mobile products as well as transaction and service platforms. In addition, royalty fees accrued and paid to Yahoo up to the closing of our initial public offering in September 2014 were recorded as part of product development expenses. We have expensed all costs that are incurred for product development.
Intellectual Property
We believe the protection of our trademarks, copyrights, domain names, trade names, trade secrets, patents and other proprietary rights is critical to our business. We rely on a combination of trademark, fair trade practice, copyright and trade secret protection laws and patent protection in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our trademarks. We also enter into confidentiality and invention assignment agreements with all of our employees, and we rigorously control access to our proprietary technology and information. As of March 31, 2015,2016, we had 6881,529 issued patents and 1,6282,141 publicly filed patent applications in China and 8281,387 issued patents and 2,4023,096 publicly filed patent
applications in various countries and jurisdictions internationally. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the current fiscal year that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital reserves, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements in fiscal year 2013,years 2014, 2015 or 2015.2016.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of March 31, 2015:2016:
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| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||||||||
| (in millions of RMB) | (in millions of RMB) | ||||||||||||||||||||||||||||||
Contractual Obligations | ||||||||||||||||||||||||||||||||
Short term borrowings(1) | 1,990 | 1,990 | — | — | — | 4,304 | 4,304 | — | — | — | ||||||||||||||||||||||
Long term borrowings(2) | 1,609 | — | 923 | 686 | — | 1,871 | — | 1,202 | 669 | — | ||||||||||||||||||||||
Unsecured senior notes(3) | 49,138 | — | 7,985 | 13,820 | 27,333 | 51,726 | — | 8,405 | 14,548 | 28,773 | ||||||||||||||||||||||
Contractual Commitments | ||||||||||||||||||||||||||||||||
Purchase of property and equipment | 1,190 | 1,188 | 2 | — | — | 803 | 796 | 7 | — | — | ||||||||||||||||||||||
Acquisition of land use rights and construction in progress | 2,181 | 1,353 | 778 | 50 | — | |||||||||||||||||||||||||||
Construction in progress | 1,688 | 1,500 | 185 | 3 | — | |||||||||||||||||||||||||||
Leases for office facility and transportation equipment | 1,056 | 400 | 496 | 127 | 33 | 900 | 394 | 330 | 111 | 65 | ||||||||||||||||||||||
Investment commitments | 5,364 | 5,364 | — | — | — | |||||||||||||||||||||||||||
Co-location, bandwidth fees and marketing expenses | 5,134 | 2,089 | 1,673 | 1,372 | — | 8,422 | 2,680 | 2,733 | 2,186 | 823 | ||||||||||||||||||||||
Investment commitments(4) | 65,597 | 65,597 | — | — | — | |||||||||||||||||||||||||||
Acquisition of license and copyrights | 3,770 | 885 | 1,627 | 1,258 | — | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Total | 67,662 | 12,384 | 11,857 | 16,055 | 27,366 | 139,081 | 76,156 | 14,489 | 18,775 | 29,661 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | | | | | |
G. Safe Harbor
See "Forward-Looking Statements."
ITEM 6.6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Directors and Executive Officers
The following table sets forth certain information relating to our directors and executive officers.
Name | Age | Position/Title | |||
---|---|---|---|---|---|
Jack Yun MA† | Executive Chairman | ||||
Joseph C. TSAI †(2) | Executive Vice Chairman | ||||
Jonathan Zhaoxi LU †(1) | Vice Chairman | ||||
Daniel Yong ZHANG †(1) | Director and Chief Executive Officer | ||||
J. Michael EVANS †(2) | 58 | Director and President | |||
Masayoshi SON ‡(3) | Director | ||||
Chee Hwa TUNG | Independent director | ||||
Walter Teh Ming KWAUK(2) | |||||
| Independent director | ||||
Jerry YANG | Independent director | ||||
Börje E. EKHOLM(2) | 53 | Independent director | |||
| |||||
Maggie Wei WU(2) | Chief Financial Officer | ||||
Jane Fang JIANG(1) | 42 | Chief People Officer | |||
Jeff Jianfeng ZHANG(1) | 42 | Chief Technology Officer | |||
Zhenfei LIU(1) | Chief Risk Officer | ||||
Trudy Shan DAI(1) | Chief Customer Officer | ||||
Timothy A. STEINERT(2) | General Counsel and Secretary | ||||
Jianhang JIN(1) | President | ||||
| |||||
| |||||
Yongfu YU(1) | President, Mobile Internet and Alimama | ||||
Simon Xiaoming HU(1) | President, Alibaba Cloud Computing | ||||
Sophie Minzhi WU(1) | President, Wholesale Marketplaces | ||||
|
For information about nomination and appointment rights to our board of directors see "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with SoftBank and Yahoo — Voting Agreement."
Biographical Information
Jack Yun MA ( ) is our lead founder and, since May 2013, has served as our executive chairman. From our founding in 1999 and until May 2013, Jack served as our chairman and chief executive officer. He is also the founder of the Zhejiang-based Jack Ma Foundation. Jack currently serves on the board of SoftBank Group Corp., one of our major shareholders and a Japanese corporation listed on the Tokyo Stock Exchange. He is also a directormember of Huayi Brothers Media Corporation, an entertainment group in China listed on The Shenzhen Stock Exchange,the Foundation Board of the World Economic Forum, a member of the U.K. government's Business Advisory Group, chairman of the Zhejiang Chamber of Commerce, as well as chairchairman of The Nature Conservancy'sthe China board of directors andEntrepreneur Club. In January 2016, he was named a director of its global board of directors. In September 2013, he joinedSustainable Development Goals (SDGs) advocate by the Breakthrough Prize in Life Sciences Foundation as a director.United Nations. Jack graduated from Hangzhou Teacher's Institute with a major in English language education.
Joseph C. TSAI ( ) joined our company in 1999 as a member of the Alibaba founding team and has served as our executive vice chairman since May 2013. He has been a non-executive director of Alibaba Health since September 2015. Joe previously served as our chief financial officer and has been a member of our board of
directors since our formation. From 1995 to 1999, Joe worked in Hong Kong with Investor AB, the main investment vehicle of Sweden's Wallenberg family, where he was responsible for Asian private equity investments. Prior to that, he was vice president and general counsel of Rosecliff, Inc., a management buyout firm based in New York. From 1990 to 1993, Joe was an associate attorney in the tax group of Sullivan & Cromwell LLP, a New York-based international law firm. Joe serves on the boards of directors of several of our investee companies. Joe is qualified to practice law in the State of New York. He received his bachelor's degree in Economics and East Asian Studies from Yale College and a juris doctor degree from Yale Law School.
Jonathan Zhaoxi LU ( ) has been our director since September 2014 and vice chairman since May 2015. Jonathan joined our company in 2000 and served as chief executive officer from May 2013 to May 2015. Mr. Lu has at different points served as the top executive officer of almost all of our key business units. He has previously served as our chief data officer and also oversaw our YunOS division. Before that, he served as chief executive officer of Alibaba.com from February 2011 until its privatization in 2012. He joined Taobao in January 2008 and served as its chief executive officer from January 2010 to June 2011. In September 2004, he led a dedicated team to establish Alipay and became Alipay's first president. From 2000 to 2004, Jonathan held several leadership roles at Alibaba.com and managed its South China sales region. Before joining Alibaba Group, Jonathan was co-founder of a network communications company. Since May 2014, Jonathan has served on the board of directors of Youku Tudou. Jonathan received a graduate certificate in hotel management from Guangzhou University and a master's degree in business administration from China Europe International Business School. Since May 2014, Jonathan has served on the board of directors of Youku Tudou.
Daniel Yong ZHANG ( ) has been our chief executive officerChief Executive Officer since May 2015 and our director since September 2014. Prior to his current role, he served as our chief operating officerChief Operating Officer from September 2013 to May 2015. Daniel was appointedHe joined our company in August 2007 as Chief Financial Officer of Taobao Marketplace and served in this position until June 2011. He took on the additional role of general manager for Tmall.com in August 2008, which he served in concurrence until appointment as president of Tmall.com in June 2011 when Tmall.com became an independent platform. He was chief financial officer of Taobao from the time he joined our company in August 2007 until June 2011, and also served as general manager of Tmall during the latter three years in this period. BeforePrior to joining Alibaba, Group, Daniel served as chief financial officerChief Financial Officer of Shanda Interactive Entertainment Limited, an online game developer and operator then listed on the NASDAQ, Stock Market, from August 2005 to August 2007. From 2002 to 2005, he was a senior managerexecutive of PricewaterhouseCoopers' Audit and Business Advisory Division in Shanghai, prior to which he worked in the Shanghai office of Arthur Andersen for seven years.Shanghai. Daniel is chairmanChairman of Intime Retail, a company listed on SEHK, and serves on the boards of directors of Alibaba Health and of Haier, each a company listed on the SEHK. Daniel also has been servingSEHK, and Weibo, a company listed on the board of directors of Weibo since May 2014.NYSE. Daniel received a bachelor's degree in finance from Shanghai University of Finance and Economics.
J. Michael EVANS has been our president since August 2015 and our director since September 2014. Mr. Evans served as Vice Chairman of The Goldman Sachs Group, Inc. from February 2008 until his retirement in December 2013. Mr. Evans served as chairman of Asia operations at Goldman Sachs from 2004 to 2013 and was the global head of Growth Markets at Goldman Sachs from January 2011 to December 2013. He also co-chaired the Business Standards Committee of Goldman Sachs from 2010 to 2013. Mr. Evans joined Goldman Sachs in 1993, became a partner of the firm in 1994 and held various leadership positions within the firm's securities business while based in New York and London, including global head of equity capital markets and global co-head of the equities division, and global co-head of the securities business. Mr. Evans is a board member of City Harvest. He is also a trustee of the Asia Society and a member of the Chinese InstituteAdvisory Council for the Bendheim Center for Finance at Princeton University. In August 2014, Mr. Evans joined the board of Certified Public Accountants.Barrick Gold Corporation. In October 2014, Mr. Evans was appointed as an independent board member of Castleton Commodities International LLC. Mr. Evans received his bachelor's degree in politics from Princeton University in 1981.
Masayoshi SON has been our director since 2000 and is the founder, chairman and chief executive officer of SoftBank Group Corp., a Japanese corporation listed on the Tokyo Stock Exchange, with operations in broadband, mobile and fixed-line telecommunications, e-commerce, Internet, technology services, media and marketing, and other businesses. Mr. Son founded SoftBank Group Corp. in 1981. Mr. Son also serves as chairman and chief executive officer of several other SoftBank subsidiaries and affiliates, including SoftBank Mobile Corp. as well as serving
as chairman of Yahoo Japan Corporation since 1996, and of Sprint Corporation since 2013. Mr. Son received a bachelor's degree in Economics from the University of California, Berkeley.
Chee Hwa TUNG ( ) has been our director since September 2014 and is the Vice Chairman of the Twelfth National Committee of the Chinese People's Political Consultative Conference of the PRC, which is an important institution of multiparty cooperation and political consultation in the PRC. Mr. Tung is the Founding Chairman of the China-United States Exchange Foundation, which is a non-profit organization registered in Hong Kong to promote understanding and strengthening relationships between China and the United States. Mr. Tung also serves in various public sector and advisory positions, including as a member of the J.P. Morgan International Council, the China Development Bank International Advisory Committee and the Advisory Board of the
Schwarzman Scholars Program at Tsinghua University. Prior to these appointments, Mr. Tung served as the First Chief Executive of the Hong Kong Special Administrative Region from July 1997 to March 2005. Mr. Tung had a successful and distinguished career in business, including serving as the Chairman and Chief Executive Officer of Orient Overseas (International) Limited, a SEHK-listed company with its principal business activities in container transport and logistics services on a global scale. Mr. Tung is also the chairman and chief executive officer of Our Hong Kong Foundation Limited, a non-government, non-profit organization dedicated to promoting the long-term and overall interests of Hong Kong. Mr. Tung received a bachelor's degree in science from the University of Liverpool.
Walter Teh Ming KWAUK ( ) has been our director since September 2014. He previously served as an independent non-executive director and chairman of the audit committee of Alibaba.com Limited, one of our subsidiaries, which was listed on the SEHK, from October 2007 to July 2012. Mr. Kwauk has been our director since September 2014 and is currently a senior consultant of Motorola Solutions (China) Co., Ltd. and serves as an independent non-executive director of Thunder Power Co. Ltd., a Taiwan company with its shares traded on Taiwan's Gre Tai Securities Market; Sinosoft Technology Group Limited, a company listed on the SEHK, of which Mr. Kwauk is also the chairman of its audit committee; and several private companies. Mr. Kwauk was a vice president of Motorola Solutions, Inc. and its director of corporate strategic finance and tax, Asia Pacific from 2003 to 2012. Mr. Kwauk served with KPMG from 1977 to 2002 and held a number of senior positions, including the general manager of KPMG's joint venture accounting firm in Beijing, the managing partner in KPMG's Shanghai office and a partner in KPMG's Hong Kong Office. He is a member of the Hong Kong Institute of Certified Public Accountants. Mr. Kwauk received a bachelor's degree in science and a licentiate's degree in accounting from the University of British Columbia.
J. Michael EVANS has been our director since September 2014. Mr. Evans served as Vice Chairman of The Goldman Sachs Group, Inc. from February 2008 until his retirement in December 2013. Mr. Evans served as chairman of Asia operations at Goldman Sachs from 2004 to 2013 and was the global head of Growth Markets at Goldman Sachs from January 2011 to December 2013. He also co-chaired the Business Standards Committee of Goldman Sachs from 2010 to 2013. Mr. Evans joined Goldman Sachs in 1993, became a partner of the firm in 1994 and held various leadership positions within the firm's securities business while based in New York and London, including global head of equity capital markets and global co-head of the equities division, and global co-head of the securities business. Mr. Evans is chairman of the board of Right To Play USA and a board member of City Harvest. He is also a trustee of the Asia Society and a member of the Advisory Council for the Bendheim Center for Finance at Princeton University. In August 2014, Mr. Evans joined the board of Barrick Gold Corporation. In October 2014, Mr. Evans was appointed as an independent board member of Castleton Commodities International LLC. Mr. Evans received his bachelor's degree in politics from Princeton University in 1981.
Jerry YANG ( ) has been our director since September 2014. Mr. Yang previously served as our director from October 2005 to January 2012. Since March 2012, Mr. Yang has served as the founding partner of AME Cloud Ventures, a venture capital firm. Mr. Yang is a co-founder of Yahoo! Inc., and served as Chief Yahoo! and as a member of its board of directors from March 1995 to January 2012. In addition, he served as Yahoo!'s Chief Executive Officer from June 2007 to January 2009. From January 1996 to January 2012, Mr. Yang served as a director of Yahoo! Japan. Mr. Yang also served as an independent director of Cisco Systems, Inc. from July 2000 to November 2012. He is currently an independent director of Workday Inc., a company listed on the New York Stock Exchange, and Lenovo Group Ltd., a company listed on the SEHK. He also serves as a director of various private companies and foundations. Mr. Yang received a bachelor's degree and a master's degree in electrical engineering from Stanford University and currently servesserved on Stanford University's board of trustees.trustees from October 2005 to September 2015.
Börje E. EKHOLM has been our director since June 2015. Mr. Ekholm is currently the head of Patricia Industries, a newly created division of Investor AB, a Swedish investment company, where he has held a variety of management positions since joining the firm in 1992. Prior to his current position, Mr. Ekholm served as president and chief executive officer and a member of the board of directors of Investor AB. Prior to becoming president and chief executive officer in 2005, Mr. Ekholm was a member of the management group of Investor AB.
Previously, Mr. Ekholm worked at McKinsey & Co. Inc. Mr. Ekholm is currently the non-executive chairman of NASDAQ OMX Inc. and also serves as a director of Chalmers Innovation AB, Telefonaktiebolaget LM Ericsson, KTH Royal Institute of Technology, Choate Rosemary Hall and NASDAQ-listed Trimble Navigation Ltd.
Mr. Ekholm received a master's degree in electrical engineering from KTH Royal Institute of Technology and a master's degree in business administration from INSEAD.
Lucy Lei PENG ( )Wan Ling MARTELLO has been our director since September 2015. She is currently the executive vice president, head of zone Asia, Oceania, Sub-Saharan Africa of Nestlé S.A. Prior to this appointment, Ms. Martello was executive vice president, chief financial officer of Nestlé S.A., and joined ourthe company in 1999 as a member of our founding team and was reappointed as our chief people officer in June 2014. Lucy had served as our chief people officer for most of the time since our founding, playing a leading role in formulating our human resources strategies. In March 2013, she was appointed as chief executive officer of Ant Financial Services. From January 2010November 2011. Before joining Nestlé S.A., Ms. Martello worked at Walmart Stores Inc. from 2005 to February 2013,2011 where she served as executive vice president, global ecommerce, and senior vice president and chief executivefinancial officer, Walmart International, at different times. Prior to that, Ms. Martello worked at NCH Marketing Services Inc. from 1998 to 2005 and Borden Foods Corporation from 1995 to 1998, where she held various senior management positions. Previously, Ms. Martello worked at Kraft Foods, Inc. from 1985 to 1995. Ms. Martello received a master's degree in business administration from the University of Alipay. Lucy graduated from Hangzhou Institute of Commerce of Zhejiang Gongshang University in 1994 withMinnesota and a bachelor's degree in business administration and taught at Zhejiangaccountancy from the University of Finance and Economics for five years after graduation.the Philippines. She is a certified public accountant in the Philippines.
Maggie Wei WU ( ) has been our chief financial officer since May 2013. Maggie served as our deputy chief financial officer from October 2011 to May 2013. Maggie joined our company in July 2007 as chief financial officer of Alibaba.com and was responsible for instituting Alibaba.com's financial systems and organization leading up to its initial public offering in Hong Kong in November of that year, as well as co- leading the privatization of Alibaba.com in 2012. She was voted best CFO in FinanceAsia's annual poll for Asia's Best Managed Companies in 2010. Before joining our company, Maggie was an audit partner at KPMG in Beijing. In her 15 years with KPMG, she was lead audit partner for the initial public offerings and audits of several major large-cap Chinese companies listed in international capital markets and provided audit and advisory services to major multinational corporations operating in China. Maggie is a member of the Association of Chartered Certified Accountants (ACCA) and a member of the Chinese Institute of Certified Public Accountants. She received a bachelor's degree in accounting from Capital University of Economics and Business.
Jane Fang JIANG ( ) joined our company in 1999 as a member of our founding team and was appointed our chief people officer in April 2016. She is currently responsible for strategy and execution of our talent and organizational culture development and overseeing our integrity department. Jane has held a number of senior management roles in different departments within the company, at different times leading China TrustPass product planning, business analysis, global operations, website operations and marketing for Alibaba.com, as well as credit system development. Prior to her current position, she was our deputy chief people officer. Jane received a bachelor's degree in industry and foreign trade from the Hangzhou Institute of Electrical Engineering.
Jeff Jianfeng ZHANG ( ) has served as our chief technology officer since April 2016. Prior to his current position, Jeff was president of China retail marketplaces from May 2015 to April 2016, and president of Taobao Marketplace and the wireless business division prior to that. He joined our company in July 2004 and has held various management positions, at different times leading Taobao Marketplace's technology infrastructure team, the B2C development team and Taobao Marketplace's product technology development team from 2004 to 2011. He served as vice president of product technology and operations of Taobao Marketplace from June 2011 to March 2012, and vice president of website and technology of Alibaba.com's China operations from March 2012 to January 2013. From January 2013 to February 2014, he oversaw Juhuasuan, local services, 1688.com, and Tmall.com. Jeff studied computer science at Zhejiang University.
Zhenfei LIU ( ) has been our chief risk officer since May 2015. Prior to his current position, Zhenfei served in various management positions since he joined us in 2006. He was head of our infrastructure services division from September 2009 to May 2015,March 2016, and concurrently served as head of our security technology division from May 2014 to May 2015. Prior to those roles, he was head of Alimama's advertising technology team. Zhenfei received his bachelor's degree in computer science from University of Science and Technology Beijing and holds a master's degree in computer science from Peking University.
Trudy Shan DAI ( ) joined our company in 1999 as a member of our founding team and has been our chief customer officer since June 2014. Prior to her current position, Trudy served as senior vice president of human resources and administration of Taobao and Alibaba.com as well as our deputy chief people officer and
chief people officer from 2009 to 2014. She was general manager of Alibaba.com's international operations from 2007 to 2008. Prior to that, she was vice president of human resources of China Yahoo! and the first general manager of Alibaba.com's Guangzhou branch, in charge of field and telephone sales, marketing and human resources in Guangdong Province. From 2002 to 2005, Trudy served as senior sales director of China TrustPass in Alibaba.com's China marketplace division. She received a bachelor's degree in engineering from Hangzhou Institute of Electrical Engineering.
Timothy A. STEINERT has been our general counsel since July 2007 and also serves as our secretary. From 1999 until he joined our company, Tim was a partner in the Hong Kong office of Freshfields Bruckhaus Deringer. From 1994 to 1999, he was an associate attorney at Davis Polk & Wardwell in Hong Kong and New York, and from 1989 to 1994, he was an associate attorney at Coudert Brothers in Beijing and New York. Tim is qualified to practice law in the State of New York and in Hong Kong. He received a bachelor's degree in history from Yale College and a juris doctor degree from Columbia University School of Law.
Jianhang JIN ( ) joined our company in 1999 as a member of our founding team and was appointed the president of our company in August 2014. Prior to his current position, he served as senior vice president of corporate affairs from September 2009 to July 2014 and from March 2007 to December 2007. He also served as
general manager of China Yahoo! (later Yahoo! Koubei) from January 2008 to August 2009 and was vice president of human resources and the CEO office from January 2006 to February 2007. As a founding member, he has served in a variety of other management roles at different times since our company's inception, including heading the marketing and website operations functions for one of our marketplaces. He received a bachelor's degree in journalism from Fudan University.
Jian WANGChris Pen-hung TUNG ( ) has servedjoined our company as chairman of our technology committee since May 2015.chief marketing officer in January 2016. Prior to his current position, he was the chief technologyexecutive officer of VML China, a marketing agency, from August 2012October 2010 to May 2015 andJanuary 2016. Prior to joining VML, he was at PepsiCo China from October 2004 to October 2010 where he served as our chief architect from the time he joined our company in September 2008. He also served asvice president of Alibaba Cloud Computing from its inception in September 2009 until September 2013. Before joining our company, he was assistant managing director at Microsoft Research Asia, where he had served since 1999.marketing. Prior to that, heChris worked at Zhejiang UniversityProctor & Gamble from 1995 to 1998, Gigamedia from 1998 to 2001 and L'Oréal from 2001 to 2003 in Hangzhou, Chinavarious senior management positions. Chris currently serves as a professor and headdirector of the psychology department. Jian serves on the board of directors of Meizu Technology Corporation Limited.VML China. He received a bachelor's degree in psychologyelectrical engineering from National Taiwan University and a Ph.Dmaster's degree in industrial engineering from Hangzhou University.
Jeff Jianfeng ZHANG ( ) has been presidentUniversity of China retail marketplaces since May 2015. Prior to his current position, Jeff was president of Taobao Marketplace and the wireless business division. He joined our company in July 2004 and has held various management positions, at different times leading Taobao Marketplace's technology infrastructure team, the B2C development team and Taobao Marketplace's product technology development team from 2004 to 2011. He served as vice president of product technology and operations of Taobao Marketplace from June 2011 to March 2012, and vice president of website and technology of Alibaba.com's China operations from March 2012 to January 2013. From January 2013 to February 2014, he oversaw Juhuasuan, local services, 1688.com, and Tmall.com. Jeff studied computer science at Zhejiang University.Michigan, Ann Arbor.
Yongfu YU ( ) has served as president of Mobile Internet and Alimama since May 2015. Prior to his current position, Yongfu served as president of UCWeb after he joined our company in June 2014 and president of AutoNavi from March 2015. From 2006 to June 2014, Yongfu was chairman and chief executive officer of UCWeb before it became our wholly-owned subsidiary. Prior to that, Yongfu was a vice president and associate with Legend Capital from 2001 to 2006. He also serves as an independent director and a member of the audit committee of Xunlei Limited, a NASDAQ-listed company. Yongfu received a bachelor's degree in business administration from Nankai University.
Simon Xiaoming HU ( ) has been the president of Alibaba Cloud Computing since November 2014. Prior to his current position, Simon served in various management positions at our company and at Ant Financial Services since he joined us in June 2005. He served as chief risk officer of Ant Financial Services from November 2013 to October 2014. From July 2009 to November 2013, he was general manager of our SME loan business. Before joining our company, Simon worked in financial institutions including China Construction Bank and China Everbright Bank for over ten years. He serves as an independent director of Zhejiang Daily Media Group Co., Ltd., a company listed on the Shanghai Stock Exchange, and a director of Hundsun Technologies Inc., a Company listed on the Shanghai Stock Exchange. Simon received a bachelor's degree in finance from Zhejiang University and an executive MBA degree from China Europe International Business School.
Sophie Minzhi WU ( ) has served as president of Alibaba.com and 1688.com, our international and China wholesale marketplaces. Sophie joined our company in November 2000 and has served in several sales management roles, including general manager of regional sales, director and vice president of China Gold Supplier sales, and vice president of China TrustPass sales. Later, Sophie became vice president of Alibaba.com's supplier
service division, responsible for leading her team to optimize service to China Gold Supplier members and enhance supplier quality. In March 2012, she was appointed the head of Alibaba.com's international operations and later also took charge of 1688.com. From October 2014 to February 2015, she also led the Rural Taobao team. Before joining Alibaba Group, Sophie was sales and customer manager at a technology development company wholly owned by Zhejiang University. She holds a bachelor's degree in international trade from Zhejiang University and an EMBA degree from China Europe International Business School.
Peng JIANGJessie Junfang ZHENG ( ) joined our company in 2000 and has been the president of YunOSour chief platform governance officer since September 2013. Peng isDecember 2015, responsible for overseeing various technology teams as well as the data business group, supporting Jian
Wang, chairmangovernance of our technology committee. He oversawretail and wholesale marketplaces. She has also been our shared-services business from January to September 2013 and served as president of Taobao Marketplace from July 2012 to Januarydeputy chief financial officer since November 2013. Prior to that, Peng washer current position, she served as financial vice president of Taobao's consumer business departmentAlibaba.com from August 2009December 2010 to July 2012. He served in various management roles in development department from 2000 to 2003, when he joined the team that later established Taobao. HeOctober 2013. Before joining our company, Jessie was an audit partner at KPMG. Jessie received a bachelor's degree in hydraulic engineering and a master's degreeaccounting from Northeastern University in hydraulics from Tsinghua University.China.
Alibaba Partnership
Since our founders first gathered in Jack Ma's apartment in 1999, they and our management have acted in the spirit of partnership. We view our culture as fundamental to our success and our ability to serve our customers, develop our employees and deliver long-term value to our shareholders. In July 2010, in order to preserve this spirit of partnership and to ensure the sustainability of our mission, vision and values, we decided to formalize our partnership as Lakeside Partners, named after the Lakeside Gardens residential community where Jack and our other founders started our company. We refer to the partnership as the Alibaba Partnership.
We believe that our partnership approach has helped us to better manage our business, with the peer nature of the partnership enabling senior managers to collaborate and override bureaucracy and hierarchy. The Alibaba Partnership currently has 3034 members comprised of 2426 members of our management, fiveseven members of management of Ant Financial Services and one member of management of Cainiao Logistics. One partner who is a member of our management is also a member of management of Ant Financial Services.Network. The number of partners in Alibaba Partnership is not fixed and may change from time to time due to the election of new partners, the retirement of partners and the departure of partners for other reasons.
Our partnership is a dynamic body that rejuvenates itself through admission of new partners each year, which we believe enhances our excellence, innovation and sustainability. Unlike dual-class ownership structures that employ a high-vote class of shares to concentrate control in a few founders, our approach is designed to embody the vision of a large group of management partners. This structure is our solution for preserving the culture shaped by our founders while at the same time accounting for the fact that founders will inevitably retire from the company.
Consistent with our partnership approach, all partnership votes are made on a one-partner-one-vote basis.
The partnership is governed by a partnership agreement and operates under principles, policies and procedures that have evolved with our business and are further described below.
Nomination and Election of Partners
The Alibaba Partnership elects new partners annually after a nomination process whereby existing partners propose candidates to the partnership committee, or the partnership committee, as described below. The partnership committee reviews the nominations and determines whether the nomination of a candidate will be proposed to the entire partnership for election. Election of new partners requires the approval of at least 75% of all of the partners.
To be eligible for election, a partner candidate must have demonstrated the following attributes:
We believe the criteria and process of the Alibaba Partnership applicable to the election of new partners, as described above, promote accountability among the partners as well as to our customers, employees and shareholders. In order to align the interests of partners with the interests of our shareholders, we require that each partner maintain a meaningful level of equity interests in our company during such individual's tenure as a partner. Since a partner nominee must have been our employee or an employee of one of our related companies or affiliates for at least five years, as of the time he or she becomes a partner, he or she will typically already own or have been awarded a personally meaningful level of equity interest in our company through our equity incentive and share purchase plans.
Duties of Partners
The main duty of partners in their capacity as partners is to embody and promote our mission, vision and values. We expect partners to be evangelists for our mission, vision and values, both within our organization and externally to customers, business partners and other participants in our ecosystem.
Partnership Committee
The partnership committee must consist of at least five partners and is currently comprised of Jack Ma, Joe Tsai, Jonathan Lu, Lucy Peng and Ming Zeng. The partnership committee is responsible for administering partner elections and allocating the relevant portion of the annual cash bonus pool for all partner members of management, with any amounts payable to partners who are our executive officers or directors or members of the partnership committee subject to approval of the compensation committee of our board of directors. Partnership committee members serve for a term of three years and may serve multiple terms. Elections of partnership committee members are held once every three years. Prior to each election, the partnership committee will nominate a number of partners equal to the number of partnership committee members that will serve in the next partnership committee term plus three additional nominees. Each partner votes for a number of nominees equal to the number of partnership committee members that will serve in the next partnership committee term and all except the three nominees who receive the least votes from the partners are elected to the partnership committee.
Director Nomination and Appointment Rights
Pursuant to our articles of association, the Alibaba Partnership has the exclusive right to nominate andor, in limited situations, appoint up to a simple majority of the members of our board of directors.
The election of each director nominee of the Alibaba Partnership will be subject to the director nominee receiving a majority vote from our shareholders voting at an annual general meeting of shareholders. If an Alibaba Partnership director nominee is not elected by our shareholders or after election departs our board of directors for any reason, the Alibaba Partnership has the right to appoint a different person to serve as an interim director of the class in which the vacancy exists until our next scheduled annual general meeting of shareholders. At the next scheduled annual general meeting of shareholders, the appointed interim director or a replacement Alibaba Partnership director nominee (other than the original nominee) will stand for election for the remainder of the term of the class of directors to which the original nominee would have belonged.
If at any time our board of directors consists of less than a simple majority of directors nominated or appointed by the Alibaba Partnership for any reason, including because a director previously nominated by the Alibaba Partnership ceases to be a member of our board of directors or because the Alibaba Partnership had previously not exercised its right to nominate or appoint a simple majority of our board of directors, the Alibaba Partnership will be entitled (in its sole discretion and without the need for any additional shareholder action) to
appoint such number of additional directors to the board as necessary to ensure that the directors nominated or appointed by the Alibaba Partnership comprise a simple majority of our board of directors.
In determining the Alibaba Partnership director nominees who will stand for election to our board, the partnership committee will propose director nominees who will be voted on by all of the partners, and those nominees who receive a simple majority of the votes of the partners will be selected for such purposes. The director nominees of the Alibaba Partnership will initially allmay be partners of the Alibaba Partnership however, we expect that in the future nominees may also includeor other qualified individuals who are not affiliated with the Alibaba Partnership.
The Alibaba Partnership's right to nominate or appoint up to a simple majority of our directors is conditioned on the Alibaba Partnership being governed by the partnership agreement in effect as of the completion of our initial public offering in September 2014, or as may be amended in accordance with its terms from time to time. Any amendment to the provisions of the partnership agreement relating to the purpose of the partnership, or to the manner in which the Alibaba Partnership exercises its right to nominate a simple majority of our directors, will be subject to the approval of the majority of our directors who are not nominees or appointees of the Alibaba Partnership and are "independent directors" within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual. The provisions relating to nomination rights and procedures described above are incorporated in our articles of association. Pursuant to our articles of association, the Alibaba Partnership's nomination rights and related provisions of our articles of association may only be changed upon the vote of shareholders representing 95% of the votes present in person or by proxy at a general meeting of shareholders.
Our board of directors currently consists of teneleven members, and fourfive of these directors are Alibaba Partnership nominees. If at any time our board of directors consists of less than a simple majority of directors nominated or appointed by the Alibaba Partnership for any reason — including because the Alibaba Partnership had previously not exercised its right to nominate or appoint a simple majority of our board of directors — the Alibaba Partnership will be entitled (in its sole discretion and without the need for any additional shareholder approval) to nominate or appoint such number of additional directors as necessary to ensure that the directors nominated or appointed by the Alibaba Partnership comprise a simple majority of our board of directors. Accordingly, the Alibaba Partnership is entitled to nominate or appoint threetwo additional directors to our board, which would increase the total number of directors to thirteen. We have entered into a voting agreement pursuant to which both SoftBank and Yahoo will agree to vote their shares in favor of the Alibaba Partnership director nominees at each annual general shareholders meeting so long as SoftBank owns at least 15% of our outstanding ordinary shares. Accordingly, for so long as SoftBank and Yahoo remain substantial shareholders, we expect the Alibaba Partnership nominees will receive a majority of votes cast at any meeting for the election of directors and will be elected as directors. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with SoftBank and Yahoo — Voting Agreement."
Current Partners
The following table sets forth the names, in alphabetical order by surname, and other information regarding the current partners of the Alibaba Partnership as of the date of this annual report.
Name | Age | Gender | Year Joined Alibaba Group | Current position with Alibaba Group or related/affiliated companies | Age | Gender | Year Joined Alibaba Group | Current position with Alibaba Group or related/affiliated companies | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jingxian CAI () | 38 | M | 2000 | Principal Engineer | 39 | M | 2000 | Principal Engineer | ||||||||||||
Li CHENG () | 40 | M | 2005 | Chief Technology Officer, Ant Financial Services | 41 | M | 2005 | Chief Technology Officer, Ant Financial Services | ||||||||||||
Trudy Shan DAI () | 38 | F | 1999 | Chief Customer Officer | 39 | F | 1999 | Chief Customer Officer | ||||||||||||
Luyuan FAN () | 42 | M | 2007 | President, Payment Business, Ant Financial Services | 43 | M | 2007 | President, Payment Business, Ant Financial Services | ||||||||||||
Yongxin FANG () | 41 | M | 2000 | Director, Human Resources | 42 | M | 2000 | Director, Human Resources | ||||||||||||
Simon Xiaoming HU () | 45 | M | 2005 | President, Alibaba Cloud Computing | 46 | M | 2005 | President, Alibaba Cloud Computing | ||||||||||||
Fang JIANG () | 41 | F | 1999 | Vice President, Corporate Integrity and Human Resources and Deputy Chief People Officer | ||||||||||||||||
Jane Fang JIANG () | 42 | F | 1999 | Chief People Officer | ||||||||||||||||
Peng JIANG () | 41 | M | 2000 | President, YunOS | 42 | M | 2000 | Senior Vice President | ||||||||||||
Jianhang JIN () | 45 | M | 1999 | President | 46 | M | 1999 | President | ||||||||||||
Eric Xiandong JING () | 42 | M | 2007 | President, Ant Financial Services | 43 | M | 2007 | President, Ant Financial Services | ||||||||||||
Zhenfei LIU () | 43 | M | 2006 | Chief Risk Officer | 44 | M | 2006 | Chief Risk Officer | ||||||||||||
Jonathan Zhaoxi LU () | 45 | M | 2000 | Vice Chairman | ||||||||||||||||
Jack Yun MA () | 50 | M | 1999 | Executive Chairman | ||||||||||||||||
Jonathan Zhaoxi LU ()† | 46 | M | 2000 | Vice Chairman | ||||||||||||||||
Jack Yun MA ()† | 51 | M | 1999 | Executive Chairman | ||||||||||||||||
Xingjun NI () | 37 | M | 2003 | Principal Engineer, Ant Financial Services | 38 | M | 2003 | Principal Engineer, Ant Financial Services | ||||||||||||
Lucy Lei PENG () | 41 | F | 1999 | Chief People Officer, Alibaba Group; Chief Executive Officer, Ant Financial Services | ||||||||||||||||
Lucy Lei PENG ()† | 42 | F | 1999 | Chief Executive Officer, Ant Financial Services | ||||||||||||||||
Sabrina Yijie PENG () | 36 | F | 2000 | General Manager, International, Ant Financial Services | 37 | F | 2000 | General Manager, International, Ant Financial Services | ||||||||||||
Xiaofeng SHAO () | 49 | M | 2005 | Senior Vice President, Director, Office of the Chairman | 50 | M | 2005 | Senior Vice President, Director, Office of the Chairman | ||||||||||||
Timothy A. STEINERT | 55 | M | 2007 | General Counsel and Secretary | 56 | M | 2007 | General Counsel and Secretary | ||||||||||||
Lijun SUN () | 39 | M | 2002 | General Manager, Rural Taobao | ||||||||||||||||
Judy Wenhong TONG () | 44 | F | 2000 | President, Cainiao Logistics | 45 | F | 2000 | Chief Executive Officer, Cainiao Network | ||||||||||||
Joseph C. TSAI () | 51 | M | 1999 | Executive Vice Chairman | ||||||||||||||||
Joseph C. TSAI ()† | 52 | M | 1999 | Executive Vice Chairman | ||||||||||||||||
Jian WANG () | 52 | M | 2008 | Chairman, Technology Committee | 53 | M | 2008 | Chairman, Technology Committee | ||||||||||||
Shuai WANG () | 40 | M | 2003 | Senior Vice President | 41 | M | 2003 | Senior Vice President | ||||||||||||
Sophie Minzhi WU () | 39 | F | 2000 | President, Wholesale Marketplaces | 40 | F | 2000 | President, Wholesale Marketplaces | ||||||||||||
Maggie Wei WU () | 47 | F | 2007 | Chief Financial Officer | 48 | F | 2007 | Chief Financial Officer | ||||||||||||
Eddie Yongming WU () | 40 | M | 1999 | Chairman, Alibaba Health | 41 | M | 1999 | Chairman, Alibaba Health | ||||||||||||
Sara Siying YU () | 40 | F | 2005 | Associate General Counsel, China | 41 | F | 2005 | Associate General Counsel, China | ||||||||||||
Ming ZENG () | 45 | M | 2006 | Executive Vice President | ||||||||||||||||
Yongfu YU () | 39 | M | 2014 | President, Mobile Internet and Alimama | ||||||||||||||||
Ming ZENG ()† | 46 | M | 2006 | Executive Vice President | ||||||||||||||||
Jeff Jianfeng ZHANG () | 41 | M | 2004 | President, China Retail Marketplaces | 42 | M | 2004 | Chief Technology Officer | ||||||||||||
Daniel Yong ZHANG () | 43 | M | 2007 | Chief Executive Officer | 44 | M | 2007 | Chief Executive Officer | ||||||||||||
Yu ZHANG () | 45 | F | 2004 | Vice President, Corporate Development | 46 | F | 2004 | Vice President, Corporate Development | ||||||||||||
Ying ZHAO () | 42 | F | 2005 | Vice President, Ant Financial Services | ||||||||||||||||
Jessie Junfang ZHENG () | 42 | F | 2010 | Chief Platform Governance Officer and Deputy Chief Financial Officer |
Bonus Pool
Our board of directors, acting on the recommendation of our compensation committee, approves an annual cash bonus pool for management of our company (which in fiscal year 20152016 comprised approximately 200over 250 individuals) equal to a percentage of our adjusted pre-tax operating profits. Once the annual cash bonus pool is calculated, our compensation committee will then first determine the proportion to be allocated to the non-partner members of our management. Any remaining portion will then be available for the partner members of our management. The partnership committee will determine the allocation of the relevant portion of the annual cash bonus pool for all partner members of management, with any amounts payable to partners who are our executive officers or directors who are partners or members of the partnership committee subject to approval of the compensation committee of our board of directors. We understand that a partner's level of contribution to our business and to the promoting of our mission, vision and values will be a key factor in determining his or her allocation from the bonus pool. A portion of the annual cash bonus pool that is available to the partner members of management may, upon the recommendation of the partnership committee and approval of our compensation committee, be deferred, with the allocations of deferred payment determined by the partnership committee with any amounts payable to our executive officers or directors who are partners or members of the partnership committee subject to approval of the compensation committee of our board of directors. We understand that participation in deferred distributions, other than retirement pension payments funded out of the deferred pool, is conditioned on a partner's continued employment with us, our affiliates and/or certain companies with which we have a significant relationship, such as Ant Financial Services.
Retirement and Removal
Partners may elect to retire from the partnership at any time. All partners except continuity partners are required to retire upon reaching the age of sixty or upon termination of their qualifying employment. Continuity partners may remain partners until they elect to retire from the partnership, die or are incapacitated or are removed as partners. Either two or three partners may be designated as continuity partners at a time, with Jack and Joe serving as the initial continuity partners. Continuity partners are either designated by a retiring continuity partner or by the serving continuity partners. Any partner, including continuity partners, may be removed upon the vote of a simple majority of all partners present at a duly-called meeting of partners for violations of certain standards set forth in the partnership agreement, including failure to actively promote our mission, vision and values, fraud, gross misconduct or gross negligence. As with other partners, continuity partners must maintain the shareholding levels required by us of all partners as described below. Partners who retire from the partnership upon meeting certain age and service requirements may be designated as honorary partners by the partnership committee. Honorary partners may not act as partners, but may be entitled to allocations from the deferred portion of the annual cash bonus pool described below as retirement pension payments. Continuity partners will not be eligible to receive allocations from the annual cash bonus pool if they cease to be our employees even if they remain partners, but may be entitled to receive allocations from the deferred bonus pool if they are honorary partners.
Restrictive Provisions
Under our articles of association, in connection with any change of control, merger or sale of our company, the partners and other holders of our ordinary shares shall receive the same consideration with respect to their ordinary shares in connection with any such transaction. In addition, our articles of association provide that the Alibaba Partnership may not transfer or otherwise delegate or give a proxy to any third partythird-party with respect to its right to nominate directors, although it may elect not to exercise its rights in full. In addition, as noted above, our articles of association also provide that the amendment of certain provisions of the Alibaba Partnership agreement relating to the purpose of the partnership or the manner in which the partnership exercises its rights to nominate or appoint a majority of our board of directors will require the approval of a majority of directors who are not appointees of the Alibaba Partnership and are "independent directors" within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual.
Amendment of Alibaba Partnership Agreement
Pursuant to the partnership agreement, amendment of the partnership agreement requires the approval of 75% of the partners in attendance at a meeting of the partners at which not less than 75% of all the partners are in attendance, except that the general partner may effect certain administrative amendments. In addition, certain amendments relating to the purposes of the Alibaba Partnership or the manner in which it exercises its nomination rights with respect to our directors require the approval of a majority of our independent directors not nominated or appointed by the Alibaba Partnership.
Alibaba Group Equity Interest Holding Requirements for Partners
Each of the partners holds his or her equity interests in our company directly as an individual or through his or her affiliates. We have entered into share retention agreements with each partner. These agreements provide that a period of three years from the date on which such person becomes a partner, or for 27 of the existing partners, from January 1, 2014, and three of the existing partners, from August 26, 2014, and four of the existing partners, from December 8, 2015, we require that each partner retain at least 60% of the equity interests (including unvested shares and shares underlying vested and unvested awards) that he or she held on the starting date of such three-year period. Following the initial three-year holding period and for so long as he or she remains a partner, we require that the partner retain at least 40% of the equity interests (including unvested shares and shares underlying vested and unvested awards) that he or she held on the starting date of the initial three-year holding period. Exceptions to the holding period rules described in the share retention agreements must be approved by a majority of the independent directors.
B. Compensation
Compensation of Directors and Executive Officers
For fiscal year 2015,2016, we paid and accrued aggregate fees, salaries and benefits (excluding equity-based grants) of up to approximately RMB169RMB435 million to our directors and executive officers as a group and granted options to purchase an aggregate of 13,000,0004,100,000 ordinary shares and 3,801,5006,231,000 RSUs to our directors and executive officers.
The board, acting on the recommendation of our compensation committee, may determine the remuneration to be paid to non-employee directors. Employee directors will not receive any additional remuneration for serving as directors other than their remuneration as employees of us or our related entities. Pursuant to our service agreements with our directors, neither we nor our subsidiaries provide benefits to directors upon termination of employment. We do not separately set aside any amounts for pensions, retirement or other benefits for our executive officers, other than pursuant to relevant statutory requirements, and, in the case of executivesrequirements. Management members who are not PRC citizens, health and life insurance.partners of the Alibaba Partnership may receive retirement payments from the deferred portion of the annual cash bonus pool available to the Alibaba Partnership.
Mr. Chee Hwa Tung has indicated to us his intention to donate all cash compensation and equity-based awards he receives from us as an independent director to one or more non-profit or charitable organizations to be designated by him.
For information regarding equity-based grants to directors and executive officers, see "— Equity Incentive Plans."
Employment Agreements
We have entered into employment agreements with each of our executive officers. We may terminate their employment at any time, with cause, and we are not required to provide any prior notice of such termination. We may also terminate their employment in circumstances prescribed under and in accordance with the requirements of applicable labor law, including notice and payment in lieu. Executive officers may terminate their employment with us at any time upon written notice. Although our employment agreements with our executive officers do not provide for severance pay, where severance pay is mandated by law, our executive officers will be entitled to such
severance pay in the amount mandated by law when his or her employment is terminated. We have been advised by our PRC counsel, Fangda Partners, that we may be required to make such severance payments upon
termination without cause to comply with the PRC Labor Law, the labor contract law and other relevant PRC regulations, which entitle employees to severance payments in case of early termination of "de facto employment relationships" by PRC entities without statutory cause regardless of whether there exists a written employment agreement with such entities.
Our grant letter agreements under our equity incentive plans also contain, among other rights, restrictive covenants that enable us to terminate grants and repurchase shares at par or the exercise price paid for such shares in the event of a grantee's termination for cause for breaching such covenants. See "— Equity Incentive Plans" below.
Equity Incentive Plans
We have adopted the following equity incentive plans since our inception:
Currently, awards are only available for issuance under our 2014 Plan. If an award under the 2011 Plan terminates, expires or lapses, or is cancelled for any reason, ordinary shares subject to the award become available for the grant of a new award under the 2014 Plan. As of March 31, 2015,2016, there were:
Our equity incentive plans provide for the granting of incentive and non-statutory options, restricted shares, RSUs, dividend equivalents, share appreciation rights and share payments to any directors, employees, and consultants of ours, our affiliates and certain other companies, such as Alipay. Share options and RSUs granted are generally subject to a four-year vesting schedule as determined by the administrator of the respective plans. Depending on the nature and the purpose of the grant, share options and RSUs in general vest 25% upon the first anniversary of the vesting commencement date for annual incentive awards or 50% upon the second anniversary of the vesting commencement date for on-hire awards, and thereafter 25% every year. InStarting in fiscal year 2015, certain RSUs and share options granted to members of our senior management members were subject to a six-year pro rata vesting schedule. We believe equity-based awards are vital to attract, motivate and retain our directors, employees and consultants, and those of certain of our affiliates and other companies, such as Alipay, and are the appropriate tool to align their interests with our shareholders. Accordingly, we will continue to grant equity-based awards to the employees, consultants and directors of our company, our affiliates and certain other companies as an important part of their compensation packages.
In addition, our equity incentive award agreements generally provide that, in the event of a grantee's termination for cause or violation of a non-competition undertaking, we will have the right to repurchase the shares acquired by such grantee, generally at par or the exercise price paid for such shares.
The following paragraphs summarize other key terms of our equity incentive plans.
Plan administration. Subject to certain limitations, our equity incentive plans are generally administered by the compensation committee of the board (or a subcommittee thereof), or such other committee of the board to which the board has delegated power to act; provided, that in the absence of any such committee, our equity incentive plans will be administered by the board. Grants to any executive directors of the board must be approved by the disinterested directors of our board.
Types of awards. The equity incentive plans provide for the granting of incentive and non-statutory options, restricted shares, restricted share units, dividend equivalents, share appreciation rights, share payments and other rights.
Award agreements. Generally, awards granted under the equity incentive plans are evidenced by an award agreement providing for the number of ordinary shares subject to the award, and the terms and conditions of the award, which must be consistent with the relevant plan.
Eligibility. Any employee, consultant or director of our company, our affiliates or certain other companies, such as Alipay, is eligible to receive grants under the equity incentive plans, but only employees of our company, our affiliates and certain other companies, such as Alipay, are eligible to receive incentive stock options.
Term of awards. The term of awards granted under our equity incentive plans are generally not to exceed ten years from the date of grant.
Acceleration, waiver and restrictions. The administrator of our equity incentive plans has sole discretion in determining the terms and conditions of any award, any vesting acceleration or waiver of forfeiture restrictions, and any restrictions regarding any award or the ordinary shares relating thereto.
Change in control. If a change in control of our company occurs, the plan administrator may, in its sole discretion,
Amendment and Termination.termination. Unless earlier terminated, our equity incentive plans continue in effect for a term of ten years. The board may at any time terminate or amend the 2014 Plan in any respect, including amendment of any form of any award agreement or instrument to be executed, provided, however, that to the extent necessary and desirable to comply with applicable laws or stock exchange rules, shareholder approval of any amendment to the 2014 Plan shall be obtained in such manner and to such degree as required.
Senior Management Equity Incentive Plan
We adopted the Senior Management Equity Incentive Plan in 2010, pursuant to which selected management of our company subscribed for preferred shares in a special purpose vehicle, Alternate Solutions Management Limited, which holds our ordinary shares. These preferred shares, subject to a non-compete provision, are redeemable by the holders thereof for our ordinary shares upon the earlier to occur of an initial public offering of our shares (subject to statutory and contractual lock-up periods), and five years from the respective dates of
issuance of the preferred shares to the participants. The maximum number of our ordinary shares redeemable upon the redemption of the preferred shares issued under this plan by the participants is 15,000,000. The underlying ordinary shares have already been issued to the special purpose vehicle and are included in our total outstanding share number. The preferred shares are subject to forfeiture if a holder engages in certain activities that compete with us.
Partner Capital Investment Plan
We adopted the Partner Capital Investment Plan in 2013 to provide partners of the Alibaba Partnership an opportunity to invest in interests in our ordinary shares in order to align further their interests with the interests of our shareholders. Pursuant to the Partner Capital Investment Plan, the partners subscribed for convertible preferred shares in two special purpose vehicles, PCIP I Limited and PCIP II Limited. These convertible preferred shares are, for a period of up to four years from the respective dates of issuance thereof, convertible into exchangeable ordinary shares in these special purpose vehicles, which are exchangeable for our ordinary shares after eight years following the respective dates of issuance of the convertible preferred shares. The convertible preference shares and the exchangeable ordinary shares of these special purpose vehicles are subject to forfeiture if a partner engages in certain activities that compete with us. The maximum number of our ordinary shares that may be acquired upon the exchange of exchangeable ordinary shares in the special purpose vehicles by the partners is 18,000,000. The underlying ordinary shares have already been issued by us to the special purpose vehicles and are included in our total outstanding share number. The Partner Capital Investment Plan permits the issuance of additional shares to the partners as the board may approve from time to time.
Share-based Awards Held by Our Directors and Officers
The following table summarizes, as of March 31, 2015, the outstanding options (including unvested restricted shares related to options early exercised), RSUs and other rights held as of March 31, 2016 by our directors and executive officers, as well as by their affiliates, under the our equity incentive plans, as well as equity held through their investments in our Senior Management Equity Incentive Plan and Partner Capital Investment Plan.
Name | Ordinary shares underlying outstanding options / restricted shares or RSUs / other rights granted or subscribed | Exercise price (US$/Share) | Date of grant(6) | Date of expiration | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Jack Yun MA | — | June 26, 2013 | June 26, 2019 | |||||||||
75,000(2) | — | January 27, 2016 | January 27, 2024 | |||||||||
Joseph C. TSAI | 1,200,000(1) | 5.00 | November 12, 2010 | — | ||||||||
— | June 26, 2013 | June 26, 2019 | ||||||||||
| ||||||||||||
— | January | January | ||||||||||
Jonathan Zhaoxi LU | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(5) | 56.00 | July 2, 2014 | July 2, 2022 | |||||||||
| *(2) | — | ||||||||||
Daniel Yong ZHANG | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(5) | 56.00 | July 2, 2014 | July 2, 2022 | |||||||||
*(2) | — | July 2, 2014 | July 2, 2022 | |||||||||
*(5) | 87.06 | May 10, 2015 | May 10, 2023 | |||||||||
*(2) | — | May 10, 2015 | May 10, 2023 | |||||||||
*(2) | — | January 27, 2016 | January 27, 2024 | |||||||||
*(2) | — | March 17, 2016 | March 17, 2024 | |||||||||
J. Michael EVANS | *(2) | — | September 24, 2014 | September 24, 2020 | ||||||||
*(5) | 79.96 | July 31, 2015 | July 31, 2023 | |||||||||
*(2) | — | July 31, 2015 | July 31, 2023 | |||||||||
Masayoshi SON | — | — | — | — | ||||||||
Chee Hwa TUNG | *(2) | — | September 24, 2014 | September 24, 2020 | ||||||||
Walter Teh Ming KWAUK | *(2) | — | September 24, 2014 | September 24, 2020 | ||||||||
| *(2) | — | September 24, 2014 | September 24, 2020 | ||||||||
Börje E. EKHOLM | *(2) | — | June 1, 2015 | June 1, 2021 | ||||||||
Wan Ling MARTELLO | *(2) | — | September 1, 2015 | September 1, 2021 | ||||||||
Maggie Wei WU | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(2) | — | July 2, 2014 | July 2, 2022 | |||||||||
*(2) | — | January 27, 2016 | January 27, 2024 | |||||||||
Jane Fang JIANG | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
*(2) | — | September 10, 2013 | September 10, 2019 | |||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(2) | — | July 2, 2014 | July 2, 2022 | |||||||||
*(2) | — | February 21, 2016 | February 21, 2024 |
Name | Ordinary shares underlying outstanding options / restricted shares or RSUs / other rights granted or subscribed | Exercise price (US$/Share) | Date of grant(6) | Date of expiration | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| ||||||||||||
| ||||||||||||
*(3) | 18.50 | May 18, 2013 | May 18, 2019 | |||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(2) | July 2, 2014 | July 2, 2022 | ||||||||||
69.54 | January 27, 2016 | January 27, 2024 | ||||||||||
*(2) | — | January | January 27, 2024 | |||||||||
Zhenfei LIU | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(2) | — | July 2, 2014 | July 2, 2022 | |||||||||
*(2) | — | January | January 27, 2024 | |||||||||
Trudy Shan DAI | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(2) | — | July 2, 2014 | July 2, 2022 | |||||||||
*(2) | — | January 27, 2016 | January 27, 2024 | |||||||||
Timothy A. STEINERT | *(1) | 5.00 | November 12, 2010 | — | ||||||||
*(3) | 18.50 | May 18, 2013 | May 18, 2019 | |||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(2) | — | July 2, 2014 | July 2, 2022 | |||||||||
| ||||||||||||
*(2) | — | |||||||||||
| ||||||||||||
Jianhang JIN | *(1) | 5.00 | November 12, 2010 | — | ||||||||
*(2) | — | May 3, 2011 | May 3, 2017 | |||||||||
*(2) | — | May 11, 2012 | May 11, 2018 | |||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
— | January 27, 2016 | January 27, 2024 | ||||||||||
Chris Pen-hung TUNG | * | |||||||||||
*(2) | — | |||||||||||
Yongfu YU | *(2) | — | August 20, 2013 | August 20, 2019 | ||||||||
*(2) | — | November 15, 2014 | November 15, 2020 | |||||||||
*(2) | — | August 21, 2015 | August 21, 2021 | |||||||||
Simon Xiaoming HU | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(2) | — | July 2, 2014 | July 2, 2022 | |||||||||
| *(2) | — | ||||||||||
Sophie Minzhi WU | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
*(4) | 14.50 | July 26, 2013 | — | |||||||||
*(2) | — | July 2, 2014 | July 2, 2022 | |||||||||
| ||||||||||||
*(2) | — | |||||||||||
Jessie Junfang ZHENG | *(3) | 18.50 | May 18, 2013 | May 18, 2019 | ||||||||
* | ||||||||||||
*(2) | — | |||||||||||
*(2) | — | August 21, 2015 | August 21, 2021 |
C. Board Practices
Nomination and Terms of Directors
Pursuant to our articles of association, our board of directors is classified into three classes of directors designated as Group I, Group II and Group III, each generally serving a three-year term unless earlier removed. The Group I directors currently consist of Joe Tsai, Michael Evans, Jonathan Lu and Börje Ekholm; the Group II directors currently consist of Daniel Zhang, Chee Hwa Tung, Jerry Yang and Jerry Yang;Wan Ling Martello; and the Group III directors currently consist of Jack Ma, Masayoshi Son and Walter Kwauk. Unless otherwise determined by the shareholders in a general meeting, our board will consist of not less than nine directors for so long as SoftBank has a director nomination right. The Alibaba Partnership has the exclusive right to nominate up to a simple majority of our board of directors, and SoftBank has the right to nominate one director for so long as SoftBank owns at least 15% of our outstanding shares. If at any time our board of directors consists of less than a simple majority of directors nominated or appointed by the Alibaba Partnership for any reason, including because a director previously nominated by the Alibaba Partnership ceases to be a member of our board of directors or because the Alibaba Partnership had previously not exercised its right to nominate or appoint a simple majority of our board of directors, the Alibaba Partnership shall be entitled (in its sole discretion) to appoint such number of additional directors to the board as necessary to ensure that the directors nominated or appointed by the Alibaba Partnership comprise a simple majority of our board of directors. The remaining members of the board of directors will be nominated by the nominating and corporate governance committee of the board. Director nominees will be elected by the simple majority vote of shareholders at our annual general meeting.
If a director nominee is not elected by our shareholders or departs our board of directors for any reason, the party or group entitled to nominate that director has the right to appoint a different person to serve as an interim director of the class in which the vacancy exists until our next scheduled annual general meeting of shareholders. At the next scheduled annual general meeting of shareholders, the appointed interim director or a replacement director nominee (who, in the case of Alibaba Partnership nominees, cannot be the original nominee) will stand for election for the remainder of the term of the class of directors to which the original nominee would have belonged.
For additional information, see "Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management — Alibaba Partnership" and "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with SoftBank and Yahoo — Voting Agreement."
Code of Ethics and Corporate Governance Guidelines
We have adopted a code of ethics, which is applicable to all of our directors, executive officers and employees. Our code of ethics is publicly available on our website.
In addition, our board of directors has adopted a set of corporate governance guidelines covering a variety of matters, including approval of related party transactions. Our corporate governance guidelines also provide that any adoption of a new equity incentive plan and any material amendments to such plans will be subject to the approval of our non-executive directors and also provide that the director nominated by SoftBank is entitled to
notices and materials for all meetings of committees of our board of directors and, by giving prior notice, may attend, observe and participate in any discussions at any committee meetings. The guidelines reflect certain guiding
principles with respect to our board's structure, procedures and committees. The guidelines are not intended to change or interpret any applicable law, rule or regulation or our articles of association.
Duties of Directors
Under Cayman Islands law, all of our directors owe us fiduciary duties, including a duty of loyalty, a duty to act honestly and a duty to act in good faith and in a manner they believe to be in our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our articles of association, as amended and restated from time to time. We have the right to seek damages if a duty owed by any of our directors is breached.
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our corporate governance guidelines provide that a majority of the members of our compensation committee and nominating and corporate governance committee will be independent directors within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual. All members of our audit committee shall be independent within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual and will meet the criteria for independence set forth in Rule 10A-3 of the Exchange Act by the end of the one year transition period for companies following an initial public offering.
Audit Committee
Our audit committee currently consists of Walter Kwauk, Michael Evans, Börje Ekholm and Joe Tsai.Wan Ling Martello. Mr. Kwauk is the chairman of our audit committee. Mr. Kwauk satisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Mr. Kwauk, Mr. EvansEkholm and Mr. EkholmMs. Martello satisfy the requirements for an "independent director" within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual and meet the criteria for independence set forth in Rule 10A-3 of the Exchange Act.
The audit committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our audit committee is responsible for, among other things:
Compensation Committee
Our compensation committee currently consists of Jerry Yang, Walter Kwauk and Joe Tsai. Mr. Yang is the chairman of our compensation committee. Mr. Yang and Mr. Kwauk satisfy the requirements for an "independent director" within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual.
Our compensation committee is responsible for, among other things:
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee currently consists of Jack Ma, Chee Hwa Tung Michael Evans and Jerry Yang. Jack is the chairman of our nominating and corporate governance committee. Mr. Tung Mr. Evans and Mr. Yang satisfy the "independence" requirements of Section 303A of the New York Stock Exchange Listed Company Manual.
Our nominating and corporate governance committee is responsible for, among other things:
Committee Observer
In accordance with our articles and the voting agreement entered into among us, Jack Ma, Joe Tsai, SoftBank and Yahoo, we have agreed that the director nominated by SoftBank is entitled to receive notices and materials for all meetings of our committees and to join as an observer meetings of the audit committee, the compensation committee, the nominating and corporate governance committee and/or our other board committees we may establish upon notice to the relevant committee.
D. Employees
Employees
As of March 31, 2013, 2014, 2015 and 2015,2016, we had a total of 20,674, 22,072, 34,985 and 34,98536,446 full-time employees, respectively. Substantially all of our employees are based in China.
The following table sets out the breakdown of our full-time employees by functions as of March 31, 2015:2016:
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Function | Number of employees(1) | % of total employees(1) | |||||
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Research and development | 18,737 | 51% | |||||
Operations and customer services | 7,877 | 22% | |||||
Sales and marketing | 6,606 | 18% | |||||
General and administrative | 3,226 | 9% | |||||
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Total | 36,446 | 100% | |||||
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We believe that we have a good working relationship with our employees and we have not experienced any significant labor disputes.
E. Share Ownership
For information regarding the share ownership of our directors and officers, see "Item 7. Major Shareholders and Related Party Transactions — A. Major Shareholders." For information as to stock options granted to our directors, executive officers and other employees, see "Item 6. Directors, Senior Management and Employees — B. Compensation — Equity Incentive Plan.Plans."
ITEM 7.7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth information with respect to beneficial ownership of our ordinary shares as of the date of this annual report by:
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes the power to direct the voting or the disposition of the securities or to receive the economic benefit of the ownership of the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days of this annual report, including through the exercise of any option or other right and the vesting of restricted shares. These shares, however, are not included in the computation of the percentage ownership of any other person. The calculations of percentage ownership in the table below isare based on 2,512,427,5042,495,276,682 ordinary shares outstanding as of June 23, 2015.May 20, 2016.
Name | Ordinary shares beneficially owned | Percent | Ordinary shares beneficially owned | Percent | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Directors and Executive Officers: | ||||||||||||||
Jack Yun MA(1) | 190,670,976 | 7.6% | 193,744,241 | 7.8% | ||||||||||
Joseph C. TSAI(2) | 78,412,114 | 3.1% | 80,026,036 | 3.2% | ||||||||||
Jonathan Zhaoxi LU | * | * | * | * | ||||||||||
Daniel Yong ZHANG | * | * | * | * | ||||||||||
J. Michael EVANS | * | * | ||||||||||||
Masayoshi SON | — | — | — | — | ||||||||||
Chee Hwa TUNG | — | — | * | * | ||||||||||
Walter Teh Ming KWAUK | * | * | * | * | ||||||||||
J. Michael EVANS | * | * | ||||||||||||
Jerry YANG | * | * | * | * | ||||||||||
Börje E. EKHOLM | — | — | * | * | ||||||||||
Lucy Lei PENG | * | * | ||||||||||||
Wan Ling MARTELLO | — | — | ||||||||||||
Maggie Wei WU | * | * | * | * | ||||||||||
Jane Fang JIANG | * | * | ||||||||||||
Jeff Jianfeng ZHANG | * | * | ||||||||||||
Zhenfei LIU | * | * | * | * | ||||||||||
Trudy Shan DAI | * | * | * | * | ||||||||||
Timothy A. STEINERT | * | * | * | * | ||||||||||
Jianhang JIN | * | * | * | * | ||||||||||
Jian WANG | * | * | ||||||||||||
Jeff Jianfeng ZHANG | * | * | ||||||||||||
Chris Pen-hung TUNG | * | * | ||||||||||||
Yongfu YU | * | * | * | * | ||||||||||
Simon Xiaoming HU | * | * | * | * | ||||||||||
Sophie Minzhi WU | * | * | * | * | ||||||||||
Peng JIANG | * | * | ||||||||||||
Jessie Junfang ZHENG | * | * | ||||||||||||
All directors and executive officers as a group | 328,513,072 | 13.1% | 311,196,212 | 12.5% | ||||||||||
Greater than 5% Beneficial Owners: | ||||||||||||||
SoftBank(3) | 797,742,980 | 31.8% | 797,742,980 | 32.0% | ||||||||||
Yahoo(4) | 383,565,416 | 15.3% | 383,565,416 | 15.4% |
Notes:
Excludes shares held by SoftBank representing SoftBank's share ownership in excess of 30% of our outstanding ordinary shares as of the most recent record date with respect to any shareholders action and up to 121,500,00021,500,000 ordinary shares held by Yahoo, over which Jack and Joe will share voting power pursuant to the voting agreement that we, Jack, Joe, SoftBank and Yahoo entered into as described in "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with Yahoo and SoftBank — Voting Agreement."
Jack has historically voted the ordinary shares held by the family trusts and he is deemed a beneficial owner of the ordinary shares held by the family trusts.
Jack does not have any pecuniary interests in the 35,000,000 ordinary shares underlying options held by SymAsia FoundationYun Capital Limited and Ying Capital Limited.
Jack's business address is 969 West Yi Road, Yu Hang District, Hangzhou 311121, the People's Republic of China.
support certain obligations under the 2014 SAPA, (iii) 15,000,000 ordinary shares underlying options held by SymAsiaJoe and Clara Tsai Foundation Limited, a company incorporated under the transferlaw of the Island of Guernsey with its registered address at Helvetia Court, South Esplanade, St. Peter Port, Guernsey GY1 4EE, that has granted Joe a revocable proxy over such shares and which options or underlying ordinary sharesis wholly-owned by Joe is entitled to direct to a charitable trust he has established,and Clara Tsai Foundation, (iv) 21,905,952 ordinary shares and 1,200,000 ordinary shares underlying preferred shares of Alternate Solutions Management Limited, in each case held by Parufam Limited, a Bahamas corporation with its registered address at Suite 200B, 2nd Floor, Centre of Commerce, One Bay Street, P.O. Box N-3944, Nassau, Bahamas, and over which, Joe, as a director of Parufam Limited, has been delegated sole voting and disposition power, (v) 21,000,000 ordinary shares held by PMH Holding Limited, a British Virgin Islands corporation with its registered address at Trident Chambers, P.O. Box 146, Road Town, Tortola, British Virgin Islands, and over which, Joe, as sole director of PMH Holding Limited, has voting and dispositive power, and (vi) 2,868,198 ordinary shares held by MFG Limited, a British Virgin Islands corporation with its registered address at Trident Chambers, P.O. Box 146, Road Town, Tortola, British Virgin Islands, and over which, Joe, as sole director of MFG Limited, has voting and dispositive power and (vii) 1,541,422 ordinary shares held by MFG II Ltd., a British Virgin Islands corporation with its registered address at Trident Chamber, P.O. Box 146, Road Town, Tortola, British Virgin Islands, and over which Joe, as sole director of MFG II Ltd., has voting and dispositive power.
Excludes shares held by SoftBank representing SoftBank's share ownership in excess of 30% of our outstanding ordinary shares as of the most recent record date with respect to any shareholders action and up to 121,500,000 ordinary shares held by Yahoo, over which Joe and Jack will share voting power pursuant to the voting agreement that we, Jack, Joe, SoftBank and Yahoo have entered into as described in "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with Yahoo and SoftBank — Voting Agreement."
Joe does not have any pecuniary interests in the 15,000,000 ordinary shares underlying options held by SymAsiaJoe and Clara Tsai Foundation Limited.
Joe's business address is c/o Alibaba Group Services Limited, 26/F Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong S.A.R.
We have one class of ordinary shares, and each holder of our ordinary shares is entitled to one vote per share.
As of June 23, 2015, 2,512,427,504May 20, 2016, 2,495,276,682 of our ordinary shares were outstanding. To our knowledge, 1,015,779,4821,300,005,347 ordinary shares, representing approximately 40.4%52% of our total outstanding shares, were held by 159126 record shareholders in the United States. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States. We are not aware of any arrangement that may at a subsequent date, result in a change of control of our company.
B. Related Party Transactions
Our Related Party Transaction Policy
In order to prevent risks of conflicts of interest or the appearance of conflicts of interest, all of our directors and employees are subject to our code of business conduct and other policies which require, among other things, that any potential transaction between us and an employee or director, their relatives and closely connected persons and certain entities in which they, their relatives or closely connected persons have an interest be approved in writing by an appropriate supervisor or compliance officer.
We have also adopted a related party transaction policy to which all of our directors, senior management and other key management personnel, all such person's family members, Ant Financial Services and its subsidiaries as well as the Alibaba Partnership and certain other related entities shall beare subject. This new policy is intended to supplement the procedures set forth in our code of business conduct and our other corporate governance policies and does not exempt any person from more restrictive provisions that may exist in our existing procedures and policies.
This related party transaction policy provides, among other things, that, unless otherwise preapprovedpre-approved by our board of directors:
Our related party transaction policy, code of business conduct and our other corporate governance policies are subject to periodic review and revision by our board.
Transactions and Agreements with SoftBank and Yahoo
Shareholders Agreement
We, SoftBank and Yahoo entered into a shareholders agreement dated October 24, 2005, as amended and restated on October 21, 2007, which was subsequently replaced and superseded by a new shareholders agreement dated September 18, 2012, or the shareholders agreement. The shareholders agreement addresses certain matters in relation to shareholder rights, corporate governance arrangements and other related obligations. The shareholders agreement, including the right of first offer, tag-along rights and preemptive rights in connection with the transfer or sale of our shares thereunder, has terminated upon the completion of our initial public offering in September 2014.
Voting Agreement
We have entered into a voting agreement with Jack Ma, Joe Tsai, SoftBank and Yahoo, which provides SoftBank with the right to nominate one director to our board of directors who will, subject to certain conditions, have the right to receive notices and materials for all meetings of our committees and to join such meetings as an observer, which rights are also reflected in our memorandum and articles of association. These nomination rights will terminate when SoftBank's shareholding declines below 15% of our outstanding shares. The voting agreement also contains provisions to the effect that:
SoftBank's and Yahoo's proxy obligations described in clause (ii) in the first bullet and the third bullet above, respectively, shall (i)(a) not apply in respect of any proposal submitted to our shareholders that may result in an issuance of shares or other equity interests of us, including securities exchangeable or convertible into shares, that would increase the amount of our then-outstanding shares by 3% or more and (ii)(b) terminate when Jack owns less than 1% of our outstanding shares on a fully diluted basis or if we materially breach the voting agreement.
Yahoo Technology and Intellectual Property License Agreement
We and Yahoo entered into a technology and intellectual property license agreement dated October 24, 2005, as amended and restated on September 18, 2012, or the Yahoo TIPLA. Under the Yahoo TIPLA, Yahoo granted to us the use of certain intellectual property. In consideration of the rights granted under the Yahoo TIPLA, we paid Yahoo a lump sum payment in the amount of US$550 million and agreed to pay Yahoo an annual royalty equal to 2% of our consolidated revenues (less certain costs) for the period from January 1, 2006 to December 31,
2012 and 1.5% of our consolidated revenues (less certain costs) for the period from January 1, 2013 until the completion of our initial public offering in September 2014. No royalties have been payable since then. For fiscal years 2013, 2014 and 2015, the royalty fees amounted to RMB592 million, RMB748 million and RMB448 million, (US$72 million), respectively.
Patent Sale and Assignment Agreement with Yahoo
We and Yahoo entered into two patent sale and assignment agreements in fiscal years 2014 and 2015, pursuant to which we acquired ownership of certain patents and patent applications for aggregate consideration of US$70 million and US$23.524 million, respectively.
Our Repurchase of Ordinary Shares from Yahoo
We are party toOn May 20, 2012, we entered into a share repurchase and preference share sale agreement with Yahoo, dated May 20, 2012, asor the Yahoo repurchase agreement. As amended through July 14, 2014, or the Yahoo repurchase agreement. The agreement governsgoverned the terms on which we have repurchased and may further repurchase from Yahoo, or cause Yahoo to sell in a qualified initial public offering, our ordinary shares. We repurchased 523,000,000523,565,416 ordinary shares from Yahoo onin September 18, 2012 at a price of US$13.5414 per share for an aggregate consideration of US$7,082 million. Immediately following the repurchase, Yahoo owned 523,565,416 ordinary shares, representing approximately 24% of our issued share capital at that time. We paid US$6,282 million of the consideration in cash and US$800 million through our issuance to Yahoo of mandatorily redeemable preference shares of our company, or the Yahoo preference shares. We negotiated the terms of the Yahoo preference shares with Yahoo on an arm's length basis. On May 16, 2013, we redeemed the Yahoo preference shares in full using funds we borrowed under our US$8 billion credit facility.
The Yahoo repurchase agreement was amended to provide that we are entitled to cause Yahoo either to sell 208,000,000 (prior to such amendment, 261,500,000 ordinary shares) ordinary shares to the public in our initial public offering or sell to us such number of shares using the proceeds from our initial public offering. In July 2014, the Yahoo repurchase agreement was further amended to reduce the number of ordinary shares we are entitled to causecaused Yahoo to sell to 140,000,000 ADSs representing 140,000,000 of our ordinary shares. Inshares in connection with our initial public offering in September 2014, Yahoo sold 140,000,000 ADSs representing 140,000,000 of our ordinary shares.2014. As of March 31, 2015,2016, Yahoo owned 383,565,416 ordinary shares, representing approximately 15%15.5% of our then issued share capital.
Investments Involving SoftBank
We have invested in businesses in which SoftBank is an existing shareholder or co-invested with SoftBank in other businesses. SoftBank has also invested in businesses in which we or our controlled entities are existing shareholders. For instance, in January 2015, we participated in a financing round with SoftBank in Travice Inc., the operator and developer of Kuaidi Dache, awhich in February 2015 merged into Didi Chuxing, the leading mobile taxi booking app providertransportation network company that provides vehicles and taxis for hire in China.China via smartphone applications. In June 2015, we announced that we agreed to invest in SoftBank's robotics business. We expect that we will continue to engage in investment activities that involve SoftBank in the future. We may continue to co-invest with SoftBank, invest in businesses in which SoftBank is already an existing investor, and may also bring SoftBank as an investor into our new businesses or businesses in which we are an existing investor.
Agreements and Transactions Related to Ant Financial Services and Its Subsidiaries
Ownership of Ant Financial Services and Alipay
We originally established Alipay in December 2004 to operate our payment services business. In June 2010, the PBOC issued new regulations that required non-bank payment companies to obtain a license in order to operate in China. These regulations provided specific guidelines for license applications only for domestic PRC-owned entities. These regulations stipulated that, in order for any foreign-invested payment company to obtain a license, the scope of business, the qualifications of any foreign investor and any level of foreign ownership would be subject to future regulations to be issued, which in addition would require approval by the PRC State Council. Further, the regulations required that any payment company that failed to obtain a license must cease operations by September 1, 2011. Although Alipay was prepared to submit its license application in early 2011, at that time the PBOC had not issued any guidelines applicable to license applications for foreign-invested payment companies (and no such guidelines have been issued as of the date of this annual report). In light of the uncertainties relating to the license qualification and application process for a foreign-invested payment company, our management determined that it was necessary to restructure Alipay as a company wholly-owned by PRC nationals in order to avail Alipay of the specific licensing guidelines applicable only to domestic PRC-owned entities. Accordingly, we divested all of our interest in and control over Alipay in 2011, which resulted in deconsolidation of Alipay from our financial statements. This action enabled Alipay to obtain a payment business license in May 2011 without delay and without any detrimental impact to our China retail marketplaces or to Alipay.
Following the divestment of our interest in and control over Alipay, effective in the first calendar quarter of 2011, the ownership structure of Alipay's parent entity, Ant Financial Services, was changed such that Jack Ma held a substantial majority of the equity ownership interest in Ant Financial Services. The ownership structure of Ant Financial Services has subsequently been further restructured and, asrestructured. In May 2016, Ant Financial Services completed a round of equity financing of approximately US$4.5 billion. As of the date of this annual report, approximately 48.9%42.28% of its equity interests are held by Hangzhou Junhan, Equity Investment Partnership, or Junhan, a PRC limited partnership, approximately 38.7%34.15% of its equity interests are held by Hangzhou Junao Equity Investment Partnership, or Junao, a PRC limited partnership, and approximately 12.4%23.57% of its equity interests are held by other shareholders.
The economicEconomic interests inof Ant Financial Services through Junhan are owned by Jack Ma, Simon Xie and other employees of our company and employees of Ant Financial Services. TheThese economic interests in Junhan held by these employees are in the form of limited partnership interests and interests similar to share appreciation rights tied to potential appreciation in the value of Ant Financial Services. The economic interests in Junao are held in the form of limited partnership interests by certain members of the Alibaba Partnership.
We understand that it is the intention of the shareholders of Ant Financial Services that:
that this reduction will be caused in a manner by which neither Jack nor any of his affiliates would receive any economic benefit. See "— Commitments of Jack Ma to Alibaba Group." We have been informed by Ant Financial Services that such proposed reduction of Jack's economic interest is expected to be accomplished within three to five years from our initial public offering in September 2014 through a combination of future equity-based incentive awards to employees and dilutive issuances of equity in Ant Financial Services, among others;
The general partner of both Junao and Junhan is an entity 100% owned by Jack Ma. As the general partner, this entity, and therefore indirectly Jack, holds the voting rights in the two limited partnerships, while the limited partners hold a majority of the economic interests in each of Junao and Junhan. Accordingly, Jack is able to exercise the voting power of Junao and Junhan as the major shareholders of Ant Financial Services.
Our Relationship with Ant Financial Services and Alipay through August 2014
After the divestment of our interest in and control over Alipay, we entered into a framework agreement in July 2011, or the 2011 framework agreement, with SoftBank, Yahoo, Alipay, Ant Financial Services, Jack Ma and Joe Tsai and certain of their affiliates. At the same time, we also entered into various implementation agreements that included a commercial agreement, or the Alipay commercial agreement, an intellectual property license and software technology service agreement, or the Alipay IPLA, and a shared services agreement, which together governed our financial and commercial relationships with Ant Financial Services and Alipay.
As described in more detail below, we restructured our relationship with Ant Financial Services in August 2014 with the approval of our board of directors and with the agreement of SoftBank, Yahoo, Alipay, Ant Financial Services, Jack Ma and Joe Tsai and certain of their and our affiliates.
Alipay Commercial Agreement
Under the Alipay commercial agreement among us, Alipay and Ant Financial Services, which agreement remains in place following the restructuring described below, Alipay provides payment processing and escrow services to us. These services enable settlement of transactions on our marketplaces through a secure payment platform and escrow process. We pay Alipay a fee on terms that are preferential to us for such services. These preferential terms enable us, with certain exceptions, to make available basic payment processing and escrow services to buyersconsumers and sellersmerchants on our marketplaces free of charge. We believe that these services provide us with a competitive advantage that otherwise would be diminished without the preferential terms of the Alipay commercial agreement.
The fees that we pay Alipay are based on fee rates and actual payment volumes processed on our marketplaces. The fee rates reflect, among other things, Alipay's bank-processing costs and operating costs allocable to the services provided to us, and accordingly are subject to adjustment on an annual basis to the extent such costs increase or decline. The Alipay commercial agreement provided that the directors of our company designated by SoftBank and Yahoo approve the fee rates payable by us in advance on an annual basis. In connection with the restructuring of our relationship with Ant Financial Services, the Alipay commercial agreement was amended to provide that, after the completion of our initial public offering, a special committee formed by our independent directors and
the director designated by SoftBank must approve the fee rates in advance on an annual basis. The fee rates for the immediately preceding year remain in effect until such time as such annual approval by the special committee has been obtained. In fiscal years 2013, 2014, 2015 and 2015,2016, we paid fees to Alipay totaling RMB1,646 million, RMB2,349 million, RMB3,853 million and RMB3,853RMB4,898 million (US$622760 million), respectively, under this agreement. The Alipay commercial agreement has an initial term of 50 years, and is automatically renewable for further periods of 50 years, subject to our right to terminate at any time upon one year's prior written notice. If the Alipay commercial agreement is required by applicable regulatory authorities, including under stock exchange listing rules, to be modified in certain circumstances, a one-time payment may be payable to us by Ant Financial Services to compensate us for the impact of such adjustment.
2014 Restructuring of Our Relationship with Ant Financial Services and Alipay
On August 12, 2014, we entered into a share and asset purchase agreement, or the 2014 SAPA, and entered into or amended certain ancillary agreements including an amendment and restatement of the Alipay IPLA, or the amended Alipay IPLA. Pursuant to these agreements, we restructured our relationships with Ant Financial Services and Alipay, its wholly-owned subsidiary, Alipay, and terminated the 2011 framework agreement. The restructuring contemplated by the 2014 SAPA and the ancillary agreements described below has taken effect and these agreements now govern our economic and commercial relationships with Ant Financial Services and Alipay. Under the 2014 SAPA, the arrangements are structured with the aim of securing long-term economic participation in Ant Financial Services which we believe is in the best interests of our company and all of our shareholders. The potential for long-term economic participation can come in the form of either a perpetual 37.5% profit share stream or a possible future direct equity interest as described below. We believe this restructuring will strengthen and benefit our company as well as better position us for future growth.
Share and Asset Purchase Agreement
Sale of SME Loan Business and Certain Other Assets
Pursuant to the 2014 SAPA, we agreed to sell certain securities and assets primarily relating to our SME loan business and other related services to Ant Financial Services, for aggregate cash consideration of RMB3,219 million, (US$519 million), which was based on a premium to the aggregate book value of the entities operating the SME loan business. The sale was completed in February 2015. In addition, pursuant to software system use and service agreements relating to the know-how and related intellectual property that we agreed to sell together with the SME loan business and related services, we will receive annual fees for a term of seven years. These fees, which will be recognized as other revenue, will be determined as follows: for calendar years 2015 to 2017, the entities
operating the SME loan business will pay us an annual fee equal to 2.5% of the average daily balance of the SME loans provided by such entities; which will be recognized as other revenue,entities, and in calendar years 2018 to 2021, these entities will pay an annual fee equal to the amount of the fees paid in the calendar year 2017. In fiscal yearyears 2015 and 2016, we received an annual feefees of RMB90 million and RMB708 million (US$15110 million), respectively, from Ant Financial Services.Services and its affiliates.
For regulatory reasons, we retained approximately RMB1,225 million of the existing SME loan portfolio upon the completion of the transfer of the SME loan business, which will be wound down over time as such loans are repaid. We will not conduct any new SME loan business going forward. The remaining balance of this retained portfolio of loans amounted to RMB835 million (US$135 million)was insignificant as of March 31, 2015.2016.
Liquidity Event Payment
Under the 2014 SAPA, in the event of a qualified IPO of Ant Financial Services or Alipay, if our total ownership of equity interests in Ant Financial Services, if any, acquired as described under "— Potential Equity Interest" below, has not reached 33%, which we refer to as the full 33% equity interest, we would be entitled, at our election, to receive a one-time payment equal to 37.5% of the equity value, immediately prior to such qualified IPO of Ant Financial Services, as a whole and not just of Alipay, its subsidiary Alipay.subsidiary. If we acquire equity interests in
Ant Financial Services in an aggregate amount less than the full 33% equity interest, then the percentage of Ant Financial Services' equity value used to calculate the liquidity event payment will be reduced proportionately.
In lieu of receiving the liquidity event payment, we may elect to receive payments under the profit sharing provision of the amended Alipay IPLA described below in perpetuity, subject to the receipt of regulatory approvals, including under applicable stock exchange listing rules, required to permit continuation of the profit share following a qualified IPO of Ant Financial Services or Alipay. If we so elect, in connection with such a qualified IPO, Ant Financial Services must use its commercially reasonable efforts to obtain such regulatory approvals. If such approvals are not obtained, then Ant Financial Services will pay us the liquidity event payment described above.
Jack Ma and Joe Tsai contributed 35,000,000 and 15,000,000, respectively, of our ordinary shares held by them to APN Ltd., a vehicle they established to hold such shares. The shares of APN Ltd., as well as the 50,000,000 ordinary shares in us held by APN Ltd., have been pledged to us to secure the liquidity event payment and certain other obligations of Ant Financial Services under the 2014 SAPA and commercial agreement, as well as the direct liability of APN Ltd. for up to US$500 million of the liquidity event payment whenever any such liquidity event payment becomes due.
Potential Equity Interest
The 2014 SAPA provides for future potential equity issuances to us by Ant Financial Services. In the event that Ant Financial Services applies for and receives certain PRC regulatory approvals in the future, Ant Financial Services will issue and we will purchase newly-issued equity interests in Ant Financial Services, up to the full 33% equity interest, or such lesser equity interest as may be permitted by the applicable regulatory approvals.
If we were to acquire such equity interests, we will have a pre-emptive right prior to the time of a qualified IPO of Ant Financial Services, in the event Ant Financial Services issues additional equity interests to third parties, that will entitle us to acquire additional equity interests in order to maintain the equity ownership percentage we hold in Ant Financial Services immediately prior to such third-party issuances.
If the liquidity event payment described above under "— Liquidity Event Payment" has not become payable upon a qualified IPO of Ant Financial Services, then our right to acquire up to the full 33% equity interest will continue after such qualified IPO. However, the equity interests that we are entitled to acquire will be reduced in proportion to any dilutive issuances of equity securities by Ant Financial Services in and following such qualified IPO.
The consideration to be paid by us to acquire any equity interest in Ant Financial Services up to the full 33% equity interest will be fully funded by payments from Ant Financial Services under the 2014 SAPA in respect of
certain intellectual property and asset transfers. Similarly, in connection with our exercise of the pre-emptive right, under the amended Alipay IPLA, we will receive payments from Ant Financial Services that will effectively fund our subscription for such additional equity interests up to a value of US$1.5 billion.
To the extent we acquire the full 33% equity interest pursuant to the provisions of the 2014 SAPA, the liquidity event payment and the profit share under the amended Alipay IPLA described in "— Alipay Intellectual Property License and Software Technology Services Agreement" below, other than the payments that effectively offset the purchase price with respect to the exercise of the pre-emptive right, will automatically terminate. If we acquire less than the full 33% equity interest in Ant Financial Services pursuant to the provisions of the 2014 SAPA, the liquidity event payment amount and the profit sharing arrangement under the amended Alipay IPLA will be proportionately reduced based on the amount of equity interests acquired by us.
We believe that under applicable regulatory rules and practices currently in effect, the relevant PRC approvals necessary for us to own an equity interest in Ant Financial Services would not be granted. There can be no assurance that such applicable regulatory rules and practices will change in the near future.
Certain Restrictions on the Transfer of Ant Financial Services Equity Interests
Pursuant to the 2014 SAPA and amended Alipay IPLA, certain parties thereto, including in some cases our company, are subject to restrictions on the transfer of equity interests in Ant Financial Services, including:
Non-competition Undertakings
Under the 2014 SAPA, we and Ant Financial Services have each agreed to certain limitations on our respective ability to enter into or participate in the same line of business as the other party. The 2014 SAPA provides that Ant Financial Services may not engage in any business conducted by us from time to time, including businesses that we enter into after the date of the 2014 SAPA, or logical extensions thereof, and we are restricted from engaging in specified activities within the scope of business of Ant Financial Services, including the provision and distribution of credit facilities and insurance, the provision of investment management and banking services, payment transaction processing and payment clearing services, leasing, lease financing and related services, trading, dealing and brokerage with respect to foreign exchange and financial instruments, distribution of securities, commodities, funds, derivatives and other financial products and the provision of credit ratings, credit profiles and credit reports. Each party may, however, make passive investments in competing businesses below specified
thresholds, in some cases after offering the investment opportunity to the other party, and we will be permitted to wind down the portion of our SME loan business that is not transferred to Ant Financial Services.
Corporate Governance Provisions
The 2014 SAPA provides that, unless not permitted in connection with a qualified IPO of Ant Financial Services and subject to other conditions, we and Ant Financial Services will recommend one independent person who Ant Financial Services will nominate as a member of its board, and Jack Ma, Joe Tsai, Junhan and Junao will agree to vote the equity interests in Ant Financial Services controlled by them in favor of such nomination. Pursuant to the 2014 SAPA, we and the other parties thereto will agreeagreed on the initial independent director as promptly as practicable, and not later than 60 days, following the date of the 2014 SAPA. We andwho Ant Financial Services have subsequently agreed to extend the time period for the parties to agree on the initial independent director to November 22, 2015.nominated and appointed as a member of its board. If such independent director resigns or such seat otherwise becomes vacant, so long as SoftBank owns at least 20% of our outstanding ordinary shares, and certain other conditions are satisfied,
SoftBank and Jack, acting jointly, will select on our behalf the individual to be designated as a replacement director, subject to the approval of an independent committee of our board. We have agreed to form an independent committee of our board comprised of our directors who meet the independent director standards under New York Stock Exchange listing rules and who are not our officers or employees, as well as any director of our board nominated by SoftBank, to approve certain actions that we may take in connection with the 2014 SAPA and related agreements.
Ancillary Agreements
In connection with the 2014 SAPA, we also entered into the amended Alipay IPLA, a data sharing agreement, a cooperation agreement, a trademark agreement, an amended and restated shared services agreement, a cooperation agreement and the amended Alipay IPLA,a trademark agreement, each of which is described below. We also entered into a binding term sheet in respect of a technology services agreement pursuant to which we agreed to provide certain cloud computing, database service and storage, computing services and certain other services to Ant Financial Services on a cost-plus basis. We further agreed to a new form of crosslicense agreement to be entered into under the 2014 SAPA, providing for a license of certain intellectual property by Ant Financial Services to us, and by us to Ant Financial Services.
Alipay Intellectual Property License and Software Technology Services Agreement
Under the terms of the Alipay IPLA, we and our subsidiaries, licensed to Alipay certain intellectual property rights and provided various software technology services to Alipay and its subsidiaries. We originally entered into the Alipay IPLA in connection with the 2011 framework agreement, and, in August 2014, we entered into the amended Alipay IPLA.
Under the Alipay IPLA, Alipay paid us a royalty and software technology services fee equal to the sum of an expense reimbursement plus 49.9% of the consolidated pre-tax income of Alipay and its subsidiaries until a liquidity event of Alipay or Ant Financial Services. Such profit share percentage was subject to downward adjustments upon certain dilutive equity issuances by Alipay or Ant Financial Services. Under the Amended IPLA, which became effective on the date we entered into the 2014 SAPA, we will receive, in addition to a service fee, royalty streams related to Alipay and other current and future businesses of Ant Financial Services, which we refer to collectively as the profit share payments. The profit share payments will be paid at least annually and will equal the sum of an expense reimbursement plus 37.5% of the consolidated pre-tax income of Ant Financial Services on a consolidated basis (subject to certain adjustments), including not only Alipay but all of Ant Financial Services' subsidiaries. The profit share payments will be reduced in proportion to any equity issuances made to us under the 2014 SAPA.
In addition, if we acquire any equity interest in Ant Financial Services as described above under "Share and Asset Purchase Agreement — Potential Equity Interest," the profit share payments will be reduced in proportion to such equity issuance and, at or prior to the time of such equity issuance, Ant Financial Services will make a payment to us in consideration for the reduction in profit share payments, in exchange for the transfer by us to Ant Financial Services of certain intellectual property. This payment by Ant Financial Services will effectively fund
our subscription for up to the full 33% equity interest. This payment will result in our acquiring equity interests in Ant Financial Services with effectively no cash impact to us, subject to applicable taxes.
The amended Alipay IPLA will terminate, and the remainder (if any) of the intellectual property exclusively related to the business of Ant Financial Services will be transferred to Ant Financial Services after the termination of the amended Alipay IPLA, (i) after our total equity interest ownership in Ant Financial Services has reached the full 33%, when either the full funding of funded payments under the 2014 SAPA is completed or a qualified IPO of Ant Financial Services or Alipay occurs; (ii) after a qualified IPO of Ant Financial Services or Alipay has occurred, when our total equity interest ownership in Ant Financial Services reaches the full 33%; (iii) when the liquidity event payment as described above under "Share and Asset Purchase Agreement — Liquidity Event Payment" becomes payable or (iv) upon transfer of certain intellectual property to Ant Financial Services as
required by the relevant stock exchange or securities authority in order to obtain approval for a qualified IPO of either Ant Financial Services or Alipay.
In fiscal years 2013, 2014, 2015 and 2015,2016, under the Alipay IPLA, we recognized royalty and software technology services fee income, net of costs incurred by our company, amounting RMB277 million, RMB1,764 million, and RMB1,667 million and RMB1,122 million (US$269174 million), respectively, as other income.
The effect of the amended Alipay IPLA is that the base of profits of the financial services businesses that we will share has been expanded, from the pre-tax income of only Alipay to the pre-tax income of the entire Ant Financial Services, while the profit sharing percentage is reduced to align with the percentage that will be used to calculate the liquidity event payment. In addition, our participation in the profits of Ant Financial Services, subject to receipt of required regulatory approvals, including under applicable stock exchange listing rules, is perpetual under the amended Alipay IPLA (unless we elect to receive the liquidity event payment under the 2014 SAPA upon a qualified IPO of Ant Financial Services or Alipay or unless we acquire the full 33% equity interest in Ant Financial Services), as opposed to automatic termination of the profit share upon a liquidity event under the 2011 framework agreement and Alipay IPLA.
Data Sharing Agreement
We and Ant Financial Services have entered into a data sharing agreement dated August 12, 2014.
Pursuant to the data sharing agreement, we, Ant Financial Services, and our controlled affiliates, which we refer to hereinafter as full data participants, will contribute all data collected or generated as a result of the use by users of our or their respective products or services (subject to applicable law, industry rules and contractual requirements) to a data platform that we operate and maintain, and to which all of the full data participants will have access. A data platform management committee established by us and Ant Financial Services may also approve non-controlled affiliates of us and Ant Financial Services and unaffiliated third parties to have certain access to and contribute data to the platform.platform, subject to execution of a data platform participation agreement containing the terms and restrictions on access to and use of the data sharing platform and shared data as the data management committee shall determine. No fees or other compensation are required to be paid by any of the full data participants for access to the data platform, other than the obligation for such participants to share in the costs of the operation of the data platform on a fair and reasonable basis. The data sharing agreement provides that none of the participants may reproduce any of the data on the data platform for transfer to their own servers, except that a participant may retain its own data that it has contributed to the data platform. As of the date of this annual report, Cainiao Network, Koubei and Alibaba Pictures have entered into data platform participation agreements with us.
The data sharing agreement initially had a minimum term of 10 years. Pursuant to the data sharing agreement, if we completed our initial public offering within five years from the date of the agreement, our board could extend the term for up to a total of 50 years. In May 2015, our board approved the extension of the term of the agreement to a total of 50 years.
Shared Services Used by Ant Financial Services
We and Ant Financial Services have entered into a shared services agreement, which was amended and restated asTable of August 12, 2014, in connection with the 2014 SAPA, pursuant to which we and Ant Financial Services provide certain administrative and support services to each other and our respective affiliates.
Ant Financial Services paid us RMB42 million, RMB46 million and RMB158 million (US$25 million) in fiscal years 2013, 2014 and 2015, respectively, for the services we provided to it under the agreement. We paid Ant Financial Services nil, nil and RMB58 million (US$9 million) in fiscal years 2013, 2014 and 2015, respectively for services Ant Financial Services provided to us under the contract.Contents
Cooperation Agreement
We and Ant Financial Services entered into a SME loan cooperation framework agreement dated August 12, 2014, pursuant to which each party agreed to cooperate with, and provide certain services with respect to, the
other party's enforcement of certain rights of such other party against users of its platforms and services and with respect to the provision of certain financial services to our customers and merchants. In particular, we agreed, upon request, to close down or suspend online storefronts and restrict marketing activities on our platforms of persons defaulting on loans made by Ant Financial Services and persons in violation of Alipay rules and regulations, and to publish notices on our platforms and provide information regarding such persons, in each case in a manner to be further agreed from time to time. Ant Financial Services agreed, upon request, to make loans and/or extensions of credit and related financial services available to our users, freeze and pay over to us funds in accounts of users violating our rules and regulations or agreements with us, accelerate loans and terminate credit facilities of such users, restrict marketing activities on its platforms by such users, and provide information regarding such users, in each case in a manner to be further agreed from time to time. Neither party is required to pay any fees in consideration for the services provided by the other party, and apart from the provision of these services, there will be no other exchange of value in connection with this agreement. The cooperation agreement has an initial term of five years, with automatic renewals upon expiry for additional five year periods. From time to time, we expect to enter into similar commercial arrangements with respect to cooperation matters and the provision of services between us and Ant Financial Services and to our respective customers.
Trademark Agreement
We and Ant Financial Services entered into a trademark agreement dated August 12, 2014, pursuant to which we granted Ant Financial Services a non-transferable, non-assignable and non-sublicensable (except to its subsidiaries) license for it and its sublicensed subsidiaries to continue to use certain trademarks and domain names based on trademarks owned by us, in connection with their payment services business and the SME loan business transferred by us to them, and in the same manner of such uses as of August 12, 2014, and a non-transferable, non-assignable and non-sublicensable (except to its subsidiaries) license to use such other trademarks and domain names based on trademarks owned by us, and in such manner, as we may agree to allow in the future. Pursuant to the trademark agreement, each of the parties further agreed to the rights and limitations that each would have to use the "Ali" name or prefix and the "ecommerce" (and its Chinese equivalent) name, prefix or logo as part of a trademark or domain name in each party's and its subsidiaries' respective businesses. Neither party is required to pay any fees under this agreement, and apart from the licenses and rights set forth in the agreement, there will be no other exchange of value in connection with this agreement.
Share-basedShared Services Agreement with Ant Financial Services
We and Ant Financial Services have entered into a shared services agreement, which was amended and restated as of August 12, 2014, in connection with the 2014 SAPA, pursuant to which we and Ant Financial Services provide certain administrative and support services to each other and our respective affiliates.
Ant Financial Services paid us RMB46 million, RMB158 million and RMB670 million (US$104 million) in fiscal years 2014, 2015 and 2016, respectively, for the services we provided to it under the agreement. We paid Ant Financial Services nil, RMB58 million and RMB56 million (US$9 million) in fiscal years 2014, 2015 and 2016, respectively, for services Ant Financial Services provided to us under the agreement.
Other Commercial Arrangements with Ant Financial Services
We have also entered into other commercial arrangements with Ant Financial Services, its subsidiaries and affiliates, such as online marketing services, treasury management and other services. In fiscal years 2014, 2015 and 2016, the amounts generated and receivable from Ant Financial Services under these arrangements were nil, nil and RMB416 million (US$65 million), respectively. During the same periods, the amounts incurred and payable by us to Ant Financial Services under these arrangements were RMB21 million, RMB248 million and RMB243 million (US$38 million), respectively.
Investments Involving Ant Financial Services
We have invested in businesses in which Ant Financial Services is an existing shareholder or co-invested with Ant Financial Services in other businesses. For instance, in September 2015, we established a joint venture under the brand name Koubei with Ant Financial Services. We and Ant Financial Services injected certain related businesses into Koubei and each invested RMB3.0 billion in this joint venture. Koubei is one of the leading restaurant and local services guide businesses in China. In addition, in February 2016, we agreed to invest US$900 million in a co-investment with Ant Financial Services in Ele.me, an operator of one of the largest mobile food ordering and delivery services in China.
Equity-based Award Reimbursement Arrangements
We grant options and RSUs relating to our ordinary shares to the employees of Ant Financial Services. As of March 31, 2014, 2015 and 2016, there were 6,397,150, 6,097,651 and 4,362,339 of our ordinary shares, respectively, underlying outstanding options and RSUs held by employees of Ant Financial Services.
We entered into agreements with Ant Financial Services in calendar years 2012 and 2013 under which we will receive a reimbursementreimbursements for options and RSUs relating to our ordinary shares granted to the employees of Ant Financial Services and its subsidiaries during the period from December 14, 2011 to March 31, 2014. As of March 31, 2015, the number of such ordinary shares covered by the agreements was 7,249,277 in aggregate. Pursuant to these agreements, we will, upon vesting of such options and RSUs, receive a cash reimbursement equal to their respective grant-dategrant date fair value.
Equity-based Awards to Our Employees by a Related Party The amounts of these reimbursements in fiscal years 2014, 2015 and 2016 were RMB266 million, RMB206 million and RMB113 million (US$18 million), respectively.
We understand that Jack Ma, as the controlling shareholder of Ant Financial Services, believes that providing equity-related awards to our employees tied to the success of Ant Financial Services will enhance the value of our business because of the strategic importance of Alipay to our marketplaces and because, through our strategic and financial relationship with Ant Financial Services, we have a significant participation in the profits and value accretion of Ant Financial Services. In March 2014, Junhan, the general partner of which is an entity controlled by Jack Ma, made a grant of certain equity-based awards similar to share-appreciation rights linked to the valuation of Ant Financial Services to most of our employees. AnySince then, Junhan has granted similar grants of equity-based performance awards to our employees on an annual basis.
The grant by Junhan to our employees will beis subject to the approval ofby our audit committee. The vesting of such awards is conditional upon the fulfillment of requisite service conditions to us, and such awards will be settled in cash by Junhan upon
disposal of such awards by the holders. Junhan has the right to repurchase the vested awards from the holders upon an initial public offering of Ant Financial Services or the termination of their employment with us at a price to be determined based on the then fair market value of Ant Financial Services. Junhan's obligation to cash settle these awards will be funded by the proceeds of sales of or loans against the equity interests in Ant Financial Services that Jack contributed to Junhan. We have no obligation to reimburse Junhan, Ant Financial Services or its subsidiaries for the cost associated with these awards. For accounting purposes, we recognize the cost relating to such equity-based awards granted by the shareholder through Junhan as a shareholder contribution as the awards will ultimately be settled in cash by Junhan. The awards are accounted for as financial derivatives and initially measured at their fair value, and the related expense will be recognized over the requisite service period in our consolidated income statements with a corresponding credit to additional paid-in capital. Subsequent changes in the fair value of the awards are recorded in our consolidated income statements through the date on which the underlying awards are settled by Junhan. The expenses arising from Ant Financial Services' share-based awards granted to our employees represent a non-cash charge that will not result in any economic costs or equity dilution to our shareholders.
Other Commercial Arrangements with Subsequent to our initial public offering, based on the arrangements agreed to in the 2014 SAPA, we, Junhan and Ant Financial Services
We have also entered into other commercial arrangements withan agreement, under which we agreed to continue granting our share-based awards to employees of Ant Financial Services, and its subsidiaries, such as treasury management and other services. In fiscal years 2013, 2014 and 2015, the amount incurred and payable by us to Ant Financial Services and its subsidiaries under these arrangements was RMB23 million, RMB21 million and RMB248 million (US$40 million), respectively.
Joint Venture with Ant Financial Services
In June 2015, we announced that we will establish a joint venture under the brand name Koubei with Ant Financial Services that aims at capturing opportunities within China's local services market, with an initial focus on the food and beverage market. We will transfer our food ordering and delivery business that we currently operate under the Taodiandian brand to this joint venture. Ant Financial Services will transfer to this joint venture its offline merchant resources. In addition, weJunhan and Ant Financial Services agreed that Junhan and/or Ant Financial Services through one of its subsidiaries will each invest RMB3.0 billion incontinue granting equity-based performance awards to our employees on an annual basis. Due to the mutually beneficial nature of this joint venture.arrangement, the parties agreed that none of them has any obligation to reimburse any other party any expenses relating to such equity-
based awards. This agreement has a term of three years and will be automatically renewed for another three years, unless otherwise terminated by written agreement among the parties or unilaterally by Ant Financial Services if it is required under applicable laws (including any regulatory requirements applicable to a public offer of Ant Financial Services' shares) to terminate the agreement.
Transactions with Alibaba Pictures
In June 2014, as part of our entertainment media strategy, we completed an investment of HK$6,244 million (RMB4,955 million) in newly issued ordinary shares representing approximately 60% of the issued share capital of Alibaba Pictures. In April 2015, we delivered a non-binding proposal to Alibaba Pictures for a possible business injection of our online movie ticketing business and financing and investment platform for the production of movies and other media content into Alibaba Pictures. There is no certainty that the possible business injection will proceed, and if it does proceed, there is no certainty on what terms the possible business injection would be implemented or that the conditions to its implementation would be satisfied. In addition, in June 2015, Alibaba Pictures entered into a placing agreement in relationplaced newly issued ordinary shares to the placing of certain new ordinary shares. Theunrelated third-party investors for aggregate proceeds from such placing amounted toof approximately HK$12,179 million (RMB9,647 million). Our equity interest in Alibaba Pictures was therefore diluted from 59.4% to 49.5% upon completion of this transaction also in June 2015.transaction. In December 2015, Alibaba Pictures completed its purchase of our online movie ticketing business and movie and TV series financing platform for a cash consideration of US$350 million (RMB2,259 million) plus certain reimbursement amounts.
Transactions with Alibaba Health
In April 2014, through a holding company jointly held with a Yunfeng Fund, we entered into an agreement pursuant to which we agreed to acquireacquired newly issued ordinary shares representing an effective equity interest of approximately 38% in Alibaba Health. The Yunfeng Fund acquired an effective equity interest of approximately 16% in this investment. See "— Relationship with Investment Funds Affiliated with Our Executive Chairman" below. We paid a total purchase price of HK$932 million upon the closing of the transaction. In April 2015, we entered into an agreement pursuant to which we agreed to transfer the operations of our TmallTmall's online pharmacy business to Alibaba Health in consideration for newly issued shares and convertible bonds of Alibaba Health. The transaction is subjectIn July 2015, pursuant to
customary closing conditions. Upon the closing of this transaction, ourequity interests in Alibaba Health (including the 38% effective equity ownership ofinterest we own), and as a result, Alibaba Health became our consolidated subsidiary. Our proposed transaction with Alibaba Health was not completed before its expiration date in March 2016 and therefore lapsed. In April 2016, we and Alibaba Health entered into a services agreement pursuant to which Alibaba Health will increaseprovide outsourced services in relation to approximately 53% (or 54.6% assuming the full conversion of the convertible bonds upon maturity) and Alibaba Health is expectedproduct categories related to become our consolidated subsidiary.Tmall's online pharmacy business.
Transaction with Entity Affiliated with Our Executive ChairmanDirectors and Officers
We entered into an agreement dated as of March 26, 2013 whereby Jack Ma, our executive chairman, acquiredJoe Tsai, our interest in a businessexecutive vice chairman, and J. Michael Evans, our president, have purchased their own aircraft for a cash consideration of US$49.7 million, which was the original purchase priceboth business and personal use. The use of the aircraft. Theabove-mentioned executive officers' own aircraft was subsequently leased to us,in connection with the performance of their duties as our employees is free of charge to be used mainly by Jack in connection with his duties as our executive chairman. Weus, and we have also entered into aagreed to assume the cost reimbursement agreement to reimburse theof maintenance, crew and incidental costsoperation of the aircraft at cost.where such cost is allocated for business purposes.
Relationship with Investment Funds Affiliated with Our Executive Chairman
Jack Ma currently has an indirectapproximately 40% interest, held directly and/or indirectly, in the general partners of threeeach of four Yunfeng Capital-sponsored investment funds sponsored by Yunfeng Capital, includingin which he is entitled to receive a portion of carried interest proceeds, namely, Yunfeng Fund, L.P., which was established in June 2010, Shanghai Yunfeng Equity Investment (Limited Partnership), Shanghai Yunfeng New Innovation Enterprise Equity Investment (Limited Partnership) and Smart System Investment Fund, which isL.P. Jack Ma also currently has an RMB fund establishedapproximately 26.7% indirect interest in May 2011, andthe general partner of Yunfeng Fund II, L.P. and KHL, L.P., each of which is also a Yunfeng Capital-sponsored investment fund in which he is also entitled to receive a portion of carried interest proceeds. Of the six Yunfeng Capital-sponsored funds in respect of which Jack Ma holds an interest in the general partner entities thereof and is entitled to receive carried interest proceeds, two are U.S. dollar denominated funds, or the U.S. Dollar Funds, two are RMB denominated funds, or the RMB Funds, one is a co-investment fund of one of the U.S. Dollar Funds and one is a parallel fund of one of the U.S. Dollar Funds. We refer to these funds collectively as the Yunfeng Funds. Jack Ma also currently has a 40% interest in each of Yunfeng Capital Limited, Shanghai Yunfeng Investment Management Co., Ltd. and Shanghai Yunfeng New Innovation Investment Management Co., Ltd., which had its final closing on May 15, 2014. Aare the investment
advisor entities of the U.S. Dollar Funds and the RMB Funds, respectively, and which we collectively refer to as Yunfeng Capital. Jack Ma, his wife, a trust established for the benefit of his family and an entity controlled by Jack and his family haswife have committed, directly or indirectly, approximately US$265.2 million and US$446.0 million as ageneral partners and limited partner and as a general partner,partners, respectively, to Yunfeng Fund II, L.P., which hasthe U.S. Dollar Funds, and approximately RMB16.0 million and approximately RMB201.1 million as general partners and limited partners, respectively, to the RMB Funds. The U.S. Dollar Funds have accepted over US$1.01.4 billion in capital commitments and the RMB Funds have accepted over RMB5.0 billion in capital commitments.
Jack will donate all distributions of (x) carried interest proceeds he may receive by virtue of his 40% indirect interest in the general partnersrespect of the threeYunfeng Funds and (y) dividends he may receive with respect to his holdings of shares in any member of Yunfeng Capital, fundswhich we collectively refer to as the Yunfeng Distributions, to, or for the benefit of, the Alibaba Foundation.Group Charitable Fund or other entities identified by Jack that serve charitable purposes. In addition, Jack has agreed that he will not claim any deductions from his applicable income tax obligations resulting from payment of the Yunfeng Distributions to the Alibaba Group Charitable Fund or any other entity identified by Jack that serves charitable purposes. See "— Commitments of Jack Ma to Alibaba Group." We expect that, through its expertise, knowledge base and extensive network of contacts in private equity in China, Yunfeng Capital will assist us in developing a range of relevant strategic investment opportunities.
Yunfeng Capital hasFunds have historically, and may in the future, enter into co-investment transactions with us and third parties, such as our recent investments in Youku Tudou and Alibaba Health. For example, inIn April 2014, in conjunction with our investment in Alibaba Health and on the same terms as us, a Yunfeng CapitalFund acquired, through a holding company it jointly established with us, an effective equity interest of approximately 16% in Alibaba Health for a total purchase price of HK$395 million. Also in April 2014, in conjunction with our investment in Youku Tudou and on the same terms as us, a Yunfeng CapitalFund agreed to invest approximately US$132 million to purchase Class A ordinary shares of Youku Tudou, representing an effective equity interest of 2.0% on a fully-diluted basis. See "Item 5. Operating and Financial Review Prospects — A. Operating Results — Recent Investment, Acquisition and Strategic Alliance Activities — Entertainment." We have also invested in other businesses in which Yunfeng Funds are existing shareholders. In addition, we committed US$80 million as a limited partner of Yunfeng Fund II, L.P. Through such investment, we have formalized an institutional relationship with Yunfeng Capital. In addition, Yunfeng Fund, L.P. was an indirect holder of approximately 84,600 convertible preference shares purchased by an entity wholly-owned by it in September 2012, and such convertible preference shares were automatically converted into our ordinary shares upon the completion of our initial public offering in September 2014.
Commitments of Jack Ma to Alibaba Group
Jack Ma, our executive chairman, has confirmed the following commitments to our board of directors in writing:
Pledge for the Benefit of and Loan Arrangement with a Related Party
In May 2015, we entered into a pledge with a financial institution in the PRC in connection with certain wealth management products with an aggregate principal amount of RMB7.3 billion we invested in to secure an RMB6.9 billion financing provided by such financial institution to Simon Xie, one of our founders and an equity holder in certain of our variable interest entities, to finance the minority investment by a PRC limited partnership in Wasu, a company listed on the Shenzhen Stock Exchange and engaged in the business of digital media broadcasting and distribution in China. In addition, we entered into a loan agreement for a principal amount of up to RMB2.0 billion with Simon Xie in April 2015 to finance the repayment by Simon of the interest under the financing. We expect that theseThese arrangements will facilitate us entering into and strengtheningstrengthen our strategic business arrangements with Wasu to enhance our entertainment strategy. Our loan to Simon will be made at an interest rate equal to SHIBOR as specified by us from time to time and is repayable in five years. The loan is secured by a pledge of Simon's limited partnership interest in the PRC limited partnership and will beis available for draw-down starting from January 1, 2016.2016, but it has not yet been drawn. We have entered into strategic cooperation agreements with a major shareholder of Wasu in order to enhance our capabilities and influence in the entertainment sector in China. A company controlled by Jack Ma will serveserves as one of the general partners of the PRC limited partnership. Yuzhu Shi, the founder, chairman and a principal shareholder of Giant Interactive, a China-based online game company that was previously listed on the New York Stock Exchange, and who is also an entrepreneur with significant experience in and knowledge of the media industry in China, serves as the other general partner. Jack, through his control of one of the general partners, and Mr. Shi, as the other general partner and the executive partner, jointly control this PRC limited partnership. The interest of the general partner controlled by Jack in the limited partnership is limited to the return of its RMB10,000 contributed capital.
Equity-settled Donation Relating to Our Ordinary Shares
During fiscal year 2014, we granted options to acquire 50,000,000 ordinary shares of usours to SymAsia Foundation, a non-profit organization designated by Jack Ma and Joe Tsai. 35,000,000 and 15,000,000 of these share options will behave been transferred to the separate charitable trusts to be established by Jack Ma and Joe Tsai, respectively. These share options were approved by our board of directors and the options are not subject to any vesting conditions and are exercisable for a period of four years from the grant date. The exercise price of these options is US$25.00 per share based on a fair market value appraisal process. For each of the eight years beginning one year after the date of listing of our ordinary shares on a recognized stock exchange, the charitable trusts are permitted to sell only up to 6,250,000 ordinary shares (or one-eighth of the total number of ordinary shares subject to the options) per year excluding such number of unsold ordinary shares carried forward from previous years. As there are no vesting conditions attached to the above share options, equity-settled donation expense of RMB1,269 million was recognized in full and recorded in general and administrative expenses during fiscal year 2014.
Transactions with Cainiao LogisticsNetwork
We entered into agreements with Cainiao Logistics,Network, our equity-accounted affiliate, during fiscal year 2014, whereby we disposed of two wholly-owned subsidiaries to the parent Cainiao of Cainiao LogisticsNetwork for cash consideration of RMB524 million. The gain on disposals in fiscal year 2014 was RMB74 million. In addition, during fiscal year 2016, we disposed a wholly-owned subsidiary to Cainiao Network for cash consideration of US$33 million (RMB204 million). The gain on disposal in fiscal year 2016 was RMB3 million (US$850.5 million). The major assets of the disposed subsidiaries consisted of land use rights in the PRC. The gain on disposals in fiscal year 2014 was RMB74 million (US$12 million).
In addition, weWe have commercial arrangements with Cainiao LogisticsNetwork conducted on an arm's length basis to receive certain logistics services. Expenses incurred in connection with the logisticlogistics services provided by Cainiao LogisticsNetwork in fiscal yearyears 2015 and 2016 were RMB785 million and RMB2,370 million (US$127368 million)., respectively.
We also have cost sharing arrangements with Cainiao Network on various administrative and cloud computing services. In connection with the services we provided, Cainiao Network paid us RMB20 million and RMB86 million (US$13 million) in fiscal years 2015 and 2016, respectively.
From time to time, we also co-invest with Cainiao Network in other businesses.
Transactions with Weibo
We entered into a strategic collaboration agreement and a marketing cooperation agreement with Weibo during fiscal year 2014, pursuant to which Weibo provided marketing services. In fiscal years 2014, 2015 and 2016, the amounts paid to Weibo pursuant to these agreements were RMB154 million, RMB654 million and RMB715 million (US$111 million), respectively.
We also have other commercial arrangements with Weibo primarily relating to the provision of cloud computing services. In connection with the services we provided, Weibo paid us nil, RMB2 million and RMB38 million (US$6 million) in fiscal years 2014, 2015 and 2016, respectively.
Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders
Chinese law restricts foreign ownership in enterprises that provide value-added telecommunications services, which includes the ICPs. As a result, we operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited in China through contractual arrangements between our wholly-foreign owned enterprises, our variable interest entities, which, where applicable, hold the ICP licenses and other regulated licenses and generally operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited, and the variable interest entity equity holders. For a description of these contractual arrangements, see "Item 4. Information on the Company — C. Organizational Structure — Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders."
Indemnification Agreements
We have entered into indemnification agreements with our directors and executive officers. These agreements require us to indemnify such individuals, to the fullest extent permitted by law, for certain liabilities to which they may become subject as a result of their affiliation with us.
Employment Agreements
See "Item. 6 Directors, Senior Management and Employees — B. Compensation — Employment Agreements."
Share Options
See "Item. 6 Directors, Senior Management and Employees — B. Compensation — Equity Incentive Plan.Plans."
Private Placements
The following is a summary of our securities issuances since April 1, 2011 through March 31, 2015.
Ordinary Shares
On August 27, 2012, we entered into a share purchase and investor rights agreement with certain investors, pursuant to which we issued an aggregate of 167,741,936 ordinary shares at a subscription price of US$15.50 per share to such investors at an aggregate consideration of US$2.6 billion on September 18, 2012.
Pursuant to the share purchase and investor rights agreement, each of these investors also agrees with Jack Ma that it will vote its ordinary shares so acquired in a manner consistent with Jack or his designee's request at any shareholders meeting with respect to certain substantial shareholder proposals, including approving transactions or proposals, the election or removal of any director, or the amendment of any provision of our articles of association relating to the election or removal of any director or the composition or powers of our board of directors, in each case, resulting in any substantial shareholder gaining the right to change our management and/or policies. For purposes of this voting provision, "substantial shareholder" is defined to mean any shareholder (other than Jack Ma and Joe Tsai (including any entities directly or indirectly controlled by Jack Ma and/or Joe Tsai or their respective family trusts, any of their designees and any of their other affiliates (other than the company or any of its subsidiaries)) that owns, or a group of shareholders (other than Jack Ma and Joe Tsai (including any entities directly or indirectly controlled by Jack Ma and/or Joe Tsai or their respective family
trusts, any of their designees and any of their other affiliates (other than the company or any of its subsidiaries)) acting in concert that own, directly or indirectly, 15% or more of our outstanding ordinary shares either (a) at the time the substantial shareholder proposal has been publicly announced or otherwise notified to us, any of the directors or any of the holders of 3% or more of our outstanding ordinary shares or (b) on the record date of the shareholders meeting related to such substantial shareholder proposal. The voting provisions under the share purchase and investor rights agreement have terminated upon completion of our initial public offering in September 2014.
In connection with our June 2014 acquisition of the remaining equity interest of UCWeb, we issued an aggregate of 12.3 million restricted shares and RSUs to certain shareholders of UCWeb.
Convertible Preference Shares
On August 31, 2012 and October 15, 2012, we entered into convertible preference share purchase agreements with certain investors, pursuant to which such investors agreed to subscribe for an aggregate of 1,688,000 series A convertible preference shares in our company, or the convertible preference shares, for an aggregate consideration of US$1,688 million. The convertible preference shares were issued in two tranches of 1,338,000 and 350,000 shares on September 18, 2012 and on October 16, 2012, respectively. We used the proceeds from the first tranche to partially finance our repurchase of 523,000,000 ordinary shares in our company from Yahoo in September 2012. We used the proceeds from the second tranche for general corporate purposes. The convertible preference shares were automatically converted into an aggregate 91,243,312 of our ordinary shares at an initial conversion price US$18.50 per ordinary share concurrently with the completion of our initial public offering in September 2014.
Redeemable Preference Shares
We issued 800,000 redeemable preference shares in our company to Yahoo in September 2012 for a total consideration of US$800 million. The consideration paid for the redeemable preference shares was used by us to partially fund the repurchase of 523,000,000 ordinary shares in our company from Yahoo in September 2012. We subsequently redeemed the redeemable preference shares in May 2013 using funds borrowed under our US$8 billion credit facility. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Transactions and Agreements with SoftBank and Yahoo — Our Repurchase of Ordinary Shares from Yahoo" for more information. As the holder of the redeemable preference shares, Yahoo was entitled to cumulative, semi-annual dividends at a rate of up to 10% per annum, subject to certain adjustments tied to the credit assessment of us, with at least 3% per annum payable in cash on pre-determined dividend payment dates and the remaining amount accrued to the liquidation preference.
Share Options, RSUs, Restricted Shares and Other Rights Granted
In fiscal years 2013, 2014 and 2015, we have granted options covering an aggregate of 22,406,000 ordinary shares, 93,112,601 ordinary share subject to RSUs, and 3,274,816 restricted shares to certain employees, consultants and directors of our company, our affiliates and certain other companies, such as Alipay, under our 2011 Equity Incentive Plan and 2014 Post-IPO Equity Incentive Plan. We granted an aggregate of 1,240,412 ordinary shares subject to RSUs and 11,151,559 restricted shares in connection with certain investments and acquisitions made by us. We also granted 100,000 ordinary shares issuable upon the exercise of outstanding options, 5,630,369 ordinary shares subject to RSUs and 5,824,000 restricted shares to employee shareholders of certain entities we acquired for entering into non-compete covenants with us. We issued 18,000,000 ordinary shares to special purpose vehicles in July 2013 under the Partner Capital Investment Plan.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8.8 FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See "Item 18. Financial Statements."
Legal and Administrative Proceedings
We are involved from time to time, and may in the future be involved in, litigation, claims or other disputes in the ordinary course of business regarding, among other things, contract disputes with our customers, copyright, trademark and other intellectual property infringement claims, consumer protection claims, employment related cases and other matters in the ordinary course of our and disputes between our sellersmerchants and buyers.consumers.
We establish balance sheet provisions relating to potential losses from litigation based on estimates of such losses. For this purpose, we classify potential losses as remote, reasonably possible or probable. We analyze
potential outcomes from current and potential litigation and proceedings as loss contingencies in accordance with U.S. GAAP. Our management believes that the risk of loss in connection with the proceedings discussed below is currently remote and that these proceedings will not have a material adverse effect on our financial condition, either individually or in the aggregate. However, in light of the inherent uncertainties involved in these matters, some of which are beyond our control, the risk of loss may become more likely and an adverse outcome of one or more of these matters could be material to our results of operations or cash flows for any particular reporting period. See note 2(ad) to our audited consolidated financial statements included elsewhere in this annual report for more information on our provisioning policy with regard to legal and administrative proceedings.
Class Action Lawsuits
Federal Consolidated Exchange Act Actions
OnIn January 30, 2015, we were named as a defendant in the first of seven putative shareholder class action lawsuits filed in the United States District Courts for the Southern District of New York, Central District of California and Northern District of California, captioned:
California. The actions wereoperative complaint is brought on behalf of a putative class of shareholders who acquired our American Depositary Shares from October 21, 2014 through January 28,29, 2015, inclusive. The complaints assert claims under the United States Securities Exchange Act of 1934.
The Southern District of New York has appointed a Lead Plaintiff and Lead Counsel on behalf of the putative class pursuant to the Private Securities Litigation Reform Act.
On In June 9, 2015, the U.S. Judicial Panel on Multidistrict Litigation ordered transfer of the actions in the Central District of California to the Southern District of New York for coordinated or consolidated pretrial proceedings with the four actions before that court. OnIn June 18, 2015, the Panel ordered transfer of the action pending in the Northern District of California to the Southern District of New York. All of the actions are now pending in the Southern District of New York under the master caption,Christine Asia Co., Ltd. et al. v. Alibaba Group Holding Limited et al., No. 1:15-md-02631-CM (S.D.N.Y.) and related cases.
The complaintsSouthern District of New York has appointed a Lead Plaintiff and Lead Counsel on behalf of the putative class pursuant to the Private Securities Litigation Reform Act.
In June 2015, the Lead Plaintiff filed a consolidated amended complaint, which generally allegealleges that the registration statement and prospectus filed in connection with our initial public offering and various other public statements contained misrepresentations regarding our business operations and financial prospects, and failed to disclose, among other things, regulatory scrutiny by the SAIC prior to our initial public offering. Specifically, plaintiffs allege that we should have disclosed a 2014 SAIC anti-counterfeiting initiative in the e-commerce market, a July 16, 2014 administrative guidance meeting we had with the SAIC that was later the subject of a self-described "white paper" issued and then withdrawn by the SAIC.SAIC, and the alleged impact of the sale of counterfeit goods on our financial results. Plaintiffs assert claims against our company and Executive Chairman Jack Yun Ma, Executive Vice Chairman Joseph C. Tsai, then Chief Executive Officer Jonathan Zhaoxi Lu and Chief Financial Officer Maggie Wei Wu for violation of sections 10(b) and 20(a) of the United States Exchange Act and Rule 10b-5. Plaintiffs seek unspecified damages, attorney'sattorneys' fees and costs.
In July 2015, the Defendants filed motions to dismiss the complaint for failure to state a claim. Briefing on the motion was complete on September 2015. The New York court has required thatparties are awaiting the court's decision.
California State Consolidated Securities Act Actions
In October 2015, we were named as a defendant in the first of three securities class action lawsuits filed in the Superior Court of the State of California, San Mateo County. The three actions were consolidated in October 2015, and plaintiffs filed a consolidated amended complaint on March 25, 2016. The consolidated action is captionedGary Buelow, et al. v. Alibaba Group Holding Limited, et al., No. CIV-535692 (San Mateo Sup. Ct.). The consolidated action is brought on behalf of a putative class of investors who purchased Alibaba American Depositary Shares pursuant or traceable to the IPO. The complaint alleges violations of Sections 11, 12(a)(2) and 15 of the United States Securities Act of 1933.
The consolidated complaint names our company, Executive Chairman Jack Yun Ma, Executive Vice Chairman Joseph C. Tsai, then Chief Executive Officer Jonathan Zhaoxi Lu, Chief Financial Officer Maggie Wei Wu,
Director Masayoshi Son, General Counsel and Secretary Timothy A. Steinert, and 34 separate underwriters of our initial public offering. It alleges that our company, our senior officers who signed the registration statement, and the underwriters made material misrepresentations in our initial offering materials similar to those alleged in the above federal consolidated complaint.
We filed a demurrer for failure to state a claim and lack of subject matter jurisdiction in response to the consolidated complaint on May 6, 2016. Briefing on the demurrer is expected to be filed on or before June 30, 2015.
complete in July 2016. Regulatory Inquiry
Pending SEC Inquiry
Earlier this year, the SEC informed us that it was initiating an investigation into whether there have been any violations of the federal securities laws. The SEC has requested that we voluntarily provide it with documents and information relating to, among other things: our consolidation policies and practices (including our accounting for Cainiao Network as an equity method investee), our policies and practices applicable to related party transactions in general, and our reporting of operating data from Singles Day. We are voluntarily disclosing this SEC request for information and cooperating with the SEC and, through our legal counsel, have been providing the SEC with requested documents and information. The SEC advised us that the initiation of a request for information should not be construed as an indication by the SEC or its staff that any violation of the federal securities laws has occurred.
Concluded SEC Inquiry
On January 30, 2015, following the release of the so-called SAIC "white paper," the SEC initiated a non-public inquiry into whether any violations of the federal securities laws had occurred. The SEC advised us that
the existence of the inquiry should not be construed as an indication by the SEC or its Staff that we or any of our officers or directors had violated any of the federal securities laws. As part of its inquiry, the SEC requested that we voluntarily provide certain information. We agreed to voluntarily cooperate with the SEC and have been cooperating. The SEC's initial information request coverscovered background facts and other information related to our interaction with the SAIC, and related matters. In September 2015, the SEC notified us that it had concluded its inquiry and, based on the information it had received, it did not intend to recommend an enforcement action against us.
Kering Lawsuit
On In May 15, 2015, we were named as a defendant in a lawsuit filed in the Southern District of New York by Gucci America Inc., Balenciaga S.A., Balenciaga America, Inc., Bottega Veneta S.A., Bottega Veneta Inc., Yves Saint Laurent America, Inc., Luxury Goods International (L.G.I.) S.A. and Kering S.A. The case is captionedGucci America, Inc. et al. v. Alibaba Group Holding Ltd. et al., No. 15-cv-03784-PKC (S.D.N.Y.). A second amended complaint was filed in September 2015. The complaint generally alleges that sellersmerchants on our marketplaces sold allegedly counterfeit or otherwise trademark infringing merchandise, purportedly with our actual or constructive knowledge, and that we purportedly supported such sellersmerchants and merchandise. In their original complaint, the plaintiffs assert multiple claims against our company and seek unspecified damages. We filed a motion to dismiss Plaintiffs' Racketeer Influenced and Corrupt Organizations Act, or RICO, claims in October 2015 and this motion is pending before the Court. Discovery on other claims is proceeding.
Dividend Policy
Since our inception, we have not declared or paid any dividends on our ordinary shares. We have no present plan to pay any dividends on our ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Any future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors, including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, the depositary will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we rely on dividends distributed by our PRC subsidiaries. Dividend distributions from our PRC subsidiaries to us are subject to PRC taxes, such as withholding tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiaries in China and on remittances, including loans, from the variable interest entities in China to fund offshore cash and financing requirements."
B. Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
ITEM 9.9 THE OFFER AND LISTING
A. Offer and Listing Details.
Our ADSs, each representing one of our ordinary shares, have been listed on the New York Stock Exchange since September 19, 2014 under the symbol "BABA." The table below shows, for the periods indicated, the high and low market prices, based on the highest and lowest intraday sales prices, on the New York Stock Exchange for our ADSs through June 22, 2015.May 20, 2016.
| Market Price(1) (US$) | ||||||
---|---|---|---|---|---|---|---|
| High | Low | |||||
Annual highs and lows | |||||||
Fiscal year 2015 (from September 19, 2014) | 120.00 | 80.03 | |||||
Fiscal year 2016 | 95.06 | 57.20 | |||||
Quarterly highs and lows | |||||||
Third calendar quarter 2015 | 85.38 | 57.20 | |||||
Fourth calendar quarter 2015 | 86.42 | 58.20 | |||||
First calendar quarter 2016 | 79.84 | 59.25 | |||||
Second calendar quarter 2016 (through May 20, 2016) | 85.89 | 75.01 | |||||
Monthly highs and lows | |||||||
December 2015 | 85.82 | 78.99 | |||||
January 2016 | 78.68 | 65.34 | |||||
February 2016 | 70.58 | 59.25 | |||||
March 2016 | 79.84 | 69.86 | |||||
April 2016 | 85.89 | 75.66 | |||||
May 2016 (through May 20, 2016) | 80.49 | 75.01 |
| Sale Price (US$) | ||||||
---|---|---|---|---|---|---|---|
| High | Low | |||||
Annual highs and lows | |||||||
Fiscal year 2014 (from September 19, 2014) | 119.15 | 81.58 | |||||
Quarterly highs and lows | |||||||
Third quarter 2014 (from September 19, 2014) | 93.89 | 87.17 | |||||
Fourth quarter 2014 | 119.15 | 84.95 | |||||
First quarter 2015 | 105.03 | 81.58 | |||||
Second quarter 2015 (through June 22, 2015) | 93.88 | 79.54 | |||||
Monthly highs and lows | |||||||
January 2015 | 105.03 | 89.08 | |||||
February 2015 | 90.61 | 84.69 | |||||
March 2015 | 86.10 | 81.58 | |||||
April 2015 | 86.14 | 81.29 | |||||
May 2015 | 93.88 | 79.54 | |||||
June 2015 (through June 22, 2015) | 90.79 | 85.68 |
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing one of our ordinary shares, have been listed on the New York Stock Exchange since September 19, 2014 under the symbol "BABA."
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10.10 ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association contained in our F-1 registration statement (File No. 333-195736), as amended, initially filed with the SEC on May 6, 2014. Our shareholders adopted our amended and restated memorandum and articles of association by a special resolution on September 2, 2014, and effective upon completion of our initial public offering of ordinary shares represented by our ADSs.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in "Item 4. Information on the Company"Company," "Item 5. Operating and Financial Review and Prospects" or elsewhere in this annual report.
D. Exchange Controls
See "Item 4. Information on the Company — B. Business Overview — Regulation — RegulationsRegulation of Foreign Exchange.Exchange and Dividend Distribution — Foreign Exchange Regulation."
E. Taxation
The following is a general summary of certain Cayman Islands, PRC and United States federal income tax consequences relevant to an investment in our ADSs and ordinary shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address U.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, the People's Republic of China and the United States. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ADSs and ordinary shares. To the extent that this discussion relates to matters of Cayman
Islands tax law, it is the opinion of Maples and Calder, our special Cayman Islands counsel. To the extent that the discussion states definitive legal conclusions under PRC tax laws and regulations, it is the opinion of Fangda Partners, our special PRC counsel.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and ordinary shares. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within, the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on the issue of shares by, or any transfers of shares of, Cayman Islands companies (except those which hold interests in land in the Cayman Islands). The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of our ADSs and ordinary shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our ADSs or ordinary shares, as the case may be, nor will gains derived from the disposal of our ADSs or ordinary shares be subject to Cayman Islands income or corporation tax.
People's Republic of China Taxation
We are a holding company incorporated in the Cayman Islands and we gain substantial income by way of dividends from our PRC subsidiaries. The EIT Law and its implementation rules, both of which became effective on January 1, 2008, provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC
subsidiary to its equity holders that are non-resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for a differentlower withholding tax rate.rate for which the foreign investor is eligible.
Under the EIT Law, an enterprise established outside of China with a "de facto management body" within China is considered a "resident enterprise," which means that it is treated in the same manner as a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define "de facto management body" as a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although Alibaba Group Holding Limited does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in Circular 82 to evaluate the tax residence status of Alibaba Group Holding Limited and its subsidiaries organized outside the PRC.
According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a "de facto management body" in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
We do not believe that we meet any of the conditions outlined in the immediately preceding paragraph. Alibaba Group Holding Limited and its offshore subsidiaries are incorporated outside the PRC. As a holding company, our key assets and records, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed a PRC "resident enterprise" by the PRC tax authorities. Accordingly, we believe that Alibaba Group Holding Limited and its offshore subsidiaries should not be treated as a "resident enterprise" for PRC tax purposes if the criteria for "de facto management body" as set forth in Circular 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body" as applicable to our offshore entities, we will continue to monitor our tax status.
The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It is not clear how "domicile" may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders or ADS holders which are non-resident enterprises as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of 10%, unless any such non-resident enterprise's jurisdiction has a tax treaty with China that provides for a preferential treatment.
Furthermore, if we are considered a PRC resident enterprise and the competent PRC tax authorities consider dividends we pay with respect to our shares or ADSs and the gains realized from the transfer of our shares or ADSs to be income derived from sources within the PRC, such dividends and gains we pay to our overseas shareholders or ADS holders who are non-resident individuals may be subject to PRC individual income tax at a rate of 20%, unless any such non-resident individuals' jurisdiction has a tax treaty with China that provides for a preferential tax rate or a tax exemption. It is also unclear whether, if we are considered a PRC resident enterprise, holders of our shares or ADSs would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas.
See "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income." and "Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in the People's Republic of China — Dividends payable to our foreign investors and gains on the sale of our ADSs or ordinary shares by our foreign investors may become subject to PRC tax law.taxation."
Material United States Federal Income Tax Considerations
The following summary describes the material United States federal income tax consequences of the ownership of our ordinary shares and ADSs as of the date of this annual report. The discussion set forth below is applicable only to United States Holders. Except where noted, this summary deals only with ordinary shares and ADSs held as capital assets. As used herein, the term "United States Holder" means a beneficial owner of an ordinary share or ADS that is for United States federal income tax purposes:
This summary does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, and regulations, rulings and judicial decisions thereunder as of the date of this annual report, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
If a partnership holds our ordinary shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ordinary shares or ADSs, you should consult your tax advisors.
This summary does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income, or the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition of our ordinary shares or ADSs, you should consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.
Taxation of Dividends
Subject to the discussion under "— Passive Foreign Investment Company" below, the gross amount of distributions on the ADSs or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income (including withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of the ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. The following discussion assumes that all dividends will be paid in U.S. dollars.
With respect to non-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on ordinary shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that our ADSs (which are listed on the New York Stock Exchange) are readily tradable on an established securities market in the United States. Thus, we believe that dividends we pay on our ordinary shares that are represented by ADSs will meet the conditions required for the reduced tax rate. Since we do not expect that our ordinary shares will be listed on an established securities market, we do not believe that dividends that we pay on our ordinary shares that are not represented by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in subsequent years. A qualified foreign corporation also includes a foreign corporation that is eligible for the benefits of certain income tax treaties with the United States. In the event that we were deemed to be a PRC resident enterprise under the EIT Law, although no assurance can be given, we might be eligible for the benefits of the income tax treaty between the United States and the PRC, which is
hereinafter referred to as the Treaty, and if we were eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by ADSs, would be eligible for the reduced rates of taxation. See "— People's Republic of China Taxation." Non-corporate United States Holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as "investment income" pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules given your particular circumstances.
Non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company, or PFIC, in the taxable year in which such dividends are paid or in the preceding taxable year. See "— Passive Foreign Investment Company" below.
In the event that we were deemed to be a PRC resident enterprise under the EIT Law, you might be subject to PRC withholding taxes on dividends paid to you with respect to the ADSs or ordinary shares. See "— People's Republic of China Taxation." In that case, subject to certain conditions and limitations, PRC withholding taxes on dividends would be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as foreign-source income and will generally constitute passive category income. However, in certain circumstances, if you have held the ADSs or ordinary shares for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for any PRC withholding taxes imposed on dividends paid on the ADSs or ordinary shares. If you are eligible for Treaty benefits, any PRC taxes on dividends will not be creditable against your United States federal income tax liability to the extent withheld at a rate exceeding the applicable Treaty rate. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.
To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs or ordinary shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the ADSs or ordinary shares), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange, as described below under "— Taxation of Capital Gains." Consequently, such distributions in excess of our current and accumulated earnings and profits would generally not give rise to foreign source income and you would generally not be able to use the foreign tax credit arising from any PRC withholding tax imposed on such distributions unless such credit can be applied (subject to applicable limitations) against United States federal income tax due on other foreign source income in the appropriate category for foreign tax credit purposes. However, we do not expect to keep earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).
Distributions of ADSs, ordinary shares or rights to subscribe for ordinary shares that are received as part of a pro rata distribution to all of our shareholders generally will not be subject to United States federal income tax. Consequently, such distributions generally will not give rise to foreign source income and you generally will not be able to use the foreign tax credit arising from any PRC withholding tax imposed on such distributions unless such credit can be applied (subject to applicable limitations) against United States federal income tax due on other foreign source income in the appropriate category for foreign tax credit purposes.
Passive Foreign Investment Company
Based on the projected composition of our income and valuation of our assets, including goodwill, we do not expect to be a PFIC for our current taxable year, and we do not expect to become one in the future, although there can be no assurance in this regard.
In general, we will be a PFIC for any taxable year in which:
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation's assets and receiving our proportionate share of the other corporation's income. Although we do not expect to be a PFIC, it is not entirely clear how the contractual arrangements between us and our variable interest entities will be treated for purposes of the PFIC rules. If it were determined that we do not own the stock of our variable interest entities for United States federal income tax purposes (for instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC.
The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have valued our goodwill based on the projected market value of our equity, a decrease in the price of our ADSs may also result in our becoming a PFIC. If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules discussed below.
If we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules with respect to any "excess distribution" received and any gain realized from a sale or other disposition, including a pledge, of ADSs or ordinary shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable
years or your holding period for the ADSs or ordinary shares will be treated as excess distributions. Under these special tax rules:
In addition, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. You will generally be required to file Internal Revenue Service Form 8621 if you hold our ADSs or ordinary shares in any year in which we are classified as a PFIC.
If we were a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-United States subsidiaries was also a PFIC, a United States Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
In certain circumstances, in lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election may be available to United States Holders of ADSs if the ADSs are listed on the New York Stock Exchange, which constitutes a qualified exchange, and are "regularly traded" for purposes of the mark-to-market election (for which no assurance can be given). It should also be noted that it is intended that only the ADSs and not the ordinary shares will be listed on the New York Stock Exchange. Consequently, if you are a United States Holder of ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election if we are or were to become a PFIC.
If you make an effective mark-to-market election, you will include in each year that we are a PFIC as ordinary income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, in each year that we are a PFIC any gain you recognize upon the sale or other disposition of your ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.
Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.
Alternatively, you can sometimes avoid the rules described above by electing to treat a PFIC as a "qualified electing fund" under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.
You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or ordinary shares if we are considered a PFIC in any taxable year.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of ADSs or ordinary shares in an amount equal to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. Subject to the discussion under "— Passive Foreign Investment Company" above, such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss. However, if we were treated as a PRC resident enterprise for EIT Law purposes and PRC tax were imposed on any gain, and if you are eligible for the benefits of the Treaty, you may elect to treat such gain as PRC source gain under the Treaty. If you are not eligible for the benefits of the Treaty or you fail to make the election to treat any gain as PRC source, then you may not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income derived from foreign sources. You will be eligible for the benefits of the Treaty if, for purposes of the Treaty, you are a resident of the United States, and you meet other requirements specified in the Treaty. Because the determination of whether you qualify for the benefits of the Treaty is fact-intensive and depends upon your particular circumstances, you are specifically urged to consult your tax advisors regarding your eligibility for the benefits of the Treaty. You are also urged to consult your tax advisor regarding the tax consequences in case any PRC tax is imposed on gain
on a disposition of our ADSs or ordinary shares, including the availability of the foreign tax credit and the election to treat any gain as PRC source, under your particular circumstances.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of our ADSs or ordinary shares and the proceeds from the sale, exchange or redemption of our ADSs or ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or, in the case of dividend payments, if you fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is furnished to the Internal Revenue Service in a timely manner.
Under the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating to ADSs or ordinary shares, subject to certain exceptions (including an exception for ADSs or ordinary shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold ADSs or ordinary shares. You are urged to consult your own tax advisors regarding information reporting requirements relating to your ownership of the ADSs or ordinary shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed with the SEC our registration statement on Form F-1 (File No. 333-195736), as amended.amended, with respect to our ordinary shares and ADSs. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we previously filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.
You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SEC's regional offices in New York, New York and Chicago, Illinois. You can also request copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing information on the operation of the SEC's Public Reference Room.
The SEC also maintains a website atwww.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may be accessed through this website.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
In accordance with NYSE Rule 203.01, we will post this annual report on our websitewww.alibabagroup.com. In addition, we will provide hardcopies of our annual report to shareholders, including ADS holders, free of charge upon request.
I. Subsidiary Information
Not applicable.
ITEM 11.11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks
Interest Rate Risk
Our main interest rate exposure relates to bank borrowings. In addition, one tranche of our unsecured senior notes bear interest at three-month LIBOR plus 0.520% per annum. We also have interest-bearing assets, including cash and cash equivalents, short-term investments and restricted cash and loan receivables.cash. We manage our interest rate exposure with a focus on reducing our overall cost of debt and exposure to changes in interest rates. From time to time, we use derivatives, such as interest rate swaps, to manage our interest rate exposure. Approximately 90%92% of the aggregate principal amount of our bank borrowings and other debtunsecured senior notes was at fixed rates, and the remaining 10%8% was at floating rates as of March 31, 2015.2016.
As of March 31, 2015 and March 31, 2014,2016, if interest rates increased/decreased by 1%, with all other variables having remained constant, and assuming the amount outstanding at March 31, 2015 and 2016 under our bank borrowings and the tranche of our unsecured senior notes that bear floating interest was outstanding for the entire respective fiscal year 2015 and the amount of bank borrowings outstanding at March 31, 2014 was outstanding for the entire fiscal year 2014,years, profit attributable to equity owners of our company would have been RMB1,202 million (US$194 million) and RMB365RMB1,089 million (US$169 million) higher/lower, respectively, mainly as a result of higher/lower interest income from our cash and cash equivalents and loan receivables.short-term investments.
Foreign Exchange Risk
Foreign currency risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Although we operate businesses in different countries, substantially all of our revenue-generating transactions, and a majority of our expense-related transactions, are denominated in Renminbi,
which is the functional currency of our major operating subsidiaries and the reporting currency of our financial statements. We do not hedge against currencyFrom time to time, we enter into hedging activities with regard to exchange rate risk.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. SinceIn June 2010, the PRC government has allowedPeople's Bank of China increased the flexibility of the exchange rate and between June 30, 2010 and December 31, 2013, the value of the Renminbi to appreciate slowlyappreciated approximately 12.0% against the U.S. dollar, again,although the value of the Renminbi depreciated approximately 2.5% against the U.S. dollar in 2014. In August 2015, the People's Bank of China changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous day's closing spot rate, foreign-exchange demand and it has appreciated more than 10% since June 2010. In April 2012,supply as well as changes in major currency rates. As a result, in 2015, the PRC government announced that it would allow greatervalue of the Renminbi exchange rate fluctuation. However, it remains unclear how this announcement might be implemented.depreciated approximately 5.8% against the U.S. dollar, and from December 31, 2015 through May 20, 2016, the value of the Renminbi further depreciated approximately 1.1% against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuations of the Renminbi against the U.S. dollar. Accordingly, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMBRenminbi and the U.S. dollar in the future.
To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to convert RMBRenminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, servicing our outstanding debts, or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the U.S. dollar amounts available to us. As of March 31, 2015, we had U.S. dollar-denominated unsecured senior notes outstanding of US$8.0 billion. If the U.S. dollar had appreciated/depreciated by 10% against the Renminbi, our interest payments as to these debt would have increased/decreased by RMB246 million (US$40 million) in fiscal year 2015.
As of March 31, 2015, we had Renminbi-denominated cash and cash equivalents and short term investments of RMB107,089 million and U.S. dollar-denominated cash and cash equivalents of US$2,461 million. Assuming we had converted RMB107,089 million into U.S. dollars at the exchange rate of RMB6.199 for US$1.00 as of March 31, 2015, our total U.S. dollar cash balance would have been US$19,736 million. If the Renminbi had depreciated by 10% against the U.S. dollar, our U.S. dollar cash balance would have been US$18,166 million.
As of March 31, 2014,2016, we had Renminbi-denominated cash and cash equivalents and short term investments of RMB43,024RMB82,302 million and U.S. dollar-denominated cash and cash equivalents of US$894,359 million. Assuming we had converted RMB43,024RMB82,302 million into U.S. dollars at the exchange rate of RMB6.2164RMB6.448 for US$1.00 as of March 31, 2014,2016, our total U.S. dollar cash balance would have been US$7,01017,123 million. If the Renminbi had depreciated by 10% against the U.S. dollar, our U.S. dollar cash balance would have been US$6,38115,963 million.
Market Price Risk
We are exposed to market price risk primarily with respect to investment securities, to a lesser extent interest rate swaps and forward exchange contracts, held by us which are reported at fair value. A substantial portion of our investment in equity investees are all held for long-term appreciation or for strategic purposes. All of these are accounted for under cost or equity method and not subject to market price risk. We are not exposed to commodity price risk.
The sensitivity analysis is determined based on the exposure of financial assets at fair value to market price risks related to equity and debt securities at the end of each reporting period. The securities we hold are accounted for as convertible bonds, trading securities or available-for-sale based on our investment intent.securities. Their changes in fair values are recorded as income for convertible bonds and trading securities or through equity for available-for-sale securities, respectively. If market prices of the respective instruments held by us had been 1% higher/lower as of March 31, 2015 and March 31, 2014,2016, our investment securities would have been approximately RMB132RMB169 million
and RMB228 million (US$2135 million) and RMB22 million higher/lower, respectively, of which the majority of such amountsRMB50 million and RMB56 million (US$8 million) relating to trading securities willwould be recognized as income or loss during the respective period.
ITEM 12.12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees Paid by Our ADS Holders
As an ADS holder, you will be required to pay the following service fees to the depositary, CitiBank,Citibank, N.A.:
Persons depositing or withdrawing shares or ADS holders must pay: | For: | |
---|---|---|
Up to | • Issuance of ADSs upon deposit of Shares (excluding issuances as a result of distributions of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs. | |
•
Delivery of ordinary shares against surrender of ADSs. | ||
•
Distribution of cash dividends or other cash distributions. | ||
•
Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs. | ||
•
Distribution of securities other than ADSs or rights to purchase additional | ||
Up to US$5.00 per 100 ADS per calendar year | • ADS services |
As an ADS holder you will also be responsible to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:
Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.
The Depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients' ADSs in DTC accounts in turn charge their clients' accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice of such changes.
Fees and Payments from the Depositary to Us
Our depositary has agreed to reimburse us for certain expenses we incur that are related to the administration and maintenance of the ADS program. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects from investors. The depositary has reimbursed us for any expenses related to the administration and maintenance of the facility in an amount of US$2513.7 million, after deduction of applicable U.S. taxes, for the year ended March 31, 2015.2016.
ITEM 13.13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See "Item 10. Additional Information" for a description of the rights of securities holders, which remain unchanged.
ITEM 15.15 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act, at March 31, 2015.2016. Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed in this annual reportthe reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, to them for assessment, and required disclosure is made within the time periodperiods specified in the SEC's rules and forms, ofand that information required to be disclosed in the Commission.reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control over Financial Reporting
This annual report does not include a report of management's assessment regardingOur management is responsible for establishing and maintaining adequate internal control over financial reporting or an attestation reportas defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. As required by Rule 13a-15(c) of the Exchange Act, our management conducted an evaluation of our company's internal control over financial reporting as of March 31, 2016 based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2016.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our independent registered public accounting firm, due to a transition period established by rulesPricewaterhouseCoopers, has audited the effectiveness of the Securities and Exchange Commission for newly public companies.our internal control over financial reporting as of March 31, 2016, as stated in its report, which appears on page F-2 of this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Walter Kwauk, an independent director within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual and a member of our audit committee, qualifies as "audit committee financial expert" as defined in Item 16A of Form 20-F.
Our board of directors has adopted a code of ethics that applies to all of our directors, executive officers and employees. We have filed our code of ethics as an exhibit to our registration statement on Form F-1 (File Number 333-195736), as amended, initially filed with the Commission on May 6, 2014. The code is also available on our official website under the investor relations section atwww.alibabagroup.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by PricewaterhouseCoopers, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below.
| Year Ended March 31, | Year ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2015 | 2016 | ||||||||||
| (in thousands of RMB) | (in thousands of RMB) | ||||||||||||
Audit Fees(1) | 14,381 | 66,956 | 66,956 | * | 38,000 | |||||||||
Audit-related Fees(2) | 1,587 | 5,422 | 5,422 | 5,958 | ||||||||||
Tax Fees(3) | 583 | 5,060 | 5,060 | 480 | ||||||||||
All Other Fees(4) | — | 111 | 111 | 967 | ||||||||||
| | | | | | | | | | | | | ||
Total | 16,551 | 77,549 | 77,549 | 45,405 | ||||||||||
| | | | | | | | | | | | | | |
| | | | | | | |
The policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers, including audit services, audit-related services, tax services and other services as described above, other than those for de minimus services which are approved by the audit committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
We are relying on the exemption under Rule 10A-3(b)(1)(iv)(A)(2) of the Exchange Act, which provides that a minority of the members of the listed issuer's audit committee may be exempt from the independence requirements of paragraph (b)(1)(ii) of Rule 10A-3 for one year from the date of effectiveness of the registration statement covering an initial public offering of securities listed by the issuer. Our audit committee currently comprises four directors of whom three are independent directors.
We do not believe that our reliance on the temporary exemption permitted by Rule 10A-3(b)(1)(iv)(A)(2) materially adversely affects the ability of our audit committee to act independently or to satisfy the requirements of Rule 10A-3 under the Exchange Act. Our audit committee will consist solely of independent directors within one year of our initial public offering.Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
OurOn August 12, 2015, we announced the implementation of a share repurchase program in an aggregate amount of up to US$4 billion over a period of two years. We have repurchased ADSs representing our ordinary shares on the open market under purchase plans adopted to implement the Share Repurchase Program. In
addition, Jack Ma, our executive chairman, and Joe Tsai, our executive vice chairman, have jointly entered into our plans as affiliated purchasers.
In addition, our equity incentive award agreements generally provide that, in the event of a grantee's termination for cause or violation of a non-competition undertaking, we will have the right to repurchase the shares acquired by such grantee, generally at par or the exercise price paid for such shares. See "Item 6. Directors, Senior Management and Employees — B. Compensation — Equity Incentive Plans." In addition, when an employee leaves
our company, we repurchase any shares acquired by such employee pursuant to early-exercised but unvested options.
The table below summarizes the repurchases we made in the periods indicated.
Month | Total Number of Ordinary Shares Purchased(1) | Total Price Paid(1) (US$) | Average Price Paid Per Ordinary Share(2) (US$) | Total Number of Ordinary Shares Purchased as Part of Share Repurchase Program(3) | Approximate Dollar Value of Ordinary Shares that May Yet Be Purchased Under Share Repurchase Program(4) (US$, in millions) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
April, 2015 | 29,018 | 531,875 | 18.33 | — | — | |||||||||||
May 2015 | — | — | — | — | — | |||||||||||
June 2015 | 70,833 | 1,310,411 | 18.50 | — | — | |||||||||||
July 2015 | — | — | — | — | — | |||||||||||
August 2015 | 20,523,626 | 1,440,310,625 | 70.18 | 18,653,009 | 2,690 | |||||||||||
September 2015 | 23,301,329 | 1,499,765,925 | 64.36 | 22,126,613 | 1,265 | |||||||||||
October 2015 | 906 | — | Par value | — | 1,265 | |||||||||||
November 2015 | 14,324 | — | Par value | — | 1,265 | |||||||||||
December 2015 | — | — | — | — | 1,265 | |||||||||||
January 2016 | 43,750 | 462,500 | 10.57 | — | 1,265 | |||||||||||
February 2016 | 7,219,297 | 455,836,405 | 63.14 | 5,775,441 | 900 | |||||||||||
March 2016 | — | — | — | — | 900 |
Month | Total Number of Ordinary Shares Purchased | Average Price Paid Per Ordinary Share (US$) | |||||
---|---|---|---|---|---|---|---|
September 2014 (September 24 to September 30) | 49,505 | 14.82 | |||||
October 2014 | 18,750 | 18.50 | |||||
November 2014 | 4,125 | 18.50 | |||||
December 2014 | 19,362 | 17.92 | |||||
January 2015 | 1,400 | Par value | |||||
February 2015 | 1,000 | Par value | |||||
March 2015 | — | — |
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE.
We are a "foreign private issuer" (as such term is defined in Rule 3b-4 under the Exchange Act), and our ADSs, each representing one ordinary share, are listed on the New York Stock Exchange. Under Section 303A of the New York Stock Exchange Listed Company Manual, New York Stock Exchange listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the New York Stock Exchange with limited exceptions. The following summarizes some significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of the New York Stock Exchange.
Under the New York Stock Exchange Listed Company Manual, or the NYSE Manual, U.S. domestic listed companies are required to have a majority independent board, which is not required under the Companies Law of the Cayman Islands, our home country. Currently, our board of directors is composed of teneleven members, five of whom are independent directors. In addition, the NYSE Manual requires U.S. domestic listed companies to have a compensation committee and a nominating/corporate governance committee, each composed entirely of independent directors, which are not required under the Companies Law of the Cayman Islands. Currently, our compensation committee is composed of three members, only two of whom are independent directors. Our nominating and corporate governance committee is composed of fourthree members, only threetwo of whom are independent directors. In addition, the NYSE Manual requires shareholder approval for certain matters, such as requiring that shareholders must be given the opportunity to vote on all equity compensation plans and material revisions to those plans, which is not required under the Cayman Islands law. We intend to comply with the requirements of Cayman Islands law only in determining whether shareholder approval is required.
ITEM 16H. MINE SAFETY DISCLOSURE.
Not applicable.
ITEM 17.17 FINANCIAL STATEMENTS.
We have elected to provideprovided financial statements pursuant to Item 18.
ITEM 18.18 FINANCIAL STATEMENTS.
The following financial statements are filed as part of this annual report, together with the report of the independent auditors:
Exhibit Number | Description of Document | ||
---|---|---|---|
1.1* | Form of Amended and Restated Memorandum and Articles of Association of the Registrant as currently in effect | ||
| |||
2.1* | Registrant's Form of Ordinary Share Certificate | ||
| |||
2.2† | Form of Deposit Agreement between the Registrant, the depositary and holders and beneficial holders of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt | ||
| |||
2.3† | Form of American depositary receipt evidencing American depositary shares (included in Exhibit 2.2) | ||
| |||
2.4* | Amended and Restated Registration Rights Agreement among the Registrant and the persons whose names are set out in Schedule I thereto, dated September 18, 2012 | ||
| |||
2.5* | Voting Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp., the Management Members as defined therein and certain other shareholders of the Registrant | ||
| |||
2.6†† | Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon as Trustee | ||
| |||
2.7†† | First Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon as Trustee | ||
| |||
2.8†† | Second Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon as Trustee | ||
| |||
2.9†† | Third Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon as Trustee | ||
| |||
2.10†† | Fourth Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon as Trustee | ||
Exhibit Number | Description of Document | ||
---|---|---|---|
| Fifth Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon as Trustee | ||
| |||
2.12†† | Sixth Supplemental Indenture, dated as of November 28, 2014 between the Registrant and Bank of New York Mellon as Trustee | ||
| |||
2.13†† | Form of Floating Rate Senior Notes Due 2017 (included in Exhibit 2.7) | ||
| |||
2.14†† | Form of 1.625% Senior Notes Due 2017 (included in Exhibit 2.8) | ||
| |||
2.15†† | Form of 2.500% Senior Notes Due 2019 (included in Exhibit 2.9) | ||
| |||
2.16†† | Form of 3.125% Senior Notes Due 2021 (included in Exhibit 2.10) | ||
| |||
2.17†† | Form of 3.600% Senior Notes Due 2024 (included in Exhibit 2.11) | ||
| |||
2.18†† | Form of 4.500% Senior Notes Due 2034 (included in Exhibit 2.12) | ||
| |||
2.19††† | Registration Rights Agreement dated as of November 28, 2014 between the Registrant and Morgan Stanley & Co. International plc, Citigroup Global Markets Inc., Deutsche Bank AG, Singapore Branch and J.P. Morgan Securities LLC | ||
4.1* | 2011 Equity Incentive Plan of the Registrant | ||
| |||
4.2* | Senior Management Equity Incentive Plan | ||
| |||
4.3* | Partner Capital Investment Plan | ||
| |||
4.4* | Form of Indemnification Agreement between the Registrant and its directors and executive officers | ||
| |||
4.5* | Form of Employment Agreement between the Registrant and its executive officers | ||
| |||
4.6* | English translation of Loan Agreements entered into by and among Jack Ma, Simon Xie and Taobao (China) Software Co., Ltd., dated January 1, 2009, as amended on October 11, 2010 and March 13, 2013 | ||
| |||
4.7* | English translation of Exclusive Call Option Agreement entered into by and among Jack Ma, Simon Xie, Taobao (China) Software Co., Ltd. and Zhejiang Taobao Network Co., Ltd., dated January 21, 2009 | ||
| |||
4.8* | English translation of Proxy Agreement entered into by and among Jack Ma, Simon Xie, Taobao (China) Software Co., Ltd. and Zhejiang Taobao Network Co., Ltd., dated January 21, 2009 | ||
| |||
4.9* | English translation of Equity Pledge Agreements entered into by and among Jack Ma, Simon Xie, Taobao (China) Software Co., Ltd. and Zhejiang Taobao Network Co., Ltd., dated January 21, 2009, as amended on March 13, 2013 | ||
| |||
4.10* | English translation of Exclusive Technical Services Agreement entered into by and between Taobao (China) Software Co., Ltd. and Zhejiang Taobao Network Co., Ltd., dated January 21, 2009 | ||
| |||
4.11* | Share Repurchase and Preference Share Sale Agreement by and between the Registrant, Yahoo! Inc. and Yahoo! Hong Kong Holdings Limited, dated May 20, 2012 | ||
| |||
4.12* | First Amendment to Share Repurchase and Preference Share Sale Agreement by and between the Registrant, Yahoo! Inc. and Yahoo! Hong Kong Holdings Limited, dated September 11, 2012 | ||
| |||
4.13* | Second Amendment to Share Repurchase and Preference Share Sale Agreement by and between the Registrant, Yahoo! Inc. and Yahoo! Hong Kong Holdings Limited, dated October 14, 2013 | ||
| |||
4.14* | Amended and Restated Technology and Intellectual Property License Agreement by and between the Registrant and Yahoo! Inc., dated September 18, 2012 | ||
|
Exhibit Number | Description of Document | ||
---|---|---|---|
4.15* | Framework Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp., Alipay.com Co., Ltd., APN Ltd., Zhejiang Alibaba E-Commerce Co., Ltd., Jack Ma and Joseph C. Tsai and the Joinder Parties, dated July 29, 2011 |
| |||
4.16* | Amendment to Framework Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp., Alipay.com Co., Ltd., APN Ltd., Zhejiang Alibaba E-Commerce Co., Ltd., Jack Ma and Joseph C. Tsai and the Joinder Parties, dated November 15, 2012 | ||
| |||
4.17* | Second Amendment to Framework Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp., Alipay.com Co., Ltd., APN Ltd., Zhejiang Alibaba E-Commerce Co., Ltd., Jack Ma and Joseph C. Tsai and the Joinder Parties, dated May 3, 2014 | ||
| |||
4.18* | Waiver and Consent Agreement by and among the Registrant, Yahoo! Inc., SoftBank Corp., Alipay.com Co., Ltd., APN Ltd., Zhejiang Alibaba E-Commerce Co., Ltd., Jack Ma and Joseph C. Tsai and the Joinder Parties, dated January 23, 2014 | ||
| |||
4.19* | Commercial Agreement by and among the Registrant, Zhejiang Alibaba E-Commerce Co., Ltd. and Alipay.com Co., Ltd., dated July 29, 2011 | ||
| |||
4.20* | Amendment to Commercial Agreement by and among the Registrant, Zhejiang Alibaba E-Commerce Co., Ltd. and Alipay.com Co., Ltd., dated December 14, 2011 | ||
| |||
4.21* | Intellectual Property License and Software Technology Services Agreement by and between the Registrant and Alipay.com Co., Ltd., dated July 29, 2011 | ||
| |||
4.22* | Share Subscription and Purchase Agreement among Ali WB Investment Holding Limited, SINA Corporation and Weibo Corporation, dated April 29, 2013 | ||
| |||
4.23* | Agreement and Plan of Merger by and among Alibaba Investment Limited, Ali ET Investment Holding Limited and AutoNavi Holdings Limited, dated April 11, 2014 | ||
| |||
4.24* | Voting Agreement by and among Alibaba Investment Limited, Ali ET Investment Holding Limited and Shareholders Listed thereto, dated April 11, 2014 | ||
| |||
4.25†† | English Translation of Loan Agreement between Simon Xie and Taobao (China) Software Co., Ltd., dated April 22, 2015 | ||
| |||
4.26* | Investment Agreement by and among Youku Tudou Inc., 1Look Holdings Ltd., Ali YK Investment Holding Limited and, solely for the purposes of Section 11.4, 11.5 and 11.16 therein, the Registrant, dated April 28, 2014 | ||
| |||
4.27* | Investor Rights Agreement by and among Youku Tudou Inc., Ali YK Investment Holding Limited and solely for the purposes of Section 7.1 and 7.2 and Article VIII therein, the Registrant and YF Venus Ltd, dated April 28, 2014 | ||
| |||
4.28* | Shareholders Agreement by and among Ali YK Investment Holding Limited and each of the persons listed on Exhibit A thereto, dated April 28, 2014 | ||
| |||
4.29* | Amended and Restated Share Purchase and Shareholders Agreement by and among Ali YK Investment Holding Limited, YF Venus Ltd and Alibaba Investment Limited, dated May 21, 2014 | ||
| |||
4.30* | Share Purchase Agreement by and among Ali UC Investment Holding Limited, the Management and the Selling Shareholders as defined therein, dated May 28, 2014 | ||
| |||
4.31* | Schedules of Material Differences of Contractual Arrangements of Material Variable Interest Entities of the Registrant | ||
| |||
4.32* | Share and Asset Purchase Agreement by and among the Registrant, Zhejiang Ant Small and Micro Financial Services Group Co., Ltd., Yahoo! Inc., SoftBank Corp. and the other Parties named therein, dated August 12, 2014 | ||
|
Exhibit Number | Description of Document | ||
---|---|---|---|
4.33* | Second Amendment to Commercial Agreement by and among the Registrant, Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. (formerly known as Zhejiang Alibaba E-Commerce Co., Ltd.) and Alipay.com Co., Ltd., dated August 12, 2014 |
| |||
4.34* | Amended and Restated Intellectual Property License and Software Technology Services Agreement by and among the Registrant, Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. and Alipay.com Co., Ltd., dated August 12, 2014 | ||
| |||
4.35* | Data Sharing Agreement by and between the Registrant and Zhejiang Ant Small and Micro Financial Services Group Co., Ltd., dated August 12, 2014 | ||
| |||
4.36* | English Translation of Software System Use and Service Agreement between Alibaba (China) Co., Ltd. and Chongqing Alibaba Small Loan Co. Ltd., dated August 12, 2014 | ||
| |||
4.37* | US$3,000,000,000 Facility Agreement between the Registrant and other parties named therein, dated August 20, 2014 | ||
| |||
4.38* | Form of 2014 Post-IPO Equity Incentive Plan | ||
| |||
4.39* | Third Amendment to Share Repurchase and Preference Share Sale Agreement by and between the Registrant, Yahoo! Inc. and Yahoo! Hong Kong Holdings Limited, dated July 14, 2014 | ||
| |||
4.40* | Form of Share Retention Agreement between the Registrant and certain members of management | ||
| |||
4.41†† | English Translation of Pledge Agreement between ICBC Credit Suisse Investment Management Co., Ltd. and Taobao (China) Software Co., Ltd., dated May 28, 2015 | ||
| |||
4.42†† | Share Purchase Agreement among Alibaba Health Information Technology Limited, Ali JK Investment Holding Limit and other parties named therein, dated April 8, 2015 | ||
| |||
4.43††† | English translation of Share Subscription Agreement between Suning Commerce Group Co., Ltd. And Taobao (China) Software Co., Ltd., dated August 9, 2015 | ||
4.44††† | Investment Agreement by and between Alibaba Group Holding Limited and Suning Commerce Group Co., Ltd., dated August 9, 2015 | ||
4.45††† | Share Subscription Agreement between Alibaba Group Holding Limited and Zhejiang Ant Small and Micro Financial Services Group Co., Ltd., dated September 7, 2015 | ||
4.46 | Agreement and Plan of Merger among Ali YK Investment Holding Limited, Ali YK Subsidiary Holding Limited, Youku Tudou Inc. and Alibaba Investment Limited, dated November 6, 2015 | ||
4.47 | US$3,000,000,000 Facility Agreement between the Registrant and other parties named therein, dated March 9, 2016 | ||
4.48 | Syndication and Amendment Agreement, dated May 3, 2016, in respect of a US$3,000,000,000 Facility Agreement dated March 9, 2016 | ||
4.49 | Amended and Restated Investment Agreement by and between Alibaba Group Holding Limited and Suning Commerce Group Co., Ltd., dated August 9, 2015 and amended and restated as of May 19, 2016 | ||
8.1 | Significant Subsidiaries and Consolidated Entities of the Registrant | ||
| |||
11.1* | Code of Ethics of the Registrant | ||
| |||
12.1 | Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| |||
12.2 | Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| |||
13.1** | Principal Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| |||
13.2** | Principal Financial Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
|
Exhibit Number | Description of Document | ||
---|---|---|---|
15.1 | Consent of PricewaterhouseCoopers — Independent Registered Public Accounting Firm | ||
| |||
15.2 | Consent of Fangda Partners | ||
| |||
15.3 | Consent of Maples and Calder | ||
|
| ||
| XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
| |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
| |||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
| |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Alibaba Group Holding Limited | ||||
By: | /s/ DANIEL YONG ZHANG Name: Daniel Yong Zhang Title: Chief Executive Officer |
Date: June 25, 2015May 24, 2016
ALIBABA GROUP HOLDING LIMITED
INDEX TO FINANCIAL STATEMENTS
| Page | |
---|---|---|
Report of Independent Registered Public Accounting Firm | F-2 | |
Consolidated Income Statements for the Years Ended March 31, | F-3 | |
Consolidated Statements of Comprehensive Income for the Years Ended March 31, | F-4 | |
Consolidated Balance Sheets as of March 31, | F-5 | |
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended March 31, | F-7 | |
Consolidated Statements of Cash Flows for the Years Ended March 31, | F-10 | |
Notes to the Consolidated Financial Statements | F-13 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Alibaba Group Holding Limited:
In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, consolidated statements of comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Alibaba Group Holding Limited and its subsidiaries (collectively, the "Company") at March 31, 20142015 and 2015,2016, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20152016 in conformity with accounting principles generally accepted in the United States of America. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company's management.effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express an opinionopinions on these financial statements and on the Company's internal control over financial reporting based on our audits.audits (which was an integrated audit in 2016). We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Hong Kong, June 25, 2015May 24, 2016
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED INCOME STATEMENTS
| | Year ended March 31, | | Year ended March 31, | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2013 | 2014 | 2015 | | 2014 | 2015 | 2016 | ||||||||||||||||||||||
| | RMB | RMB | RMB | US$ | | RMB | RMB | RMB | US$ | ||||||||||||||||||||
| | | | | (Note 2(ag)) | | | | | (Note 2(a)) | ||||||||||||||||||||
| | (in millions, except per share data) | | (in millions, except per share data) | ||||||||||||||||||||||||||
| Notes | | | | | Notes | | | | | ||||||||||||||||||||
Revenue | 5 | 34,517 | 52,504 | 76,204 | 12,293 | 5 | 52,504 | 76,204 | 101,143 | 15,686 | ||||||||||||||||||||
Cost of revenue | 22 | (9,719 | ) | (13,369 | ) | (23,834 | ) | (3,845 | ) | 23 | (13,369 | ) | (23,834 | ) | (34,355 | ) | (5,328 | ) | ||||||||||||
Product development expenses | 22 | (3,753 | ) | (5,093 | ) | (10,658 | ) | (1,720 | ) | 23 | (5,093 | ) | (10,658 | ) | (13,788 | ) | (2,138 | ) | ||||||||||||
Sales and marketing expenses | (3,613 | ) | (4,545 | ) | (8,513 | ) | (1,373 | ) | 23 | (4,545 | ) | (8,513 | ) | (11,307 | ) | (1,753 | ) | |||||||||||||
General and administrative expenses | 9, 22 | (2,889 | ) | (4,218 | ) | (7,800 | ) | (1,258 | ) | 9, 23 | (4,218 | ) | (7,800 | ) | (9,205 | ) | (1,428 | ) | ||||||||||||
Amortization of intangible assets | 16 | (130 | ) | (315 | ) | (2,089 | ) | (337 | ) | 16 | (315 | ) | (2,089 | ) | (2,931 | ) | (455 | ) | ||||||||||||
Impairment of goodwill and intangible assets | 16, 17 | (175 | ) | (44 | ) | (175 | ) | (28 | ) | |||||||||||||||||||||
Yahoo TIPLA amendment payment | 4(d), 22 | (3,487 | ) | — | — | — | ||||||||||||||||||||||||
Impairment of goodwill | 17 | (44 | ) | (175 | ) | (455 | ) | (71 | ) | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Income from operations | 10,751 | 24,920 | 23,135 | 3,732 | 24,920 | 23,135 | 29,102 | 4,513 | ||||||||||||||||||||||
Interest and investment income, net | 39 | 1,648 | 9,455 | 1,525 | 1,648 | 9,455 | 52,254 | 8,104 | ||||||||||||||||||||||
Interest expense | (1,572 | ) | (2,195 | ) | (2,750 | ) | (443 | ) | (2,195 | ) | (2,750 | ) | (1,946 | ) | (301 | ) | ||||||||||||||
Other income, net | 6, 22 | 894 | 2,429 | 2,486 | 401 | 6, 23 | 2,429 | 2,486 | 2,058 | 319 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Income before income tax and share of results of equity investees | 10,112 | 26,802 | 32,326 | 5,215 | 26,802 | 32,326 | 81,468 | 12,635 | ||||||||||||||||||||||
Income tax expenses | 7 | (1,457 | ) | (3,196 | ) | (6,416 | ) | (1,035 | ) | 7 | (3,196 | ) | (6,416 | ) | (8,449 | ) | (1,310 | ) | ||||||||||||
Share of results of equity investees | 14 | (6 | ) | (203 | ) | (1,590 | ) | (257 | ) | 14 | (203 | ) | (1,590 | ) | (1,730 | ) | (269 | ) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Net income | 8,649 | 23,403 | 24,320 | 3,923 | 23,403 | 24,320 | 71,289 | 11,056 | ||||||||||||||||||||||
Net income attributable to noncontrolling interests | (117 | ) | (88 | ) | (59 | ) | (9 | ) | ||||||||||||||||||||||
Net (income) loss attributable to noncontrolling interests | (88 | ) | (59 | ) | 171 | 27 | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Net income attributable to Alibaba Group Holding Limited | 8,532 | 23,315 | 24,261 | 3,914 | 23,315 | 24,261 | 71,460 | 11,083 | ||||||||||||||||||||||
Accretion of Convertible Preference Shares | 4(d) | (17 | ) | (31 | ) | (15 | ) | (2 | ) | 22 | (31 | ) | (15 | ) | — | — | ||||||||||||||
Dividends accrued on Convertible Preference Shares | 4(d) | (111 | ) | (208 | ) | (97 | ) | (16 | ) | 22 | (208 | ) | (97 | ) | — | — | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Net income attributable to ordinary shareholders | 8,404 | 23,076 | 24,149 | 3,896 | 23,076 | 24,149 | 71,460 | 11,083 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | | | | | | | | | | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Earnings per share/ADS attributable to ordinary shareholders | 10 | 10 | ||||||||||||||||||||||||||||
Basic | 3.66 | 10.61 | 10.33 | 1.67 | 10.61 | 10.33 | 29.07 | 4.51 | ||||||||||||||||||||||
Diluted | 3.57 | 10.00 | 9.70 | 1.56 | 10.00 | 9.70 | 27.89 | 4.33 | ||||||||||||||||||||||
Weighted average number of share/ADS used in computing earnings per share/ADS (million share) | 10 | 10 | ||||||||||||||||||||||||||||
Basic | 2,294 | 2,175 | 2,337 | 2,337 | 2,175 | 2,337 | 2,458 | |||||||||||||||||||||||
Diluted | 2,389 | 2,332 | 2,500 | 2,500 | 2,332 | 2,500 | 2,562 |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||||
| RMB | RMB | RMB | US$ | |||||||||
| | | | (Note 2(a)) | |||||||||
| (in millions) | ||||||||||||
Net income | 23,403 | 24,320 | 71,289 | 11,056 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Other comprehensive income: | |||||||||||||
- Foreign currency translation: | |||||||||||||
Change in unrealized gains | 538 | 52 | 312 | 48 | |||||||||
Less: reclassification adjustment for (gains) losses recorded in net income | (14 | ) | — | 21 | 3 | ||||||||
| | | | | | | | | | | | | |
Net change | 524 | 52 | 333 | 51 | |||||||||
| | | | | | | | | | | | | |
- Available-for-sale securities: | |||||||||||||
Change in unrealized gains | 306 | 3,102 | 2,343 | 363 | |||||||||
Less: reclassification adjustment for gains recorded in net income | (13 | ) | — | (422 | ) | (65 | ) | ||||||
Less: tax effect | — | — | (488 | ) | (76 | ) | |||||||
| | | | | | | | | | | | | |
Net change | 293 | 3,102 | 1,433 | 222 | |||||||||
| | | | | | | | | | | | | |
- Interest rate swaps under hedge accounting: | |||||||||||||
Change in unrealized gains (losses) | 36 | (36 | ) | — | — | ||||||||
| | | | | | | | | | | | | |
- Forward exchange contracts under hedge accounting: | |||||||||||||
Change in unrealized losses | — | — | (168 | ) | (26 | ) | |||||||
| | | | | | | | | | | | | |
Other comprehensive income | 853 | 3,118 | 1,598 | 247 | |||||||||
| | | | | | | | | | | | | |
Total comprehensive income | 24,256 | 27,438 | 72,887 | 11,303 | |||||||||
Less: total comprehensive (income) loss attributable to noncontrolling interests | (90 | ) | (56 | ) | 102 | 16 | |||||||
| | | | | | | | | | | | | |
Total comprehensive income attributable to Alibaba Group Holding Limited | 24,166 | 27,382 | 72,989 | 11,319 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED BALANCE SHEETS
| | As of March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2015 | 2016 | |||||||||
| | RMB | RMB | US$ | ||||||||
| | | | (Note 2(a)) | ||||||||
| | (in millions) | ||||||||||
| Notes | | | | ||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | 108,193 | 106,818 | 16,566 | |||||||||
Short-term investments | 2(q) | 14,148 | 4,700 | 729 | ||||||||
Restricted cash | 11 | 2,297 | 1,346 | 209 | ||||||||
Investment securities | 12 | 3,658 | 4,178 | 648 | ||||||||
Prepayments, receivables and other assets | 13 | 13,813 | 17,028 | 2,640 | ||||||||
| | | | | | | | | | | | |
Total current assets | 142,109 | 134,070 | 20,792 | |||||||||
Investment securities | 12 | 14,611 | 29,392 | 4,558 | ||||||||
Prepayments, receivables and other assets | 13 | 4,085 | 6,007 | 932 | ||||||||
Investment in equity investees | 14 | 33,877 | 91,461 | 14,184 | ||||||||
Property and equipment, net | 15 | 9,139 | 13,629 | 2,114 | ||||||||
Land use rights | 2(v) | 3,105 | 2,876 | 446 | ||||||||
Intangible assets | 16 | 6,575 | 5,370 | 833 | ||||||||
Goodwill | 17 | 41,933 | 81,645 | 12,662 | ||||||||
| | | | | | | | | | | | |
Total assets | 255,434 | 364,450 | 56,521 | |||||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Liabilities, Mezzanine Equity and Shareholders' Equity |
| |||||||||||
Current liabilities: | ||||||||||||
Current bank borrowings | 20 | 1,990 | 4,304 | 667 | ||||||||
Income tax payable | 2,733 | 2,790 | 433 | |||||||||
Accrued expenses, accounts payable and other liabilities | 19 | 19,834 | 27,334 | 4,240 | ||||||||
Merchant deposits | 2(ab) | 7,201 | 7,314 | 1,134 | ||||||||
Deferred revenue and customer advances | 18 | 7,914 | 10,297 | 1,597 | ||||||||
| | | | | | | | | | | | |
Total current liabilities | 39,672 | 52,039 | 8,071 | |||||||||
Deferred revenue | 18 | 445 | 418 | 65 | ||||||||
Deferred tax liabilities | 7 | 4,493 | 6,471 | 1,004 | ||||||||
Non-current bank borrowings | 20 | 1,609 | 1,871 | 290 | ||||||||
Unsecured senior notes | 21 | 48,994 | 51,596 | 8,002 | ||||||||
Other liabilities | 19 | 2,150 | 2,166 | 335 | ||||||||
| | | | | | | | | | | | |
Total liabilities | 97,363 | 114,561 | 17,767 | |||||||||
| | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||||
| RMB | RMB | RMB | US$ | |||||||||
| | | | (Note 2(ag)) | |||||||||
| (in millions) | ||||||||||||
Net income | 8,649 | 23,403 | 24,320 | 3,923 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Other comprehensive income: | |||||||||||||
- Foreign currency translation: | |||||||||||||
Change in unrealized gains | 455 | 538 | 52 | 9 | |||||||||
Less: reclassification adjustment for gains recorded in net income | — | (14 | ) | — | — | ||||||||
| | | | | | | | | | | | | |
Net change | 455 | 524 | 52 | 9 | |||||||||
| | | | | | | | | | | | | |
- Available-for-sale investment securities: | |||||||||||||
Change in unrealized (losses) gains | (9 | ) | 306 | 3,102 | 500 | ||||||||
Less: reclassification adjustment for gains recorded in net income | — | (13 | ) | — | — | ||||||||
| | | | | | | | | | | | | |
Net change | (9 | ) | 293 | 3,102 | 500 | ||||||||
| | | | | | | | | | | | | |
- Interest rate swaps under hedge accounting: | |||||||||||||
Change in unrealized gains (losses) | — | 36 | (36 | ) | (6 | ) | |||||||
| | | | | | | | | | | | | |
Other comprehensive income | 446 | 853 | 3,118 | 503 | |||||||||
| | | | | | | | | | | | | |
Total comprehensive income | 9,095 | 24,256 | 27,438 | 4,426 | |||||||||
Less: total comprehensive income attributable to noncontrolling interests | (117 | ) | (90 | ) | (56 | ) | (9 | ) | |||||
| | | | | | | | | | | | | |
Total comprehensive income attributable to Alibaba Group Holding Limited | 8,978 | 24,166 | 27,382 | 4,417 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITEDCONSOLIDATED BALANCE SHEETS
| | As of March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2014 | 2015 | |||||||||
| | RMB | RMB | US$ | ||||||||
| | | | (Note 2(ag)) | ||||||||
| | (in millions) | ||||||||||
| Notes | | | | ||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | 33,045 | 108,193 | 17,453 | |||||||||
Short-term investments | 2(q) | 10,587 | 14,148 | 2,282 | ||||||||
Restricted cash and escrow receivables | 11 | 4,921 | 2,297 | 371 | ||||||||
Loan receivables, net | 2(r) | 13,159 | 835 | 135 | ||||||||
Investment securities | 12 | 1,442 | 3,658 | 590 | ||||||||
Prepayments, receivables and other assets | 13 | 4,679 | 12,978 | 2,094 | ||||||||
| | | | | | | | | | | | |
Total current assets | 67,833 | 142,109 | 22,925 | |||||||||
Investment securities | 12 | 3,023 | 14,611 | 2,357 | ||||||||
Prepayments, receivables and other assets | 13 | 2,087 | 4,085 | 659 | ||||||||
Investment in equity investees | 14 | 17,666 | 33,877 | 5,465 | ||||||||
Property and equipment, net | 15 | 5,581 | 9,139 | 1,474 | ||||||||
Land use rights | 2(t) | 1,660 | 3,105 | 501 | ||||||||
Intangible assets | 16 | 1,906 | 6,575 | 1,061 | ||||||||
Goodwill | 17 | 11,793 | 41,933 | 6,764 | ||||||||
| | | | | | | | | | | | |
Total assets | 111,549 | 255,434 | 41,206 | |||||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Liabilities, Mezzanine Equity and Shareholders' Equity |
| |||||||||||
Current liabilities: | ||||||||||||
Current bank borrowings | 20 | 1,100 | 1,990 | 321 | ||||||||
Secured borrowings | 2(r) | 9,264 | — | — | ||||||||
Income tax payable | 1,267 | 2,733 | 441 | |||||||||
Escrow money payable | 11 | 2,659 | — | — | ||||||||
Accrued expenses, accounts payable and other liabilities | 19 | 11,887 | 19,834 | 3,199 | ||||||||
Merchant deposits | 2(aa) | 4,711 | 7,201 | 1,162 | ||||||||
Deferred revenue and customer advances | 18 | 6,496 | 7,914 | 1,277 | ||||||||
| | | | | | | | | | | | |
Total current liabilities | 37,384 | 39,672 | 6,400 | |||||||||
Deferred revenue | 18 | 428 | 445 | 72 | ||||||||
Deferred tax liabilities | 7 | 2,136 | 4,493 | 725 | ||||||||
Non-current bank borrowings | 20 | 30,711 | 1,609 | 260 | ||||||||
Unsecured senior notes | 21 | — | 48,994 | 7,903 | ||||||||
Other liabilities | 19 | 72 | 2,150 | 347 | ||||||||
| | | | | | | | | | | | |
Total liabilities | 70,731 | 97,363 | 15,707 | |||||||||
| | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
| | As of March 31, | | As of March 31, | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2014 | 2015 | | 2015 | 2016 | ||||||||||||||||||
| | RMB | RMB | US$ | | RMB | RMB | US$ | ||||||||||||||||
| | | | (Note 2(ag)) | | | | (Note 2(a)) | ||||||||||||||||
| | (in millions) | | (in millions) | ||||||||||||||||||||
| Notes | | | | Notes | | | | ||||||||||||||||
Commitments and contingencies | 24, 25 | — | — | — | 25, 26 | — | — | — | ||||||||||||||||
Mezzanine equity: |
| |||||||||||||||||||||||
Convertible Preference Shares, US$0.000025 par value; 2,600,000 shares authorized; 1,688,000 and nil shares issued and outstanding as of March 31, 2014 and 2015, respectively; liquidation value of RMB10,284 million and nil as of March 31, 2014 and 2015, respectively | 4(d) | 10,284 | — | — | ||||||||||||||||||||
Others | 117 | 658 | 106 | |||||||||||||||||||||
| | | | | | | | | ||||||||||||||||
Total mezzanine equity | 10,401 | 658 | 106 | |||||||||||||||||||||
| | | | | | | | | ||||||||||||||||
Mezzanine equity | 658 | 350 | 54 | |||||||||||||||||||||
Alibaba Group Holding Limited shareholders' equity: |
| |||||||||||||||||||||||
Ordinary shares, US$0.000025 par value; 2,797,400,000 and 4,000,000,000 shares authorized as of March 31, 2014 and 2015, respectively; 2,226,810,660 and 2,495,499,036 shares issued and outstanding as of March 31, 2014 and 2015, respectively | 1 | 1 | — | |||||||||||||||||||||
Ordinary shares, US$0.000025 par value; 4,000,000,000 shares authorized as of March 31, 2015 and 2016; 2,495,499,036 and 2,473,927,859 shares issued and outstanding as of March 31, 2015 and 2016, respectively | 1 | 1 | — | |||||||||||||||||||||
Additional paid-in capital | 27,043 | 117,142 | 18,897 | 117,142 | 132,206 | 20,504 | ||||||||||||||||||
Treasury shares at cost | 2(ad) | — | — | — | 2(ae) | — | — | — | ||||||||||||||||
Restructuring reserve | 4(b) | — | (1,152 | ) | (186 | ) | 4(b) | (1,152 | ) | (888 | ) | (138 | ) | |||||||||||
Subscription receivables | 2(ae) | (540 | ) | (411 | ) | (66 | ) | 2(af) | (411 | ) | (172 | ) | (27 | ) | ||||||||||
Statutory reserves | 2(af) | 2,474 | 2,715 | 438 | 2(ag) | 2,715 | 3,244 | 503 | ||||||||||||||||
Accumulated other comprehensive income | ||||||||||||||||||||||||
Cumulative translation adjustments | (1,144 | ) | (1,095 | ) | (177 | ) | (1,095 | ) | (1,050 | ) | (163 | ) | ||||||||||||
Unrealized gain on available-for-sale investment securities, interest rate swaps and others | 321 | 3,397 | 549 | |||||||||||||||||||||
Unrealized gain on available-for-sale securities, interest rate swaps and others | 3,397 | 4,894 | 760 | |||||||||||||||||||||
Retained earnings | 1,183 | 24,842 | 4,007 | 24,842 | 78,752 | 12,213 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||
Total Alibaba Group Holding Limited shareholders' equity | 29,338 | 145,439 | 23,462 | 145,439 | 216,987 | 33,652 | ||||||||||||||||||
Noncontrolling interests | 1,079 | 11,974 | 1,931 | 11,974 | 32,552 | 5,048 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||
Total equity | 30,417 | 157,413 | 25,393 | 157,413 | 249,539 | 38,700 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||
Total liabilities, mezzanine equity and equity | 111,549 | 255,434 | 41,206 | 255,434 | 364,450 | 56,521 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||
| | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
| | | | | | | Accumulated other comprehensive income (loss) | | | | | | | | | | | Accumulated other comprehensive income (loss) | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | Unrealized gain (loss) on available-for- sale investment securities, interest rate swaps and others | | Total Alibaba Group Holding Limited shareholders' equity (deficits) | | | | | | | | | | Unrealized gain (loss) on available-for-sale securities, interest rate swaps and others | | Total Alibaba Group Holding Limited shareholders' equity (deficits) | | | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | | | | | | Retained earnings (Accumulated deficits) | | | Ordinary shares | | | | | | Retained earnings (Accumulated deficits) | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional paid-in capital | Treasury shares | Subscription receivables | Statutory reserves | Cumulative translation adjustments | Unrealized gain (loss) on available-for- sale investment securities, interest rate swaps and others | Total Alibaba Group Holding Limited shareholders' equity (deficits) | Additional paid-in capital | Treasury shares | Subscription receivables | Statutory reserves | Cumulative translation adjustments | Unrealized gain (loss) on available-for-sale securities, interest rate swaps and others | Total Alibaba Group Holding Limited shareholders' equity (deficits) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share | Amount | Total Alibaba Group Holding Limited shareholders' equity (deficits) | Share | Amount | Total Alibaba Group Holding Limited shareholders' equity (deficits) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except share data) | (in millions, except share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of April 1, 2012 | 2,506,952,201 | 1 | 20,778 | — | (819 | ) | 1,096 | (2,121 | ) | 1 | 12,552 | 31,488 | 2,895 | 34,383 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of April 1, 2013 | 2,175,220,739 | 1 | 21,655 | — | (852 | ) | 1,337 | (1,666 | ) | (8 | ) | (20,491 | ) | (24 | ) | 537 | 513 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 3 | — | 455 | — | — | 458 | — | 458 | — | — | — | — | 16 | — | 536 | — | — | 552 | 2 | 554 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized losses on available-for-sale investment securities | — | — | — | — | — | — | — | (9 | ) | — | (9 | ) | — | (9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gains on available-for-sale securities | — | — | — | — | — | — | — | 293 | — | 293 | — | 293 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swaps under hedge accounting | — | — | — | — | — | — | — | 36 | — | 36 | — | 36 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income for the year | — | — | — | — | — | — | — | — | 8,532 | 8,532 | 117 | 8,649 | — | — | — | — | — | — | — | — | 23,315 | 23,315 | 88 | 23,403 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Deconsolidation of a subsidiary | — | — | — | — | — | — | — | — | — | — | (60 | ) | (60 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of shares of consolidated subsidiaries | 1,446,505 | — | (13,105 | ) | — | — | — | — | — | — | (13,105 | ) | (2,768 | ) | (15,873 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals of partial interest in subsidiaries | — | — | 1 | — | — | — | — | — | — | 1 | 10 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deconsolidation of subsidiaries | — | — | — | — | — | — | (14 | ) | — | — | (14 | ) | — | (14 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of shares of a consolidated subsidiary | — | — | (7 | ) | — | — | — | — | — | — | (7 | ) | (2 | ) | (9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of subsidiaries | — | — | 39 | — | — | — | — | — | — | 39 | 294 | 333 | 828,299 | — | 276 | — | — | — | — | — | — | 276 | — | 276 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares | 167,741,936 | — | 16,434 | — | — | — | — | — | — | 16,434 | — | 16,434 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares for Partner Capital Investment Plan (Note 8(c)) | 18,000,000 | — | — | — | — | — | — | — | — | — | 442 | 442 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of share options and vesting of early exercised options and RSUs, including repayment of related employee loans | 23,582,277 | — | 469 | — | (75 | ) | — | — | — | — | 394 | — | 394 | 30,880,761 | — | 700 | — | (12 | ) | — | — | — | — | 688 | — | 688 | ||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase and retirement of ordinary shares | (524,502,180 | ) | — | (3,923 | ) | — | 39 | — | — | — | (41,334 | ) | (45,218 | ) | — | (45,218 | ) | (3,943,139 | ) | — | (32 | ) | — | 308 | — | — | — | (504 | ) | (228 | ) | — | (228 | ) | ||||||||||||||||||||||||||||||||||||||||
Amortization of compensation cost | — | — | 1,090 | — | — | — | — | — | — | 1,090 | 49 | 1,139 | — | — | 2,784 | — | — | — | — | — | — | 2,784 | 12 | 2,796 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-settled donation | — | — | 1,269 | — | — | — | — | — | — | 1,269 | — | 1,269 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares in relation to investment in equity investees and others | 5,824,000 | — | 637 | — | — | — | — | — | — | 637 | — | 637 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accretion to convertible preferred shareholders | — | — | (17 | ) | — | — | — | — | — | — | (17 | ) | — | (17 | ) | — | — | (31 | ) | — | — | — | — | — | — | (31 | ) | — | (31 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Dividend to convertible preferred shareholders | — | — | (111 | ) | — | — | — | — | — | — | (111 | ) | — | (111 | ) | — | — | (208 | ) | — | — | — | — | — | — | (208 | ) | — | (208 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Appropriation to statutory reserves | — | — | — | — | — | 241 | — | — | (241 | ) | — | — | — | — | — | — | — | — | 1,137 | — | — | (1,137 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Balance as of March 31, 2013 | 2,175,220,739 | 1 | 21,655 | — | (852 | ) | 1,337 | (1,666 | ) | (8 | ) | (20,491 | ) | (24 | ) | 537 | 513 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2014 | 2,226,810,660 | 1 | 27,043 | — | (540 | ) | 2,474 | (1,144 | ) | 321 | 1,183 | 29,338 | 1,079 | 30,417 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
| | | | | | | Accumulated other comprehensive income (loss) | | | | | | | | | | | | Accumulated other comprehensive income (loss) | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | Unrealized gain (loss) on available-for- sale investment securities, interest rate swaps and others | | Total Alibaba Group Holding Limited shareholders' equity (deficits) | | | | | | | | | | | Unrealized gain (loss) on available-for-sale securities, interest rate swaps and others | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | | | | | | Retained earnings (Accumulated deficits) | | | | | | | | | | | | Total Alibaba Group Holding Limited shareholders' equity | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional paid-in capital | Treasury shares | Subscription receivables | Statutory reserves | Cumulative translation adjustments | Unrealized gain (loss) on available-for- sale investment securities, interest rate swaps and others | Total Alibaba Group Holding Limited shareholders' equity (deficits) | Ordinary shares | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share | Amount | Total Alibaba Group Holding Limited shareholders' equity (deficits) | Additional paid-in capital | Treasury shares | Restructuring reserve (Note 4(b)) | Subscription receivables | Statutory reserves | Cumulative translation adjustments | Noncontrolling interests | Total equity | Total Alibaba Group Holding Limited shareholders' equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | Share | Amount | Total Alibaba Group Holding Limited shareholders' equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except share data) | | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of April 1, 2013 | 2,175,220,739 | 1 | 21,655 | — | (852 | ) | 1,337 | (1,666 | ) | (8 | ) | (20,491 | ) | (24 | ) | 537 | 513 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except share data) | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of April 1, 2014 | 2,226,810,660 | 1 | 27,043 | — | — | (540 | ) | 2,474 | (1,144 | ) | 321 | 1,183 | 29,338 | 1,079 | 30,417 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 16 | — | 536 | — | — | 552 | 2 | 554 | — | — | — | — | — | — | — | 49 | 10 | — | 59 | (7 | ) | 52 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gains on available-for-sale investment securities | — | — | — | — | — | — | — | 293 | — | 293 | — | 293 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gains on available-for-sale securities | — | — | — | — | — | — | — | — | 3,102 | — | 3,102 | — | 3,102 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swaps under hedge accounting | — | — | — | — | — | — | — | 36 | — | 36 | — | 36 | — | — | — | — | — | — | — | — | (36 | ) | — | (36 | ) | — | (36 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income for the year | — | — | — | — | — | — | — | — | 23,315 | 23,315 | 88 | 23,403 | — | — | — | — | — | — | — | — | — | 24,261 | 24,261 | 63 | 24,324 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Deconsolidation of subsidiaries | — | — | — | — | — | — | (14 | ) | — | — | (14 | ) | — | (14 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of shares of a consolidated subsidiary | — | — | (7 | ) | — | — | — | — | — | — | (7 | ) | (2 | ) | (9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liquidation and deconsolidation of subsidiaries | — | — | — | — | — | — | (26 | ) | — | — | 26 | — | (378 | ) | (378 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of subsidiaries | 828,299 | — | 276 | — | — | — | — | — | — | 276 | — | 276 | 8,876,755 | — | 3,782 | — | — | — | — | — | — | — | 3,782 | 10,897 | 14,679 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares for Partner Capital Investment Plan (Note 8(c)) | 18,000,000 | — | — | — | — | — | — | — | — | — | 442 | 442 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of share options and vesting of early exercised options and RSUs, including repayment of related employee loans | 30,880,761 | — | 700 | — | (12 | ) | — | — | — | — | 688 | — | 688 | 20,240,334 | — | 516 | — | — | 160 | — | — | — | — | 676 | — | 676 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase and retirement of ordinary shares | (3,943,139 | ) | — | (32 | ) | — | 308 | — | — | — | (504 | ) | (228 | ) | — | (228 | ) | (892,859 | ) | — | (13 | ) | — | — | 6 | — | — | — | (249 | ) | (256 | ) | — | (256 | ) | ||||||||||||||||||||||||||||||||||||||||||
Deemed disposals of partial interest in subsidiaries arising from exercise or vesting of share-based awards | — | — | (7 | ) | — | — | — | — | — | — | — | (7 | ) | 17 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase from, net of subscription, by noncontrolling interest for Partner Capital Investment Plan (Note 8(c)) | — | — | — | — | — | (37 | ) | — | — | — | — | (37 | ) | (86 | ) | (123 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemption of treasury shares granted for Senior Management Share Incentive Scheme | — | — | 15 | — | — | — | — | — | — | — | 15 | (15 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital injection from noncontrolling interests | — | — | — | — | — | — | — | — | — | — | — | 174 | 174 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of compensation cost | — | — | 2,784 | — | — | — | — | — | — | 2,784 | 12 | 2,796 | — | — | 12,659 | — | — | — | — | — | — | — | 12,659 | 291 | 12,950 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-settled donation | — | — | 1,269 | — | — | — | — | — | — | 1,269 | — | 1,269 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of ordinary shares in relation to investment in equity investees and others | 5,824,000 | — | 637 | — | — | — | — | — | — | 637 | — | 637 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Ordinary Shares — initial public offer | 149,220,834 | — | 61,536 | — | — | — | — | — | — | — | 61,536 | — | 61,536 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Excess value receivable arising from the restructuring of the commercial arrangements with Ant Financial Services and related amortization (Note 4(b)) | — | — | 1,318 | — | (1,152 | ) | — | — | �� | — | — | — | 166 | — | 166 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of convertible preferred shares | 91,243,312 | — | 10,293 | — | — | — | — | — | — | — | 10,293 | — | 10,293 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accretion to convertible preferred shareholders | — | — | (31 | ) | — | — | — | — | — | — | (31 | ) | — | (31 | ) | — | — | — | — | — | — | — | — | — | (15 | ) | (15 | ) | — | (15 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Dividend to convertible preferred shareholders | — | — | (208 | ) | — | — | — | — | — | — | (208 | ) | — | (208 | ) | — | — | — | — | — | — | — | — | — | (97 | ) | (97 | ) | — | (97 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Dividend declared by a consolidated subsidiary to noncontrolling interests | — | — | — | — | — | — | — | — | — | — | — | (61 | ) | (61 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Appropriation to statutory reserves | — | — | — | — | — | 1,137 | — | — | (1,137 | ) | — | — | — | — | — | — | — | — | — | 267 | — | — | (267 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Balance as of March 31, 2014 | 2,226,810,660 | 1 | 27,043 | — | (540 | ) | 2,474 | (1,144 | ) | 321 | 1,183 | 29,338 | 1,079 | 30,417 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2015 | 2,495,499,036 | 1 | 117,142 | — | (1,152 | ) | (411 | ) | 2,715 | (1,095 | ) | 3,397 | 24,842 | 145,439 | 11,974 | 157,413 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
| | | | | | | | Accumulated other comprehensive income (loss) | | | | | | | | | | | | Accumulated other comprehensive income (loss) | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | Unrealized gain (loss) on available-for- sale investment securities, interest rate swaps and others | | | | | | | | | | | | | Unrealized gain (loss) on available-for-sale securities, interest rate swaps and others | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | Total Alibaba Group Holding Limited shareholders' equity | | | | | | | | | | | | Total Alibaba Group Holding Limited shareholders' equity | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | | | | | | | | | | Ordinary shares | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional paid-in capital | Treasury shares | Restructuring reserve (Note 4(b)) | Subscription receivables | Statutory reserves | Cumulative translation adjustments | Noncontrolling interests | Total equity | Total Alibaba Group Holding Limited shareholders' equity | Additional paid-in capital | Treasury shares | Restructuring reserve (Note 4(b)) | Subscription receivables | Statutory reserves | Cumulative translation adjustments | Noncontrolling interests | Total equity | Total Alibaba Group Holding Limited shareholders' equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share | Amount | Total Alibaba Group Holding Limited shareholders' equity | Share | Amount | Total Alibaba Group Holding Limited shareholders' equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, except share data) | (in millions, except share data) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of April 1, 2014 | 2,226,810,660 | 1 | 27,043 | — | — | (540 | ) | 2,474 | (1,144 | ) | 321 | 1,183 | 29,338 | 1,079 | 30,417 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of April 1, 2015 | 2,495,499,036 | 1 | 117,142 | — | (1,152 | ) | (411 | ) | 2,715 | (1,095 | ) | 3,397 | 24,842 | 145,439 | 11,974 | 157,413 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | — | 49 | 10 | — | 59 | (7 | ) | 52 | — | — | — | — | — | (16 | ) | — | 24 | 232 | — | 240 | 56 | 296 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gains on available-for-sale investment securities | — | — | — | — | — | — | — | — | 3,102 | — | 3,102 | — | 3,102 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of interest rate swaps under hedge accounting | — | — | — | — | — | — | — | — | (36 | ) | — | (36 | ) | — | (36 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gains on available-for-sale securities | — | — | — | — | — | — | — | — | 1,433 | — | 1,433 | — | 1,433 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of forward exchange contracts under hedge accounting | — | — | — | — | — | — | — | — | (168 | ) | — | (168 | ) | — | (168 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income for the year | — | — | — | — | — | — | — | — | — | 24,261 | 24,261 | 63 | 24,324 | — | — | — | — | — | — | — | — | — | 71,460 | 71,460 | (158 | ) | 71,302 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Liquidation and deconsolidation of subsidiaries | — | — | — | — | — | — | (26 | ) | — | — | 26 | — | (378 | ) | (378 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deconsolidation of subsidiaries | — | — | — | — | — | — | — | 21 | — | — | 21 | (10,849 | ) | (10,828 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of subsidiaries | 8,876,755 | — | 3,782 | — | — | — | — | — | — | — | 3,782 | 10,897 | 14,679 | — | — | — | — | — | — | — | — | — | — | — | 31,409 | 31,409 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of share options and vesting of early exercised options and RSUs, including repayment of related employee loans | 20,240,334 | — | 516 | — | — | 160 | — | — | — | — | 676 | — | 676 | 25,016,386 | — | 519 | — | — | 255 | — | — | — | — | 774 | — | 774 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase and retirement of ordinary shares | (892,859 | ) | — | (13 | ) | — | — | 6 | — | — | — | (249 | ) | (256 | ) | — | (256 | ) | (46,587,563 | ) | — | (2,774 | ) | — | — | — | — | — | — | (17,021 | ) | (19,795 | ) | — | (19,795 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Deemed disposals of partial interest in subsidiaries arising from exercise or vesting of share-based awards | — | — | (7 | ) | — | — | — | — | — | — | — | (7 | ) | 17 | 10 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase from, net of subscription, by noncontrolling interest for Partner Capital Investment Plan (Note 8(c)) | — | — | — | — | — | (37 | ) | — | — | — | — | (37 | ) | (86 | ) | (123 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition of shares of a consolidated subsidiary | — | — | (30 | ) | — | — | — | — | — | — | — | (30 | ) | — | (30 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Redemption of treasury shares granted for Senior Management Share Incentive Scheme | — | — | 15 | — | — | — | — | — | — | — | 15 | (15 | ) | — | — | — | 13 | — | — | — | — | — | — | — | 13 | (13 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital injection from noncontrolling interests | — | — | — | — | — | — | — | — | — | — | — | 174 | 174 | — | — | — | — | — | — | — | — | — | — | — | 56 | 56 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of compensation cost | — | — | 12,659 | — | — | — | — | — | — | — | 12,659 | 291 | 12,950 | — | — | 16,434 | — | — | — | — | — | — | — | 16,434 | 80 | 16,514 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Ordinary Shares — initial public offer | 149,220,834 | — | 61,536 | — | — | — | — | — | — | — | 61,536 | — | 61,536 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Excess value receivable arising from the restructuring of the commercial arrangements with Ant Financial Services and related amortization (Note 4(b)) | — | — | 1,318 | — | (1,152 | ) | — | — | — | — | — | 166 | — | 166 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of convertible preferred shares | 91,243,312 | — | 10,293 | — | — | — | — | — | — | — | 10,293 | — | 10,293 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accretion to convertible preferred shareholders | — | — | — | — | — | — | — | — | — | (15 | ) | (15 | ) | — | (15 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend to convertible preferred shareholders | — | — | — | — | — | — | — | — | — | (97 | ) | (97 | ) | — | (97 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax benefits from share-based awards | — | — | 725 | — | — | — | — | — | — | — | 725 | — | 725 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of excess value receivable arising from the restructuring of the commercial arrangements with Ant Financial Services (Note 4(b)) and others | — | — | 177 | — | 264 | — | — | — | — | — | 441 | — | 441 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend declared by a consolidated subsidiary to noncontrolling interests | — | — | — | — | — | — | — | — | — | — | — | (61 | ) | (61 | ) | — | — | — | — | — | — | — | — | — | — | — | (3 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Appropriation to statutory reserves | — | — | — | — | — | — | 267 | — | — | (267 | ) | — | — | — | — | — | — | — | — | — | 529 | — | — | (529 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||
Balance as of March 31, 2015 | 2,495,499,036 | 1 | 117,142 | — | (1,152 | ) | (411 | ) | 2,715 | (1,095 | ) | 3,397 | 24,842 | 145,439 | 11,974 | 157,413 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2016 | 2,473,927,859 | 1 | 132,206 | — | (888 | ) | (172 | ) | 3,244 | (1,050 | ) | 4,894 | 78,752 | 216,987 | 32,552 | 249,539 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | 2014 | 2015 | 2016 | ||||||||||||||||||||
| RMB | RMB | RMB | US$ | RMB | RMB | RMB | US$ | ||||||||||||||||||
| | | | (Note 2(ag)) | | | | (Note 2(a)) | ||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||
Net income | 8,649 | 23,403 | 24,320 | 3,923 | 23,403 | 24,320 | 71,289 | 11,056 | ||||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||||
Revaluation of previously held equity interest related to step acquisitions | — | — | (6,535 | ) | (1,054 | ) | ||||||||||||||||||||
(Gain) Loss on disposals of equity investees | (68 | ) | 3 | (128 | ) | (21 | ) | |||||||||||||||||||
Revaluation of previously held equity interest | — | (6,535 | ) | (18,603 | ) | (2,885 | ) | |||||||||||||||||||
Loss (Gain) on disposals of equity investees | 3 | (128 | ) | (3,089 | ) | (479 | ) | |||||||||||||||||||
Realized and unrealized gain related to investment securities | (80 | ) | (90 | ) | (178 | ) | (29 | ) | (90 | ) | (178 | ) | (906 | ) | (141 | ) | ||||||||||
Change in fair value of other assets and liabilities | 245 | 21 | 521 | 84 | (98 | ) | 102 | 84 | 13 | |||||||||||||||||
Gain on disposals of other subsidiaries | (8 | ) | (387 | ) | (307 | ) | (50 | ) | (387 | ) | (307 | ) | (26,913 | ) | (4,174 | ) | ||||||||||
Depreciation and amortization of property and equipment and land use rights | 805 | 1,339 | 2,326 | 375 | 1,339 | 2,326 | 3,770 | 584 | ||||||||||||||||||
Amortization of intangible assets | 130 | 315 | 2,089 | 337 | 315 | 2,089 | 2,931 | 455 | ||||||||||||||||||
Tax benefits from share-based awards | — | — | (1,120 | ) | (174 | ) | ||||||||||||||||||||
Share-based compensation expense | 1,259 | 2,844 | 13,028 | 2,102 | 2,844 | 13,028 | 16,082 | 2,494 | ||||||||||||||||||
Equity-settled donation expense | — | 1,269 | — | — | 1,269 | — | — | — | ||||||||||||||||||
Impairment of goodwill and intangible assets | 175 | 44 | 175 | 28 | ||||||||||||||||||||||
Loss (Gain) on disposals of property and equipment | 3 | — | (13 | ) | (2 | ) | ||||||||||||||||||||
Impairment of cost method equity investees and investment securities | 119 | 419 | 1,864 | 289 | ||||||||||||||||||||||
Impairment of goodwill | 44 | 175 | 455 | 71 | ||||||||||||||||||||||
Gain on disposals of property and equipment | — | (13 | ) | (11 | ) | (2 | ) | |||||||||||||||||||
Amortization of restructuring reserve (Note 4(b)) | — | — | 166 | 27 | — | 166 | 264 | 41 | ||||||||||||||||||
Share of results of equity investees | 6 | 203 | 1,590 | 257 | 203 | 1,590 | 1,730 | 269 | ||||||||||||||||||
Deferred income taxes | 104 | 1,466 | 1,659 | 268 | 1,466 | 1,659 | 1,226 | 190 | ||||||||||||||||||
Allowance for doubtful accounts relating to micro loans | 120 | 442 | 650 | 105 | 442 | 650 | (9 | ) | (1 | ) | ||||||||||||||||
Changes in assets and liabilities, net of effects of acquisitions and disposals: | ||||||||||||||||||||||||||
Restricted cash and escrow receivables | (974 | ) | (1,329 | ) | (851 | ) | (137 | ) | (1,329 | ) | (851 | ) | — | — | ||||||||||||
Loan receivables | (2,828 | ) | (9,175 | ) | (11,674 | ) | (1,883 | ) | ||||||||||||||||||
Prepayments, receivables and other assets | (354 | ) | (3,567 | ) | (2,253 | ) | (363 | ) | (12,742 | ) | (13,927 | ) | (4,012 | ) | (622 | ) | ||||||||||
Income tax payable | (116 | ) | 1,008 | 1,410 | 227 | 1,008 | 1,410 | 1,237 | 192 | |||||||||||||||||
Escrow money payable | 976 | 1,344 | 837 | 135 | ||||||||||||||||||||||
Accrued expenses, accounts payable and other liabilities | 3,657 | 3,992 | 10,578 | 1,706 | 5,336 | 11,415 | 8,104 | 1,257 | ||||||||||||||||||
Merchant deposits | 2,338 | 1,628 | 2,490 | 402 | 1,628 | 2,490 | 113 | 18 | ||||||||||||||||||
Deferred revenue and customer advances | 437 | 1,606 | 1,317 | 212 | 1,606 | 1,317 | 2,350 | 364 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Net cash provided by operating activities | 14,476 | 26,379 | 41,217 | 6,649 | 26,379 | 41,217 | 56,836 | 8,815 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Cash flows from investing activities: | ||||||||||||||||||||||||||
Decrease (Increase) in short-term investments, net | 2,589 | (8,304 | ) | (1,113 | ) | (179 | ) | |||||||||||||||||||
(Increase) Decrease in short-term investments, net | (8,304 | ) | (1,113 | ) | 4,619 | 716 | ||||||||||||||||||||
Decrease in restricted cash | 334 | 199 | 1,139 | 184 | 199 | 1,139 | 746 | 116 | ||||||||||||||||||
Increase in trading investment securities, net | (12 | ) | (147 | ) | (16 | ) | (3 | ) | ||||||||||||||||||
Acquisitions of available-for-sale and held-to-maturity investment securities | (60 | ) | (2,972 | ) | (11,801 | ) | (1,904 | ) | ||||||||||||||||||
Disposals of available-for-sale and held-to-maturity investment securities | 26 | 372 | 939 | 151 | ||||||||||||||||||||||
(Increase) Decrease in trading investment securities, net | (147 | ) | (16 | ) | 9 | 1 | ||||||||||||||||||||
Acquisitions of available-for-sale and held-to-maturity securities | (2,972 | ) | (11,801 | ) | (15,363 | ) | (2,382 | ) | ||||||||||||||||||
Disposals of available-for-sale and held-to-maturity securities | 372 | 939 | 2,177 | 338 | ||||||||||||||||||||||
Acquisitions of equity investees | (16,468 | ) | (23,430 | ) | (37,625 | ) | (5,835 | ) | ||||||||||||||||||
Disposals of equity investees | 89 | 99 | 10,021 | 1,554 | ||||||||||||||||||||||
Acquisitions of: | ||||||||||||||||||||||||||
Land use rights and construction in progress | (1,457 | ) | (1,491 | ) | (2,935 | ) | (474 | ) | (1,491 | ) | (2,935 | ) | (5,407 | ) | (839 | ) | ||||||||||
Other property, equipment and intangible assets | (1,046 | ) | (3,285 | ) | (4,770 | ) | (769 | ) | (3,285 | ) | (4,770 | ) | (5,438 | ) | (843 | ) | ||||||||||
Disposals of property and equipment | 301 | — | — | — | ||||||||||||||||||||||
Cash paid for business combinations, net of cash acquired | (52 | ) | (732 | ) | (10,255 | ) | (1,654 | ) | (732 | ) | (10,255 | ) | (1,495 | ) | (232 | ) | ||||||||||
Deconsolidation and disposal of subsidiaries, net of cash proceeds | 551 | (46 | ) | (1,271 | ) | (205 | ) | |||||||||||||||||||
Deconsolidation and disposal of subsidiaries, net of cash proceeds (Note 4(b) and (e)) | (46 | ) | (1,271 | ) | 4,890 | 758 | ||||||||||||||||||||
Loans to employees, net of repayments | (344 | ) | (212 | ) | (40 | ) | (6 | ) | (212 | ) | (40 | ) | 35 | 5 | ||||||||||||
Acquisitions of equity investees | (452 | ) | (16,468 | ) | (23,430 | ) | (3,780 | ) | ||||||||||||||||||
Disposals of equity investees | 167 | 89 | 99 | 16 | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Net cash provided by (used in) investing activities | 545 | (32,997 | ) | (53,454 | ) | (8,623 | ) | |||||||||||||||||||
Net cash used in investing activities | (32,997 | ) | (53,454 | ) | (42,831 | ) | (6,643 | ) | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | 2014 | 2015 | 2016 | ||||||||||||||||||||
| RMB | RMB | RMB | US$ | RMB | RMB | RMB | US$ | ||||||||||||||||||
| | | | (Note 2(ag)) | | | | (Note 2(a)) | ||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||
Issuance of ordinary shares, including repayment of loan and interest receivable on employee loans for the exercise of ordinary shares | 16,792 | 1,638 | 61,831 | 9,974 | 1,638 | 61,831 | 693 | 108 | ||||||||||||||||||
Repurchase of ordinary shares | (40,111 | ) | (157 | ) | (270 | ) | (44 | ) | (157 | ) | (270 | ) | (19,795 | ) | (3,070 | ) | ||||||||||
Issuance (Repurchase) of ordinary shares for Partner Capital Investment Plan (Note 8(c)) | — | 442 | (123 | ) | (20 | ) | 442 | (123 | ) | — | — | |||||||||||||||
Issuance of Convertible Preference Shares, net of direct incidental fees incurred | 10,542 | — | — | — | ||||||||||||||||||||||
Payment of dividend on Convertible Preference Shares | (103 | ) | (208 | ) | (104 | ) | (17 | ) | ||||||||||||||||||
Payment of dividend on Convertible Preference Shares (Note 22) | (208 | ) | (104 | ) | — | — | ||||||||||||||||||||
Redemption of Redeemable Preference Shares | — | (5,131 | ) | — | — | (5,131 | ) | — | — | — | ||||||||||||||||
Payment for privatization of Alibaba.com Limited | (15,134 | ) | — | — | — | |||||||||||||||||||||
Acquisition of the remaining noncontrolling interest in a subsidiary | (335 | ) | (9 | ) | — | — | (9 | ) | — | — | — | |||||||||||||||
Dividend paid by a consolidated subsidiary to noncontrolling interests | — | — | (61 | ) | (10 | ) | — | (61 | ) | (3 | ) | — | ||||||||||||||
Capital Injection from noncontrolling interest | — | — | 174 | 28 | — | 174 | 56 | 9 | ||||||||||||||||||
Deemed disposals of partial interest in subsidiaries, net of related costs | 11 | — | 6 | 1 | — | 6 | — | — | ||||||||||||||||||
Tax benefits from share-based awards | — | — | 725 | 112 | ||||||||||||||||||||||
Proceeds from secured borrowings relating to micro loans | 8,705 | 53,195 | 88,422 | 14,264 | 53,195 | 88,422 | — | — | ||||||||||||||||||
Repayment of secured borrowings relating to micro loans | (6,607 | ) | (46,029 | ) | (82,269 | ) | (13,271 | ) | (46,029 | ) | (82,269 | ) | — | — | ||||||||||||
Proceeds from current bank borrowings | 2,439 | 681 | 25,804 | 4,163 | 681 | 25,804 | 28,208 | 4,374 | ||||||||||||||||||
Repayment of current bank borrowings | (2,584 | ) | (423 | ) | (24,734 | ) | (3,990 | ) | (423 | ) | (24,734 | ) | (26,349 | ) | (4,086 | ) | ||||||||||
Proceeds from non-current bank borrowings | 24,979 | 30,153 | 19,602 | 3,162 | 30,153 | 19,602 | 765 | 119 | ||||||||||||||||||
Repayment of non-current bank borrowings | — | (24,788 | ) | (49,538 | ) | (7,991 | ) | (24,788 | ) | (49,538 | ) | (146 | ) | (23 | ) | |||||||||||
Proceeds from unsecured senior notes | — | — | 48,757 | 7,865 | — | 48,757 | — | — | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Net cash (used in) provided by financing activities | (1,406 | ) | 9,364 | 87,497 | 14,114 | |||||||||||||||||||||
Net cash provided by (used in) financing activities | 9,364 | 87,497 | (15,846 | ) | (2,457 | ) | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Effect of exchange rate changes on cash and cash equivalents | (76 | ) | (97 | ) | (112 | ) | (18 | ) | (97 | ) | (112 | ) | 466 | 72 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Increase in cash and cash equivalents | 13,539 | 2,649 | 75,148 | 12,122 | ||||||||||||||||||||||
Increase (Decrease) in cash and cash equivalents | 2,649 | 75,148 | (1,375 | ) | (213 | ) | ||||||||||||||||||||
Cash and cash equivalents at beginning of year | 16,857 | 30,396 | 33,045 | 5,331 | 30,396 | 33,045 | 108,193 | 16,779 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | ||||
Cash and cash equivalents at end of year | 30,396 | 33,045 | 108,193 | 17,453 | 33,045 | 108,193 | 106,818 | 16,566 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||
| | | | | | | | | | | | | |
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosures of cash flow information:
Payment of income taxes
Income tax paid was RMB1,469 million, RMB722 million, RMB3,458 million and RMB3,458RMB6,465 million for the years ended March 31, 2013, 2014, 2015 and 2015,2016, respectively.
Payment of interest
Interest paid was RMB912 million, RMB1,220 million, RMB956 million and RMB956RMB1,560 million for the years ended March 31, 2013, 2014, 2015 and 2015,2016, respectively.
Business combinations:combinations
| Year ended March 31, | Year ended March 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | 2014 | 2015 | 2016 | ||||||||||||||
| (in millions of RMB) | (in millions of RMB) | ||||||||||||||||||
Cash paid for business combinations | (100 | ) | (767 | ) | (16,291 | ) | (767 | ) | (16,291 | ) | (3,055 | ) | ||||||||
Cash acquired in business combinations | 48 | 35 | 6,036 | 35 | 6,036 | 1,560 | ||||||||||||||
| | | | | | | | | | | | | | | | | | |||
(52 | ) | (732 | ) | (10,255 | ) | |||||||||||||||
(732 | ) | (10,255 | ) | (1,495 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | ||
| | | | | | | | | | |
Major non-cash transactions:transactions
During the year ended March 31, 2013, the Company completed the Initial Repurchase for a total consideration of RMB44.9 billion (US$7.1 billion), of which RMB5.1 billion (US$800 million) was settled by the issuance of the Redeemable Preference Shares to Yahoo (Note 4(d)).
During the years ended March 31, 2013 and 2014, the Company entered into certain non-compete agreements with certain key individuals in exchange for restricted shares, restricted share units and options underlying 400,000 and 7,195,581 ordinary shares of the Company. The Company respectively.did not have similar arrangement during the year ended March 31, 2015 and 2016.
Restructuring of equity investments
During the year ended March 31, 2016, RMB6,202 million included in both acquisitions and disposals of equity investees under investing activities were related to the restructuring of certain equity investments, including Cainiao Network (Note 4(w)) and others, to establish new holding company. The Company withdrew the investments in such underlying equity investees and the proceeds from the withdrawals were reinvested in full in their new holding companies established.
The accompanying notes form an integral part of these consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
1. Organization and principal activities
Alibaba Group Holding Limited (the "Company," and where appropriate, the term "Company" also refers to its subsidiaries and variable interest entities as a whole), was incorporated in the Cayman Islands on June 28, 1999. The Company is a holding company and conducts its businesses primarily through its subsidiaries and variable interest entities ("VIEs"). The Company is principally engaged in online and mobile commerce through offering of products, services and technology that enable merchants, brands and other businesses to operate efficientlytransform the way they market, sell and extend their reach to sell to consumers and businessesoperate in the People's Republic of China (the "PRC" or "China") and internationally. Major shareholders of the Company include SoftBank Corp. ("SoftBank") and Yahoo! Inc. ("Yahoo").
The Company providesCompany's core commerce business is comprised of marketplaces operating in retail commerce in China, wholesale commerce in China and wholesale marketplaces available through both personal computerinternational and mobile interfacescross-border commerce. Retail commerce in the PRC and internationally. Retail marketplaces and servicesChina operated by the Company includeincludes (i) the China online shoppingcommerce destination ("Taobao Marketplace"); (ii) the China third-party platform for brands and retail platformretailers ("Tmall"); and (iii) the China group buying site that offers quality products by aggregating demand from consumers mainly through limited time discountedsales and marketing platform for flash sales ("Juhuasuan"); and (iv) the global consumer marketplace targeting consumers around the world ("AliExpress"). Wholesale marketplacescommerce in China operated by the Company includeincludes the online China domestic wholesale marketplace ("1688.com"). International and cross-border commerce operated by the online business-to-businessCompany includes (i) the global marketplace that focuses on global trade among businessestargeting consumers from around the world to buy directly from manufacturers and distributors in China ("AliExpress"); (ii) a platform within the Tmall for overseas brands and retailers to reach Chinese consumers without the need for physical operations in China ("Tmall Global") and (iii) the wholesale marketplace for global trade ("Alibaba.com").
In addition, the Company is a provider of public cloud services which offers a complete suite of cloud computing services,services: including elastic computing, database, servicesstorage and storage andcontent delivery network, large scale computing, security and management and application services, for the Company's own platforms and the platforms of the Company's related companies and for use by sellers on the marketplaces and otherto third-party customers ("Alibaba Cloud Computing"). The Company also operates business in mobile media and entertainment through three distribution platforms, UCWeb mobile media, game publishing and multi-screen entertainment as well as content creation and production companies in film, music and sports. The Company also participates in the logistics and local services sectors through investments in Cainiao Network (Note 4(w)) and Koubei (Note 4(n)), respectively. In addition, the Company has a profit sharing interest in Ant Financial Services (Note 4(b)), the financial services group that operates through Alipay.com Co., Ltd. ("Alipay"), a third-party online payment platform in China. The Company makes available online payment processing services ("Payment Services") on its marketplaces through an arrangement with Alipay.com Co., Ltd. ("Alipay"), the entity operating the Payment Services. Alipay.
The Company derives substantially all of its revenue from the PRC.
Alibaba.com Limited, a subsidiary of the Company which operates Alibaba.com, 1688.com and AliExpress, was listed on the Hong Kong Stock Exchange on November 6, 2007. On June 20, 2012, the privatization of Alibaba.com Limited by way of a scheme of arrangement under Section 86 of the Cayman Islands Companies Law was approved and accordingly the listing of the shares of Alibaba.com Limited on the Hong Kong Stock Exchange was withdrawn (Note 4(c)). Following the privatization, Alibaba.com Limited became a wholly-owned subsidiary of the Company.
2. Summary of significant accounting policies
(a) Basis of presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Translations of balances in the consolidated balance sheet, consolidated income statement, consolidated statement of comprehensive income and statement of cash flows from Renminbi ("RMB") into the United States Dollar ("US$") as of and for the year ended March 31, 2016 are solely for the convenience of the readers and were calculated at the rate of US$1.00=RMB6.4480, representing the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2016. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on March 31, 2016, or at any other rate.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(b) Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
(c) Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, including the wholly-foreign owned enterprises ("WFOEs"), and VIEs for which the Company is the primary beneficiary. All transactions and balances among the Company, its subsidiaries and VIEs have been eliminated upon consolidation. The results of subsidiaries and VIEs acquired or disposed of during the year are recorded in the consolidated income statements from the effective date of acquisition or up to the effective date of disposal, as appropriate.
A subsidiary is an entity in which (i) the Company directly or indirectly controls more than 50% of the voting power; or (ii) the Company has the power to appoint or remove the majority of the members of the board of directors or to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the investee pursuant to a statute or under an agreement among the shareholders or equity holders. A VIE entity is required to be consolidated by the primary beneficiary of the entity if the nominee equity holders in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
To comply with the PRC laws, rules and regulations that restrictlegal restrictions on foreign ownership of companies that operate Internet content and other restricted businesses, the Company operates its websites and engages in such restricted services in the PRC through certain PRC domestic companies, whose equity interests are held by certain management members or founders of the Company. The registered capital of these PRC domestic companies was funded by the Company through loans extended to certain management members or founders of the Company. The Company has entered into certain exclusive technical services agreements with these PRC domestic companies, which entitle it to receive a majority of their residual returns and make it obligatory for the Company to absorb a majority of the risk of losses from their activities. In addition, the Company has entered into certain agreements with those management members or founders, including loan agreements that require them to contribute registered capital to those PRC domestic companies, exclusive call option agreements to acquire the equity interests in these companies when permitted by the PRC laws, rules and regulations, equity pledge agreements of the equity interests held by those management members or founders, and proxy agreements that irrevocably authorize individuals designated by the Company to exercise the equity owner's rights over these PRC domestic companies.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(c) Consolidation (Continued)
Details of the typical VIE structure of the Company's significant VIEs, primarily domestic companies associated with the operations of Taobao Marketplace, Tmall, Juhuasuan, 1688.com, AliExpress, 1688.com, Alibaba.com and Alibaba Cloud Computing, are set forth below:
Loan agreements
Pursuant to the relevant loan agreements, the respective WFOEs have granted interest-free loans to the relevant nomineeVIEs equity holders, of the VIEs, which may only be used for the purpose of capital contributions to the relevant VIEs or as may be otherwise agreed by the WFOEs. The WFOEs may require acceleration of repayment at their absolute discretion. When the nomineeVIEs equity holders of the VIEs make early repayment of the outstanding amount, the WFOEs or a third party designated by the
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
WFOEs may purchase the equity interests in the VIEs at a price equal to the outstanding amount of the loan, subject to any applicable PRC laws, rules and regulations. The nomineeVIEs equity holders of VIEs undertake not to enter into any prohibited transactions in relation to the VIEs, including the transfer of any business, material assets, intellectual property rights or equity interests in the VIEs to any third party.
Exclusive call option agreements
The nomineeVIEs equity holders of the VIEs have granted the WFOEs exclusive call options to purchase their equity interest in the VIEs at an exercise price equal to the higher of (i) the registered capital in the VIEs; and (ii) the minimum price as permitted by applicable PRC laws. Each relevant VIE has further granted the relevant WFOE an exclusive call option to purchase its assets at an exercise price equal to the book value of the assets or the minimum price as permitted by applicable PRC laws, whichever is higher. The WFOEs may nominate another entity or individual to purchase the equity interest or assets, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of the equity interest or assets pursuant to the call option. Each WFOE is entitled to all dividends and other distributions declared by the VIE, and the nomineeVIE equity holders of VIE have agreed to give up their rights to receive any distributions or proceeds from the disposal of their equity interests in the VIE which are in excess of the original registered capital that they contributed to the VIE, and to pay any such distributions or premium to the WFOE. The exclusive call option agreements remain in effect until the equity interest or assets that are the subject of such agreements are transferred to the WFOEs.
Proxy agreements
Pursuant to the relevant proxy agreements, each of the nomineeVIEs equity holders of the VIEs irrevocably authorizes any person designated by the WFOEs to exercise his rights as an equity holder of the VIEs, including the right to attend and vote at equity holderholders' meetings and appoint directors.
Equity pledge agreements
Pursuant to the relevant equity pledge agreements, the relevant nomineeVIEs equity holders of the VIEs have pledged all of their interests in the equity of the VIEs as a continuing first priority security interest in favor of the
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(c) Consolidation (Continued)
corresponding WFOEs to secure the outstanding amounts advanced under the relevant loan agreements described above and to secure the performance of obligations by the VIEs and/or the nominee equity holders of the VIEs under the other structure contracts. Each WFOE is entitled to exercise its right to dispose of the VIEs equity holders' pledged interests in the equity of the VIE and has priority in receiving payment by the application of proceeds from the auction or sale of such pledged interests, in the event of any breach or default under the loan agreement or other structure contracts, if applicable. These equity pledge agreements remain in force for the duration of the relevant loan agreement and other structure contracts. These equity pledges have been registered with the relevant office of the Administrations for Industry and Commerce in the PRC.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
Exclusive technical services agreements
Each relevant VIE has entered into an exclusive technical services agreement with the respective WFOE, pursuant to which the relevant WFOE provides exclusive technical services to the VIE. In exchange, the VIE pays a service fee to the WFOE which typically constitutesamount to what would be substantially all of the VIE's pre-tax profit, resulting in a transfer of substantially all of the profits from the VIE to the WFOE.
Other arrangements
The exclusive call option agreements described above also enable the Company to receive substantially all of the economic benefits from the VIEs by typically entitling the WFOEs to all dividends and other distributions declared by the VIEs and to any distributions or proceeds from the disposal by the nomineeVIEs equity holders of the VIEs of their equity interests in the VIEs that are in excess of the original registered capital that they contributed to the VIEs.
Based on these contractual agreements, the Company believes that the PRC domestic companies as described above should be considered as VIEs because the nominee equity holders do not have significant equity at risk nor do they have the characteristics of a controlling financial interest and the Company is the primary beneficiary of these PRC domestic companies. Accordingly, the Company believes that these VIEs should be consolidated based on the structure as described above.
The following financial information of the VIEs in the PRC was recorded in the accompanying consolidated financial statements:
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Cash and cash equivalents and short-term investments | 1,367 | 2,272 | ||||||
Amounts due from Ant Financial Services | 3 | 2,741 | ||||||
Loan receivables | 13,159 | 835 | ||||||
Investment in equity investees and securities | 240 | 4,018 | ||||||
Property and equipment and intangible assets | 1,089 | 1,353 | ||||||
Total assets | 18,874 | 13,811 | ||||||
Secured borrowings | 9,264 | — | ||||||
Amounts due to WFOEs and other non-VIEs group companies | 4,801 | 7,741 | ||||||
Total liabilities | 17,446 | 11,420 |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
2. Summary of significant accounting policies (Continued)
(c) Consolidation (Continued)
The following financial information of the VIEs in the PRC was recorded in the accompanying consolidated financial statements:
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Cash and cash equivalents and short-term investments | 2,272 | 3,978 | ||||||
Amounts due from Ant Financial Services | 2,741 | 247 | ||||||
Investment in equity investees and securities | 4,018 | 11,605 | ||||||
Property and equipment and intangible assets | 1,353 | 1,218 | ||||||
Others | 3,427 | 2,698 | ||||||
Total assets | 13,811 | 19,746 | ||||||
Amounts due to WFOEs and other non-VIEs group companies | 7,741 | 12,372 | ||||||
Others | 3,679 | 4,649 | ||||||
Total liabilities | 11,420 | 17,021 |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
Revenue (i) | 3,088 | 6,170 | 10,457 | ||||||||
Net (loss) profit (i) | (325 | ) | (587 | ) | 659 | ||||||
Net cash used in operating activities | (134 | ) | (2,642 | ) | (7,343 | ) | |||||
Net cash used in investing activities | (555 | ) | (1,337 | ) | (5,502 | ) | |||||
Net cash provided by financing activities | 812 | 4,157 | 13,018 |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
Revenue (i) | 6,170 | 10,457 | 8,558 | ||||||||
Net (loss) income (i) | (587 | ) | 659 | 35 | |||||||
Net cash (used in) provided by operating activities | (2,642 | ) | (7,343 | ) | 1,224 | ||||||
Net cash used in investing activities | (1,337 | ) | (5,502 | ) | (7,160 | ) | |||||
Net cash provided by financing activities | 4,157 | 13,018 | 6,494 |
The VIEs did not have any material related party transactions except for those transacted with WFOEs which were eliminated in these consolidated financial statements and the related party transactions disclosed in Note 23 or elsewhere in these consolidated financial statements.
Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs and can have assets transferred out of the VIEs under its control. Therefore, the Company considers that there is no asset in any of the consolidated VIEs that can be used only to settle obligations of the VIEs, except for registered capital and PRC statutory reserves. As all consolidated VIEs are incorporated as limited liability companies under the PRC Company Law of the PRC, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the consolidated VIEs.
Currently there is no contractual arrangement which requires the Company to provide additional financial support to the VIEs. However, as the Company conducts its businesses primarily based on the licenses and approvals held by its VIEs, the Company has provided and will continue to provide financial support to the VIEs considering the business requirements of the VIEs, as well as the Company's own business objectives in the future.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(c) Consolidation (Continued)
Unrecognized revenue-producing assets held by the VIEs include certain Internet content provision and other licenses, domain names and trademarks. The Internet content provision and other licenses are required under relevant PRC laws, rules and regulations for the operation of Internet businesses in the PRC, and therefore are integral to the Company's operations. The Internet content provision licenses require that core PRC trademark registrations and domain names are held by the VIEs that provide the relevant services.
(d) Business combinations and noncontrolling interests
The Company accounts for its business combinations using the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") 805 "Business Combinations" ("ASC 805").Combinations." The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities incurred by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
noncontrolling interests. The excess of (i) the total costs of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated income statements. During the measurement period, which can be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
In a business combination achieved in stages, the Company re-measures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated income statements.
When there is a change in ownership interests that result in a loss of control of a subsidiary, the Company deconsolidates the subsidiary from the date control is lost. Any retained noncontrolling investment in the former subsidiary is measured at fair value and is included in the calculation of the gain or loss upon deconsolidation of the subsidiary.
For the Company's majority-owned subsidiaries and VIEs, a noncontrolling interest is recognized to reflect the portion of their equity which is not attributable, directly or indirectly, to the Company. Consolidated net income (loss) on the consolidated income statements includes the net income (loss) attributable to noncontrolling interests and mezzanine equity holders when applicable. Net income (loss) attributable to mezzanine equity holders is included in net income (loss) attributable to noncontrolling interests on the consolidated income statements, while it is excluded from the consolidated statements of changes in shareholders' equity. The cumulative results of operations attributable to noncontrolling interests, along with adjustments for share-based compensation expense arising from outstanding share-based awards relating to subsidiaries' shares, are also recorded as noncontrolling interests in the Company's consolidated balance sheets. Cash flows related to transactions with noncontrolling interests are presented under financing activities in the consolidated statements of cash flows.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(e) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, which is a strategic committee comprised of members of the Company's management team. In the respective periods presented, the Company had one single operating and reportable segment, namely the provision of online and mobile commerce and related services. Although the online and mobile commerce and related services consist of different business units of the Company, information provided to the chief operating decision-maker is at the revenue level and the Company does not allocate operating costs or assets across business units, as the chief operating decision-maker does not use such information to allocate resources or evaluate the performance of the business units. Details of the Company's revenue are set out in Note 5. As the Company's long-lived assets are substantially all located in the PRC and substantially all of the Company's revenue is derived from within the PRC, no geographical information is presented.
(f) Foreign currency translation
The functional currency of the Company is the United States Dollar ("US$") and reporting currency of the Company is Renminbi ("RMB").RMB. The Company's subsidiaries and VIEs with operations in the PRC, Hong Kong, United States and other jurisdictions use their respective currencies as their functional currencies. The financial statements of the Company's subsidiaries and VIEs, other than the subsidiaries and VIEs with the functional currency of RMB, are translated into RMB using the exchange rate as of the balance sheet date for assets and liabilities and average exchange rate for the year for income and expense items. Translation gains
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
and losses are recorded in accumulated other comprehensive income or loss as a component of shareholders' equity.
In the financial statements of the Company's subsidiaries and VIEs, transactions in currencies other than the functional currency are measured and recorded in the functional currency using the exchange rate in effect at the date of the transaction. At the balance sheet date, monetary assets and liabilities that are denominated in currencies other than the functional currency are translated into the functional currency using the exchange rate at the balance sheet date. All gains and losses arising from foreign currency transactions are recorded in the determination of net income or loss during the year in which they occur.
(g) Revenue recognition
Revenue principally represents online marketing services revenue, commissions on transactions, membership and storefront fees and cloud computing services revenue. Revenue comprises the fair value of the consideration received or receivable for the provision of services in the ordinary course of the Company's activities and is recorded net of value-added tax ("VAT"). Consistent with the criteria of ASC 605 "Revenue Recognition" ("ASC 605"), the Company recognizes revenue when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been provided, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(g) Revenue recognition (Continued)
Revenue arrangements with multiple deliverables are divided into separate units of accounting. The arrangement consideration is allocated at the inception of the arrangement to each element based on their relative fair values for revenue recognition purposes. The consideration is allocated to each element using vendor-specific objective evidence or third-party evidence of the standalone selling price for each deliverable, or if neither type of evidence is available, using management's best estimate of selling price. Revenue arrangements with multiple deliverables primarily relate to the sale of membership packages and online marketing services on the international wholesale marketplace, which are not material to the Company's total revenue.
In accordance with ASC 605, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is primarily obligated in a transaction, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded on a gross basis. When the Company is not the primary obligor, does not bear the inventory risk and does not have the ability to establish the price, revenue is recorded on a net basis.
When services are exchanged or swapped for other services, the exchange is regarded as a revenue-generating transaction unless such exchange was made for services of a similar nature and value, which is not regarded as a revenue-generating transaction. The revenue is measured at the fair value of the services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the services received cannot be measured reliably, the revenue is measured at the fair value of the services provided in a barter transaction, by reference to non-barter transactions involving similar services, adjusted by the amount of any cash or cash equivalents transferred. The amount of revenue recognized for barter transactions was insignificant for each of the periods presented.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
Revenue recognition policies for each type of service are analyzed as follows:
Online marketing services revenue
The Company receives service fees from merchants on the retail and wholesale marketplaces for pay for performance ("P4P") marketing services, display marketing, and placement services and Taobaoke program on the Company's marketplaces and certain third party marketing affiliates' websites.
P4P marketing services allow merchants to bid for keywords that match product or service listings appearing in search or browser results on the Company's marketplaces. Merchants prepay for P4P marketing services and the related revenue is recognized when a user clicks their product or service listings. The positioning of such listings and the price for such positioning are determined through an online auction system, which facilitates price discovery through a market-based mechanism.
Display marketing allows merchants to place advertisements in particular areas of a web page, at fixed prices or prices established by a real-time bidding system, in particular formats and over particular periods of time. DisplayIn general, merchants need to prepay for display marketing and revenue is generally recognized ratably over the period in which the advertisement is displayed or when an advertisement appears on pages clicked or viewed by users, and only if collectionusers.
Table of the resulting receivable is probable.Contents
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(g) Revenue recognition (Continued)
In delivery of these online marketing services, the Company, through the third-party marketing affiliate program, also places the P4P marketing services content of the participating merchants on third-party websites in the forms of picture or text links through contextual relevance technology to match merchants' marketing content to the textual content of the third-party website and the users' attributes based on the Company's systems and algorithms. When such links on third-party websites are clicked, users are diverted to a landing page of the Company's marketplaces where listings of the participating merchant as well as similar products or services of other merchants are presented. These other merchants may include those also participating in the online marketing services through the third-party marketing affiliate program or those only purchasing online marketing services on the Company's own marketplaces, as well as, in some cases, those who do not purchase online marketing services at all. Revenue is only recognized when such users further click on the P4P marketing content on such landing pages. In limited cases, the Company may embed a search box for one of its marketplaces on such third-party websites, and when a keyword is input into the search box, the user will be diverted to the Company's website where search results are presented and revenue can be generated through a similar mechanism. For third-party marketing affiliates with whom the Company has an arrangement to share such revenue, traffic acquisition cost is also recognized at the same time if the P4P marketing content on the landing page clicked by the users is from merchants participating in the third-party marketing affiliate program. The Company places display marketing content on third-party websites in a similar manner. Substantially allA substantial portion of online marketing services revenue generated through the third-party marketing affiliate program represented P4P marketing services revenue for each of the years presented. P4P marketing service revenue as well as display marketing revenue generated on the Company's marketplaces or through the third-party marketing affiliate program are recorded on a gross basis principally because the Company is the primary obligor to the merchants in the arrangements.
The Company receives placement services fees from merchants on promotional slots for a specified period on the Company's Juhuasuan marketplace and recognizes those fees as revenue when the underlying promotional services are provided.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
In addition, the Company offers the Taobaoke program which generates commissions from merchants for transactions completed and settled through Alipay and completed by buyersconsumers sourced from certain third party marketing affiliates' websites. A significant portion of such commission is shared with the third party marketing affiliates and theThe Company's portion of commission revenue generated through third party marketing affiliates' websites is recognized at the time when the underlying transaction is completed and is recorded on a net basis principally because the Company is not the primary obligor as it does not have latitude in establishing prices or does not have inventory risk. Such commissions earned byIn certain occasions where the Company are typically determined usingis obligated to pay for website inventory costs in fixed amounts to third-party marketing affiliates regardless of whether commission revenue is generated from these marketing affiliates, such commission revenue is recorded on a fixed percentage of the fee in the arrangement.gross basis.
Commissions on transactions
The Company earns commissions from merchants when transactions are completed and settled through Alipay on certain retail marketplaces of the Company. Such commissions are generally determined as a percentage based on the value of merchandise being sold by the merchants. Revenue related to commissions is recognized in the consolidated income statements at the time when the underlying transaction is completed.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(g) Revenue recognition (Continued)
Membership and storefront fees
The Company earns membership revenue from wholesale sellers in respect of the sale of membership packages and subscriptions which allow them to host premium storefronts on the Company's wholesale marketplaces. The Company also earns revenue from merchants who subscribe to Wangpu, the Company's storefront software that includes a suite of tools that assist sellersmerchants in upgrading, decorating and managing their storefronts on retail marketplaces. These service fees are paid in advance for a specific contracted service period. All these fees are initially deferred when received and revenue is recognized ratably over the term of the respective service contracts as the services are provided.
Cloud computing and Internet infrastructure revenue
The Company earns revenue from cloud computing and Internet infrastructure from the provision of services such as elastic computing, database services and storage and large scale computing services, as well as web hosting and domain name registration. Revenue is recognized at the time when the services are provided or ratably over the term of the service contracts as appropriate.
Interest and other income
Interest income on micro loans (Note 2(r)) is recognized as other revenue using the effective interest rate method which is reviewed and adjusted periodically based on changes in estimated cash flows. The Company disposed of certain equity interests and assets primarily relating to the micro loan business and related services and ceased to generate interest income on micro loans upon the completion of the restructuring of Payment Services during the year ended March 31, 2015 (Note 4(b)). Other interest income is recognized on a time-proportion basis using the effective interest method, and is classified as "interest and investment income" in the consolidated income statements. Other than the above, receipts of fees in respect of all other incidental services provided by the Company, including mobile value-added services, are recognized when services are delivered and the amounts relating to such incidental services are not material to the Company's total revenue.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
(h) Cost of revenue
Cost of revenue consists primarily of staff costs and share-based compensation expense, payment processing fees, expenses associated with the operation of the Company's websites, such as bandwidth and co-location fees, depreciation and maintenance costs for computers, servers, call centers and other equipment, traffic acquisition costs, unit-volume driven rebates, allowance for doubtful accounts in relation to the micro loanslogistics costs and other related incidental expenses that are directly attributable to the Company's principal operations. Following recent reforms of PRC tax laws, business tax is gradually being replaced by VAT, which is recorded as a reduction of revenue, starting from the year ended March 31, 2013.
(i) Product development expenses
Product development expenses consist primarily of staff costs and share-based compensation expense and other related incidental expenses that are directly attributable to the development, maintenance and enhancement of the infrastructure, applications, operating systems, software, database and network for the Company's marketplaces, mobile products as well as transaction and service platforms. In addition, royalty fees accrued and paid to Yahoo up to the closing of the Company's initial public offering in September 2014 are recorded as part of product development expenses (Note 4(d) and 22)23).
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(i) Product development expenses (Continued)
The Company expenses all costs that are incurred in connection with the planning and implementation phases of development and costs that are associated with repair or maintenance of the existing websites or the development of software and website content. Costs incurred in the development phase are capitalized and amortized over the estimated product life. However, since the inception of the Company, the amount of costs qualifying for capitalization has been insignificant and as a result, all website and software development costs have been expensed as incurred.
(j) Sales and marketing expenses
Sales and marketing expenses consist primarily of online and offline advertising expenses, promotion expenses, sales commissions, staff costs and share-based compensation expense and other related incidental expenses that are incurred directly to attract or retain buyersconsumers and sellersmerchants for the Company's marketplaces.
The Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of delivering advertisements in the period in which the advertising space or airtime is used. Advertising and promotional expenses totaled RMB1,312 million, RMB2,022 million, RMB4,090 million and RMB4,090RMB5,524 million during the years ended March 31, 2013, 2014, 2015 and 2015,2016, respectively.
(k) Share-based compensation
Share-based awards granted to the Company's employees are measured at fair value on grant date and share-based compensation expense is recognized (i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated forfeitures, over the requisite service period. The fair value of share options is determined using the Black-Scholes valuation model and the fair value of restricted shares and restricted share units ("RSUs") is determined with reference to the fair value of the underlying shares. Share-based awards granted to non-employees are initially measured at fair value on the grant date and re-measured at each reporting date through the vesting date. Such value is recognized as expense over the respective service period, net of estimated forfeitures. Share-based
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
compensation expense, when recognized, is charged to the consolidated income statements with the corresponding entry to additional paid-in capital or noncontrolling interests as disclosed in Note 2(d).
At each date of measurement, the Company reviews internal and external sources of information to assist in the estimation of various attributes to determine the fair value of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected life, expected volatility and expected forfeiture rates. As the Company was a private company prior to its initial public offering (Note 4(a)), the sources utilized to determine those attributes at the date of measurement arewere subjective in nature and requirerequired the Company to use judgment in applying such information to the share valuation models. The Company iswas required to consider many factors and makemade certain assumptions during this assessment. If any of the assumptions used to determine the fair value of the share-based awards changes significantly, share-based compensation expense may differ materially in the future from that recorded in the current reporting period.
(l) Other employee benefits
The Company's subsidiaries and VIEs in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(l) Other employee benefits (Continued)
provided to employees. The relevant labor regulations require the Company's subsidiaries in the PRC to pay the local labor and social welfare authorities monthly contributions at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor and social welfare authorities are responsible for meeting all retirement benefits obligations and the Company's subsidiaries in the PRC have no further commitments beyond their monthly contributions. The contributions to the plan are expensed as incurred. During the years ended March 31, 2013, 2014, 2015 and 2015,2016, contributions to such plan amounting to RMB816 million, RMB974 million, RMB1,601 million and RMB1,601RMB2,094 million, respectively, were charged to the consolidated income statements.
The Company also makes payments to other defined contribution plans for the benefit of employees employed by subsidiaries outside of the PRC. Amounts contributed during the years ended March 31, 2013, 2014, 2015 and 20152016 were insignificant.
(m) Income taxes
The Company accounts for income taxes using the liability method, under which deferred income taxes are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that the asset will not be realizable in the foreseeable future.
Deferred taxes are also recognized on the undistributed earnings of subsidiaries, which are presumed to be transferred to the parent company and are subject to withholding taxes, unless there is sufficient evidence to show that the subsidiary has invested or will invest the undistributed earnings indefinitely or that the earnings will be remitted in a tax-free liquidation.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
The Company adopts ASC 740-10-25 "Income Taxes" which prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The Company did not have significant unrecognized uncertain tax positions or any unrecognized liabilities, interest or penalties associated with unrecognized tax benefit as of and for the years ended March 31, 2013, 2014, 2015 and 2015.2016.
(n) Government grants
For government grants that are non-operating in nature and with no further conditions to be met, the amounts are recognized as income in other income, net when received.upon receipt. For government grants that contain certain operating conditions, the amounts are recorded as liabilities when received,upon receipt, and are recognized in the consolidated income statements as a reduction of the related costs for which the grants are intended to compensate when the conditions are met.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(o) Operating leasesLeases
Leases whereare classified as either capital or operating leases. Leases that transfer substantially all the rewardsbenefits and risks ofincidental to the ownership of assets remain withare accounted for as if there was an acquisition of an asset and incurrence of an obligation at the lessorinception of the lease. All other leases are accounted for as operating leases. Rentals applicable to such operating leases wherein rental payments are charged torecognized in the consolidated income statements on a straight-line basis over the lease term.terms. The Company had no capital leases for the years ended March 31, 2014, 2015 and 2016.
(p) Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. Cash and cash equivalents of the Company primarily represent bank deposits, fixed deposits with maturities less than three months and investments in money market funds. As of March 31, 20142015 and 2015,2016, the Company had certain amounts of cash held in accounts managed by Alipay in connection with the provision of online and mobile commerce and related services for a total amount of RMB1,294RMB1,443 million and RMB1,443RMB786 million, respectively, which have been classified as cash and cash equivalents on the consolidated balance sheets.
(q) Short-term investments
Short-term investments consist primarily of investments in fixed deposits with maturities between three months and one year and investments in fixed depositsmoney market funds or other investments whereby the Company has the intention to redeem such fixed deposits or other investments within one year. As of March 31, 20142015 and 2015,2016, the fixed deposits that were recorded as short-term investments amounted to RMB6,017RMB11,462 million and RMB11,462RMB97 million, respectively. As of the same dates, the Company had certain amounts of short-term investments held in accounts managed by Alipay for a total amount of RMB300RMB1,185 million and RMB1,185RMB2,564 million, respectively.
(r) Loan receivables and secured borrowingsVAT receivables
Loan receivables consist primarily of micro loans extended to small and medium size enterprises that are merchants on the Company's marketplaces. VAT receivables mainly represent the advance settlement of relevant VAT refund amounts provided by OneTouch (Note 4(g)) to its customers prior to receiving such VAT refund from tax authorities. Such amounts are recorded at the principal or claimed refund amount less allowance for doubtful accounts relating to micro loans and the VAT receivables, respectively, and include accrued interest receivable as of the balance sheet date. Allowance for doubtful accounts relating to micro loans representsand VAT receivables represent the Company's best estimate of the
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
losses inherent in the outstanding portfolio of loans.loans and VAT receivables. The loancredit periods extended by the Company to the merchants related to the micro loans generally range from 7 days to 360 days.days and the collection periods related to the VAT receivables generally range from three to six months. Judgment is required to determine the allowance amounts and whether such amounts are adequate to cover potential bad debts, and periodic reviews are performed to ensure such amounts continue to reflect the best estimate of the losses inherent in the outstanding portfolio of debts. As of March 31, 2014,2015 and 2016, allowance for doubtful accounts relating to micro loansVAT receivables amounted to RMB622 million.RMB184 million and RMB699 million, respectively. The Company disposed of certain equity interests and assets primarily relating to the micro loan business and related services and upon the completion of the restructuring of Payment Services during the year ended March 31, 2015 (Note 4(b)), accordingly the balances of micro loans and allowance for doubtful accounts relating to micro loans became insignificant as of March 31, 2015.since then. For the years ended March 31, 2013, 2014, 2015 and 2015,2016, the charge-offs and recoveries in
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(r) Loan and VAT receivables (Continued)
relation to the allowance for doubtful accounts relating to micro loans and VAT receivables were also insignificant.
The Company has entered into arrangements with certain third party financial institutions under which the Company has transferred the legal titles or economic benefits in certain loan receivables in exchange for cash proceeds. The Company continues to provide management, administration and collection services on the transferred loan receivables and is subject to certain provisions which require the Company to absorb a portion of the losses incurred in the outstanding portfolio of loan receivables in the event of default. The Company is considered to have retained control over the transferred loan receivables due to the existence of such provisions, and accordingly such loan receivables did not meet the requirements for asset derecognition. Accordingly, the Company recognizes such loan receivables as pledged assets, and the proceeds received from the transfers are recognized as secured borrowings. Such pledged assets recorded in loan receivables amounted to RMB10,217 million and nil as of March 31, 2014 and 2015, respectively.
(s) Investment securities
The classification of investment securities is based on the Company's intent, which is re-evaluated at each balance sheet date, with respect to those securities. Investment securities classified as trading securities, comprising of listed equity securities and financial derivatives such as warrants and equity swaps used as market access products to invest in listed equity securities in the PRC, are carried at fair value with realized or unrealized gains and losses recorded in the consolidated income statements. The securities that the Company has positive intent and ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost. The maturities of the held-to-maturity securities held by the Company generally range from one to ten years. Other investment securities classified as available-for-sale are carried at fair value with unrealized gains and losses recorded in accumulated other comprehensive income (loss) as a component of shareholders' equity. Realized gains and losses and provision for decline in value judged to be other than temporary, if any, are recognized in the consolidated income statements. In computing realized gains and losses on available-for-sale securities, the Company determines cost based on amounts paid, including direct costs such as commissions to acquire the security, using the average cost method. Other than the above, the Company has applied the fair value option for convertible bonds subscribed during the years ended March 31, 2014 and 2015.subscribed. Such fair value option permits the irrevocable fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.
The convertible bonds accounted for under the fair value option is carried at fair value with realized or unrealized gains and losses recorded in the consolidated income statements. Interest income is recognized using the effective interest rate method which is reviewed and adjusted periodically based on changes in estimated cash flows. Dividend income is recognized when the right to receive the payment is established.
(t) Investment in equity investees
Equity investments represent the Company's investments in privately held companies and listed securities. The Company applies the equity method to account for an equity investment, in common stock or in-substance common stock, according to ASC 323 "Investment — Equity Method and Joint Ventures," over which it has significant influence but does not own a majority equity interest or otherwise control.
An investment in in-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that entity's common stock. The Company considers subordination, risks and rewards of ownership and obligation to transfer value when determining whether an investment in an entity is substantially similar to an investment in that entity's common stock.
For other equity investments that are not considered as debt securities or equity securities that have readily determinable fair values and over which the Company neither has significant influence nor control through investment in common stock or in-substance common stock, the cost method is used.
Under the equity method, the Company's share of the post-acquisition profits or losses of the equity investee is recognized in the consolidated income statements and its share of post-acquisition movements in accumulated other comprehensive income is recognized in shareholders' equity. The Company records its
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
2. Summary of significant accounting policies (Continued)
adjusted periodically based on changes in estimated cash flows. Dividend income is recognized when the right to receive the payment is established.
(t) Land use rightsInvestment in equity investees (Continued)
Land use rights represent lease prepaymentsshare of the results of such equity investees on a one quarter in arrears basis. The excess of the carrying amount of the investment over the underlying equity in net assets of the equity investee represents goodwill and intangible assets acquired. When the Company's share of losses in the equity investee equals or exceeds its interest in the equity investee, the Company does not recognize further losses, unless the Company has incurred obligations or made payments or guarantees on behalf of the equity investee.
Under the cost method, the Company carries the investment at cost and recognizes income to the local Bureauextent of Land and Resources. Land use rights are carried at cost less accumulated amortization and impairment losses. Amortization is provided to write offdividends received from the cost of lease prepayments on a straight-line basis over the perioddistribution of the right which is 40 - 70 years.equity investee's post-acquisition profits.
(u) Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization less any provision required for impairment in value. Depreciation and amortization are computed using the straight-line method with no residual value based on the estimated useful lives of the various classes of assets, which range as follows:
Computer equipment and software | 3 - 5 years | ||
Furniture, office and transportation equipment | 3 - 5 years | ||
Buildings | 20 - 50 years | ||
Leasehold improvements | shorter of remaining lease period or estimated useful life |
Construction in progress represents buildings and related premises under construction, which is stated at actual construction cost less any impairment loss. Construction in progress is transferred to the respective category of property and equipment when completed and ready for its intended use.
Costs of repairs and maintenance are expensed as incurred and asset improvements are capitalized. The cost and related accumulated depreciation and amortization of assets disposed of or retired are removed from the accounts, and any resulting gain or loss is reflected in the consolidated income statements.
(v) Land use rights
Land use rights represent lease prepayments to the local Bureau of Land and Resources. Land use rights are carried at cost less accumulated amortization and impairment losses. Amortization is provided to write off the cost of lease prepayments on a straight-line basis over the period of the right which is 40 - 70 years.
(w) Intangible assets
Intangible assets acquired through business acquisitions are recognized as assets separate from goodwill if they satisfy either the "contractual-legal" or "separability" criterion. Purchased intangible assets and intangible assets arising from the acquisitions of subsidiaries and VIE subsidiaries are recognized and measured at fair
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(w) Intangible assets (Continued)
value upon acquisition. Separately identifiable intangible assets that have determinable lives continue to be amortized over their estimated useful lives using the straight-line method as follows:
User base and customer relationships | 2 - 6 years | ||
Trade names, trademarks and domain names | 3 - 12 years | ||
Developed technology and patents | 2 - 5 years | ||
Licenses and copyrights | 1 - 5 years | ||
Non compete agreements | over the contracted term from 2 - 6 years |
Separately identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for identifiable intangible assets is based on the amount by which the carrying amount of the assets exceeds the fair value of the assets.
(x) Goodwill
Goodwill represents the excess of the purchase consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of the acquired entity as a result of the Company's acquisitions of interests in its subsidiaries and VIEs. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.
In performing the two-step quantitative impairment test, the first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
goodwill to the carrying value of a reporting unit's goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for the purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units, and determining the fair value of each reporting unit.
(w) Intangible assets
Intangible assets acquired through business acquisitions are recognized as assets separate from goodwill if they satisfy either the "contractual-legal" or "separability" criterion. Purchased intangible assets and intangible assets arising from the acquisitions of subsidiaries and VIE subsidiaries are recognized and measured at fair value upon acquisition. Separately identifiable intangible assets that have determinable lives continue to be amortized over their estimated useful lives using the straight-line method as follows:
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Separately identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for identifiable intangible assets is based on the amount by which the carrying amount of the assets exceeds the fair value of the asset.
(x)(y) Impairment of long-lived assets other than goodwill
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(y) Impairment of long-lived assets other than goodwill (Continued)
measured by a comparison of the carrying amount of an asset to the future undiscounted net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairment of long-lived assets other than investment in equity investees intangible assets and goodwill was recognized for the years ended March 31, 2013, 2014, 2015 and 2015.
(y) Investment in equity investees
Equity investments represent the Company's investments in privately held companies and listed securities. The Company applies the equity method to account for an equity investment, in common stock or in-substance common stock, according to ASC 323 "Investment — Equity Method and Joint Ventures," over which it has significant influence but does not own a majority equity interest or otherwise control.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
An investment in in-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that entity's common stock. The Company considers subordination, risks and rewards of ownership and obligation to transfer value when determining whether an investment in an entity is substantially similar to an investment in that entity's common stock.
For other equity investments that are not considered as debt securities or equity securities that have readily determinable fair values and over which the Company neither has significant influence nor control through investment in common stock or in-substance common stock, the cost method is used.
Under the equity method, the Company's share of the post-acquisition profits or losses of the equity investee is recognized in the consolidated income statements and its share of post-acquisition movements in accumulated other comprehensive income is recognized in shareholders' equity. The Company records its share of the results of such equity investees on a one quarter in arrears basis. The excess of the carrying amount of the investment over the underlying equity in net assets of the equity investee represents goodwill and intangible assets acquired. When the Company's share of losses in the equity investee equals or exceeds its interest in the equity investee, the Company does not recognize further losses, unless the Company has incurred obligations or made payments or guarantees on behalf of the equity investee.
Under the cost method, the Company carries the investment at cost and recognizes income to the extent of dividends received from the distribution of the equity investee's post-acquisition profits.
The Company continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company's carrying value; the financial condition, operating performance and the prospects of the equity investee; and other company specific information such as recent financing rounds. If the decline in fair value is deemed to be other than temporary, the carrying value of the equity investee is written down to fair value. Impairment charges in connection with the cost method investments of RMB245 million, RMB119 million and RMB419 million were recorded in interest and investment income, net in the consolidated income statements for the years ended March 31, 2013, 2014 and 2015, respectively. Impairment charges in connection with the equity method investments of nil, nil and RMB438 million were recorded in share of results of equity investees in the consolidated income statements for the years ended March 31, 2013, 2014 and 2015, respectively (Note 14).2016.
(z) Interest rate swapsDerivatives and hedging
In accordance with ASC 815 "Derivatives and Hedging," all contracts that meet the definition of a derivative should be recognized on the consolidated balance sheets as either assets or liabilities and recorded at fair value. Changes in the fair value of interest rate swapsderivatives are either recognized periodically in the consolidated income statements or in other comprehensive income depending on the use of the interest rate swapsderivatives and whether it qualifies for hedge accounting and is so designated.
To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception, detailing the particular risk management objective and strategy for the hedge (which includes the item and risk that is being hedged), the derivative that is being used and how hedge effectiveness is being assessed. A derivative has to be effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. The effectiveness of the hedging relationship is evaluated on a prospective and retrospective basis using qualitative and quantitative measures of correlation. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Quantitative methods include a comparison of the changes in the fair value or discounted cash flow of the hedging instrument to the hedged item. A hedging relationship is considered effective if the results of the hedging instrument are within a ratio of 80% to 125% of the results of the hedged item.
Interest rate swaps
Interest rate swaps designated as hedging instruments to hedge against the cash flows attributable to recognized assets or liabilities or forecast payments may qualify as cash flow hedges. During the year ended March 31, 2014, the Company entered into interest rate swapsswap contracts to swap floating interest payments related to certain borrowings for fixed interest payments to hedge the interest rate risk associated with certain
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
forecasted payments and obligations. The effective portion of changes in the fair value of interest rate swaps that are designated and qualify as cash flow hedges is recognized in accumulated other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in interest and investment income, (loss), net in the consolidated income statements. Amounts accumulated are removed from accumulated other comprehensiveThe fair value change of the interest rate swaps not qualified for hedge accounting held by the Company resulted in a gain of RMB102 million and a loss of RMB43 million, which were recognized in interest and investment income, and recognizednet in the consolidated income statements for the years ended March 31, 2014 and 2015, respectively.
Amounts in accumulated other comprehensive income shall be reclassified into earnings in the periods whensame period during which the underlying hedged transactions (interest payments) affect the consolidated income statements.forecasted transaction affects earnings. Upon the termination of the interest rate swapsswap contracts during the year ended March 31, 2015, the hedging instruments were derecognized from the consolidated balance sheets and accumulated other comprehensive income was recorded in interest and investment income, net resulting in a loss of RMB59 million in the consolidated income statements for the year ended March 31, 2015.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(z) Derivatives and hedging (Continued)
Forward exchange contracts
Forward exchange contracts designated as hedging instruments to hedge against the future changes in currency exposure of net investments in foreign operations may qualify as net investment hedges. During the year ended March 31, 2016, the Company entered into several forward exchange contracts to hedge the foreign currency risk associated with investments in net assets of certain subsidiaries with operations in the PRC of which their functional currencies are RMB. The effective portion of the changes in fair value of the forward exchange contracts that are designated and qualified as net investment hedges is recognized in accumulated other comprehensive income to offset the cumulative translation adjustments related to those subsidiaries. The gain or loss relating to the ineffective portion, which is measured based on changes in forward exchange rates, is recognized immediately in other income, net in the consolidated income statements. Amounts accumulated are removed from accumulated other comprehensive income and recognized in the consolidated income statements upon disposal of those subsidiaries. Once the hedge becomes ineffective, hedge accounting is discontinued prospectively. As of March 31, 2016, forward exchange contracts with fair value of US$40 million (RMB257 million) are qualified and designated as hedging instruments. During the year ended March 31, 2016, the Company recognized a loss of US$46 million (RMB298 million) in other income, net in the consolidated income statement, which was the aggregate of (i) the changes in fair value of the forward exchange contracts not qualified for hedge accounting and (ii) the ineffective portion of the changes in fair value of the forward exchange contracts that are designated and qualified as net investment hedges.
Changes in the fair value of interest rate swapsthe derivatives not qualified for hedge accounting are reported in the consolidated income statements. The estimated fair value of interest rate swapsthe derivatives is determined at discrete points in time based on the relevant market information. These estimates are calculated with reference to the market rates using industry standard valuation techniques. Upon
(aa) Bank borrowing and unsecured senior notes
Bank borrowings are recognized initially at fair value, net of upfront fees and other incident fees incurred. Unsecured senior notes are recognized initially at fair value, net of debt discounts or premiums and debt issuance costs. Costs incurred which are directly attributable to the terminationbank borrowings and unsecured senior notes are capitalized and amortized over the estimated term of the facilities using the effective interest rate swaps contracts during the year ended March 31, 2015, the interest rate swaps not qualified for hedge accounting were derecognized from the consolidated balance sheets. The fair value changemethod. Upfront fees, debt discount or premium and debt issuance costs are recorded as a reduction of the proceeds received and the related accretion is recorded as interest rate swaps not qualified for hedge accounting held by the Company was nil, gain of RMB102 million and loss of RMB43 million for the years ended March 31, 2013, 2014 and 2015, respectively and such amounts were recorded in interest and investment income, netexpense in the consolidated income statements.statements over the estimated term of the facilities using the effective interest method.
(aa)(ab) Merchant deposits
The Company collects deposits representing an annual upfront service fee from merchants on Tmall at the beginning of each calendar year. These deposits are initially recorded as a liability by the Company. Such deposits are refundable to a merchant depending on the level of sales volume that is generated by that merchant on Tmall during the period. If the transaction volume target is not met at the end of each calendar year, the relevant deposits will be non-refundable and such portion of the deposits is recognized as revenue in the consolidated income statements.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(ac) Deferred revenue and customer advances
Deferred revenue and customer advances represent service fees received from customers that relate to services to be provided in the future. Deferred revenue, mainly relating to membership and storefront fees, is stated at the amount of service fees received less the amount previously recognized as revenue upon the provision of the respective services over the terms of the respective service contracts.
(ac) Bank borrowing(ad) Commitments and unsecured senior notescontingencies
Bank borrowingIn the normal course of business, the Company is subject to contingencies, such as legal proceedings and unsecured senior notesclaims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recognized initially at fair value, netrecorded when it is probable that a liability has been incurred and the amount of upfront fees, debt discounts or premiums. Debt issuance costs incurredthe assessment can be reasonably estimated.
Certain conditions may exist as of the date the consolidated financial statements are issued, which are directly attributablemay result in a loss to the debt issuanceCompany, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are capitalizedpending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with its legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and amortized overthe amount of the liability can be estimated, then the estimated termliability would be accrued in the consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the facilities using the effective interest method. Upfront fees, debt discount or premium are recorded as a reductioncontingent liability, together with an estimate of the proceeds received and the related accretion is recorded as interest expense in the income statements over the estimated termrange of the facilities usingreasonably possible loss, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the effective interest method.nature of the guarantee would be disclosed.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
2. Summary of significant accounting policies (Continued)
(ad)(ae) Treasury shares
The Company accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury shares account on the consolidated balance sheets. At retirement, the ordinary shares account is charged only for the aggregate par value of the shares. The excess of the acquisition cost of treasury shares over the aggregate par value is allocated between additional paid-in capital (up to the amount credited to the additional paid-in capital upon original issuance of the shares) and retained earnings. The treasury shares account includes 33,000,00028,245,662 and 28,245,66224,393,569 ordinary shares issued at par to subsidiaries of the Company for the purpose of certain equity investment plans for management which were issued at par value, as of March 31, 20142015 and 2015,2016, respectively.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
2. Summary of significant accounting policies (Continued)
(af) Subscription receivables
The Company made available loans to certain employees of the Company and its related companies in order to finance their exercise of share options and subscription for ordinary shares of the Company (Note 13). The participants of all such loans have pledged the ownership of their ordinary shares or restricted shares as security for these loans. For accounting purposes, loans outstanding with respect to the exercise of vested options and share subscription are recorded as subscription receivables in equity. Further, unvested options that were exercised are recorded as other current liabilities and they are transferred to equity upon vesting.
(af)(ag) Statutory reserves
In accordance with the relevant regulations and their articles of association, subsidiaries of the Company incorporated in the PRC are required to allocate at least 10% of their after-tax profit determined based on the PRC accounting standards and regulations to the general reserve until such reserve has reached 50% of the relevant subsidiary's registered capital. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the respective board of directors of the subsidiaries. These reserves can only be used for specific purposes and are not transferable to the Company in the form of loans, advances or cash dividends. During the years ended March 31, 2013, 2014, 2015 and 2015,2016, appropriations to the general reserve amounted to RMB241 million, RMB1,137 million, RMB267 million and RMB267RMB529 million, respectively. No appropriations to the enterprise expansion fund and staff welfare and bonus fund have been made by the Company.
(ag) Convenience translation(ah) Reclassification of comparative figures
Translations of balances inIn previous years, loan receivables arising from micro loans extended to small and medium size enterprises are separately presented as "Loan receivables, net" on the consolidated balance sheet, consolidated income statement, consolidated statementsheets. After the Company disposed of comprehensive incomecertain equity interests and statementassets primarily relating to the micro loan business and related services upon the completion of cash flows from RMB into US$ asthe restructuring of and forPayment Services during the year ended March 31, 2015 are solely for(Note 4(b)), the convenience ofloan receivables balance became insignificant. Accordingly, the readersCompany revised the presentation to report the loan receivables balance under "Prepayments, receivables and were calculated at the rate of US$1.00=RMB6.1990, representing the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2015. No representation is made that the RMBother assets." Prior year amounts could have been or could be, converted, realized or settled into US$ at that ratereclassified to maintain consistency with the current year presentation. These reclassifications had no effect on March 31, 2015, or at any other rate.the reported results of operations and net assets. Corresponding reclassifications have also been made to the consolidated statement of cash flows.
3. Recent accounting pronouncements
In AprilMay 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, "Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity," which provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
3. Recent accounting pronouncements (Continued)
2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity's operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. The new guidance is effective prospectively for the Company for all new disposals of components and new classification as held for sale beginning April 1, 2015. The revised guidance will not have a material effect on the Company's financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in "Topic 605, Revenue Recognition""Revenue Recognition (Topic 605)" and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. In April 2016, the FASB issued ASU 2016-10 to clarify ASU 2014-09 on identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The new guidance is effective retrospectively for the Company for the year end ending March 31, 2019 and the interim reporting periods during the year ending March 31, 2019, with early application permitted only for the annual reporting period ending June 30, 2017, with early application not permitted.March 31, 2018 and the interim reporting periods during the year ending March 31, 2018. The Company is evaluating the existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
3. Recent accounting pronouncements (Continued)
In January 2015, the FASB issued ASU 2015-01, "Income Statement-ExtraordinaryStatement — Extraordinary and Unusual Items," which eliminates the concept of extraordinary and unusual items from U.S. GAAP. The new guidance is effective prospectively for the Company for the year end ending March 31, 2017 and interim reporting periods during the year ending March 31, 2017. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance will not have a material effect on the Company's financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810) — Amendments to the Consolidation Analysis," which amends the criteria for determining which entities are considered VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. The guidance is effective for the Company for the year ending March 31, 20162017 and interim reporting periods during the year ending March 31, 2016.2017. The guidance may be applied retrospectively or through a cumulative effect adjustment to equity as of the beginning of the year of adoption. Early application is permitted, including adoption in an interim period. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs relating to a recognized debt liability to be presented in the consolidated balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective retrospectively for the Company for the year end ending March 31, 2017 and interim reporting periods during the year ending March 31, 2017. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance will not have a material effect on the Company's financial position, results of operations or cash flows. At this time, the Company does not expect this accounting standard update to have a material impact on the consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805) — Simplifying the Accounting for Measurement-Period Adjustments," which eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance is effective prospectively for the Company for the year ending March 31, 2017 and interim reporting periods during the year ending March 31, 2017. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the consolidated balance sheet. The new guidance is effective for the Company for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows. At this time, the Company does not expect this accounting standard update to have a material impact on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01 "Financial Instruments-Overall (Subtopic 825-10) — Recognition and Measurement of Financial Assets and Financial Liabilities," which amends various aspects of
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 2015
2016
3. Recent accounting pronouncements (Continued)
the recognition, measurement, presentation, and disclosure for financial instruments. With respect to the Company's consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. The new guidance is effective for the Company for the year ending March 31, 2019 and interim reporting periods during the year ending March 31, 2019. Early adoption is permitted only for certain provisions. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new ASC 842 "Leases" to replace the previous ASC 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09. The new guidance is effective for the Company for the year ending March 31, 2020 and interim reporting periods during the year ending March 31, 2020. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-05 "Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships," which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC 815 "Derivatives and hedging," does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The new guidance is effective for the Company for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-06 "Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments" to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The new guidance is effective for the Company for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-07 "Simplifying the Transition to the Equity Method of Accounting," to simplify the accounting for equity method investments, which eliminates the requirement in ASC 323 "Investments — equity method and joint ventures" that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The new guidance is effective for the Company for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The Company
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
3. Recent accounting pronouncements (Continued)
is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09 "Improvements to Employee Share-Based Payment Accounting" to simplify the accounting for employee share-based payment transactions, including the income tax consequences, classification of excess tax benefits on the statement of cash flows, introduction of accounting policy election on forfeitures, and the change of the threshold of share withholding by employer for settlement of employees' tax without causing the award to be liability classified. The new guidance is effective for the Company for the year ending March 31, 2018 and interim reporting periods during the year ending March 31, 2018. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of this revised guidance on the Company's financial position, results of operations or cash flows.
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments
Equity transactions
(a) Initial public offering
On September 24, 2014, the Company completed its initial public offering on the New York Stock Exchange under the symbol of "BABA." The Company offered 123,076,931 American Depositary Shares, or ADS, and other selling shareholders, including Yahoo, among others, offered an aggregate of 197,029,169 ADSs. Each ADS represents one ordinary share and was sold to the public at US$68.00 per ADS. On the same date of the initial public offering, the underwriters exercised in full the option to purchase an additional 26,143,903 ADSs and 21,871,997 ADSs at US$68.00 per ADS from the Company and certain other selling shareholders respectively. Net proceeds raised by the Company from the initial public offering amounted to US$10.0 billion after deducting underwriting discounts and commissions and other offering expenses.
Restructuring transactions
(b) Restructuring of Payment Services
Restructuring of Payment Services in 2011
Pursuant to the regulations issued by the People's Bank of China (the "PBOC"), non-bank payment companies were required to obtain a license in order to operate a payment business in the PRC. These regulations provided specific guidelines for license applications only for domestic PRC-owned entities. These regulations stipulated that, in order for any foreign-invested payment company to obtain a license, the scope of business, the qualifications of any foreign investor and any level of foreign ownership would be subject to future regulations to be issued, which in addition would require approval by the PRC State Council. Further, the regulations required that any payment company that failed to obtain a license must cease operations by September 1, 2011. Although Alipay was prepared to submit its license application in early 2011, at that time the PBOC had not issued any guidelines applicable to license applications for foreign-invested payment companies. In light of the uncertainties relating to the license qualification and application process for a foreign-invested payment company, the Company's management determined that it was necessary to restructure Alipay as a company wholly-owned by PRC nationals in order to avail Alipay of the specific licensing guidelines applicable only to domestic PRC-owned entities. Accordingly, the Company divested all of its interest in and control over Alipay, which resulted in deconsolidation of Alipay from the consolidated financial statements.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(b) Restructuring of Payment Services (Continued)
As part of the restructuring, the loan extended for the funding of paid-in capital of Zhejiang Ant Small and Micro Financial Services Company, Ltd. (formerly known as Zhejiang Alibaba E-CommerceGroup Co., Ltd.) ("Ant Financial Services") that held the equity interests of Alipay was repaid by the management members in full to the Company. Certain agreements entered into between the Company and Ant Financial Services, such as the loan agreement, the pledge agreement for the same equity interests held by certain management members of the Company, the option agreement to acquire the equity interests in Ant Financial Services when permitted by the PRC laws, among others (the "Agreements"), which allowed the Company to control Ant Financial Services, were also terminated.
Following the restructuring during the year ended March 31, 2011, the Company has not consolidated or equity accounted for the entities engaging in Payment Services because the Company has no direct and indirect investment in and does not control or have significant influence over Ant Financial Services, Alipay and their subsidiaries.
During the year ended March 31, 2012, the Company entered into the following commercial arrangements, among others, with APN Ltd., a company owned by two directors of the Company, Yahoo, SoftBank, Alipay,
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
Ant Financial Services, and Ant Financial Services'sServices' equity holders, setting out the mechanism for the future collaboration among the relevant parties relating to the Payment Services:
Pursuant to the terms of the Framework Agreement, the Company will receive from Ant Financial Services an amount equal to 37.5% of the equity value of Alipay less US$500 million (RMB3,100 million), being the face value of the Promissory Note payable, upon a Liquidity Event as defined in this agreement (the "Liquidity Payment"). Under no circumstances will the amount of the Liquidity Payment plus US$500 million be less than US$2.0 billion (RMB12.4 billion) or more than US$6.0 billion (RMB37.2 billion), subject to certain increases and additional payments if a Liquidity Event does not occur by the sixth anniversary of the agreement. If a Liquidity Event does not occur by the tenth anniversary of this agreement, the Company will have a right to demand Ant Financial Services and Alipay to effect a Liquidity Event as soon as practicable, provided that the equity value or enterprise value of Alipay at such time exceeds US$1.0 billion (RMB6.2 billion). If the Liquidity Event is demanded by the Company, the minimum amount of US$2.0 billion (RMB12.4 billion) described above will not apply to the Liquidity Payment, unless the Liquidity Event is effected by means of a transfer of more than 37.5% of the securities of Alipay. Upon payment of the Liquidity Payment, certain assets and intellectual property related to the operations of Payment Services, which were retained by the Company (the "Retained Business Assets"), will be transferred to Alipay.
"Liquidity Event" means the earliest to occur of: (a) a qualified initial public offering of Alipay; (b) a transfer of 37.5% or more of the securities of Alipay; or (c) a sale of all or substantially all of the assets of Alipay.
In addition, the Company received a non-interest bearing promissory note (the "Promissory Note") in the principal amount of US$500 million (RMB3,100 million) with a seven-year maturity from APN Ltd. The Promissory Note was secured by a pledge of 50 million ordinary shares of the Company, which were contributed by two directors of the Company to APN Ltd. The Promissory Note formed part of the consideration for the transfer of the Retained Business Assets upon the Liquidity Event and the
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(b) Restructuring of Payment Services (Continued)
Promissory Note was payable upon the earlier of the occurrence of the Liquidity Event or December 14, 2018. The Framework Agreement was subsequently amended and pursuant to the terms of the amendment, the Promissory Note was cancelled and the amount of the Liquidity Payment which the Company would be entitled to receive in the event of a Liquidity Event was increased by US$500 million, the principal amount of the cancelled Promissory Note.
Under the terms of this agreement, the Company licenses certain intellectual property and provides certain software technology services to Alipay in exchange for a royalty fee and software technology services fee in an amount equal to the costs incurred by the Company in providing the software technology services plus 49.9% of the consolidated pre-tax income of Alipay and its subsidiaries, subject to downward adjustments upon certain dilutive equity issuances by Ant Financial Services or Alipay, but in no case below 30.0%. If Alipay incurs a pre-tax loss, the fee that the Company would charge Alipay would equal the costs incurred by the Company in providing the software technology services. This agreement will terminate at the earlier of (a) the payment of the Liquidity Payment, and (b) such time
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
when termination may be required by applicable regulatory authorities in connection with a qualified initial public offering by Alipay.
Under the terms of this agreement, the Company receives payment processing services from Alipay, the fee rate for which is subject to review and approval by the Company's independent directors designated by Yahoo and SoftBank on an annual basis (the "Payment Processing Fee"). This agreement has an initial term of fifty years and shall be renewable thereafter. If the commercial agreement is required by applicable regulatory authorities to be modified in certain circumstances, a one-time payment may be payable to the Company by Ant Financial Services as compensation for the impact of such adjustment. Expenses in connection with the Payment Processing Fee of RMB1,646 million, RMB2,349 million, RMB3,853 million and RMB3,853RMB4,898 million were recorded in cost of revenue in the consolidated income statements for the years ended March 31, 2013, 2014, 2015 and 2015,2016, respectively (Note 22)23).
All closing conditions attached to the Framework Agreement and related supplemental arrangements were fulfilled in December 2011.
Restructuring of Payment Services in 2014
The Framework Agreement and related supplemental arrangements were terminated in August 2014 upon the restructuring of the commercial agreements with Payment Services when the Company entered into a share and asset purchase agreement (the "SAPA""2014 SAPA") with Ant Financial Services, the other parties to the Framework Agreement entered into in 2011, Hangzhou Junhan Equity Investment Partnership ("Junhan") and Hangzhou Junao Equity Investment Partnership, a PRC limited partnership the interests in which are held by certain members of the Alibaba Partnership.
Pursuant to the 2014 SAPA, the Company agreed to sell, subject to receipt of regulatory approvals and other customary closing conditions, certain equity interests and assets primarily relating tosold the micro loan business and related services (the "Transferred Business") to Ant Financial Services for aggregate cash consideration of RMB3,219 million. In addition, the
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(b) Restructuring of Payment Services (Continued)
Company entered into software system use and service agreements with Ant Financial Services relating to the know-howknow how and related intellectual property that the Company has agreed to sell together with the micro loan business and related services.services (Note 23). In calendar years 2015 to 2017, the Company received or will receive an annual fee equal to 2.5% of the average daily book balance of the micro loans managed by Ant Financial Services. In calendar years 2018 to 2021, the Company will receive an annual fee equal to the amount paid for the calendar year 2017 (together with the fees received in calendar years 2015 to 2017, the "SME Annual Fee"). The SME Annual Fee of RMB90 million wasand RMB708 million were recorded in other revenue in the consolidated financial statements for the yearyears ended March 31, 2015.2015 and 2016, respectively.
In connection with the 2014 SAPA, the Company also entered into an amendment and restatement of the Intellectual Property License and Software Technology Services Agreement (the "Amendedamended intellectual property license agreement with Alipay ("amended Alipay IPLA"), pursuant to which the Company licenses certain intellectual property and provides certain software technology services related to Alipay's current operationsAlipay and the Transferred Business. Under the Amendedamended Alipay IPLA, the Company will receive royalty streams and a service fee (collectively, the "Amended IPLA"Profit Share Payments") which will be paid at least annually, amounting to the sum of an expense reimbursement plus 37.5% of the consolidated pre-tax income of Ant Financial Services, subject to certain adjustments. In addition, if the Company acquires any
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
equity interest in Ant Financial Services, the Company will transfer an agreed portion of the underlying intellectual property to Ant Financial Services at the time of such equity issuance. At the same time, the Amended IPLAProfit Share Payments will also be reduced in proportion to such equity issuances made to the Company.
Income in connection with the royalty fee and software technology services fee under IPLAthe Intellectual Property License and Software Technology Services Agreement and the Amended IPLAProfit Share Payments, net of costs incurred by the Company, of RMB277 million, RMB1,764 million, and RMB1,667 million wasand RMB1,122 million were recorded in other income, net in the consolidated income statements for the years ended March 31, 2013, 2014, 2015 and 2015,2016, respectively (Note 22)23).
Pursuant to the terms of the 2014 SAPA, in the event of an initial public offering of Ant Financial Services or Alipay at an implied equity value exceeding US$2525.0 billion which results in gross proceeds of at least US$22.0 billion (a "Qualified IPO"), if the Company's total ownership of equity interests in Ant Financial Services has not reached 33%, the Company would be entitled at its election to receive a one-time payment equal to 37.5% of the equity value of Ant Financial Services as determined immediately prior to such Qualified IPO. There is no cap on the maximum value of such liquidity event payment. If the Company acquires equity interests in Ant Financial Services in an aggregate amount less than 33%, the percentage of Ant Financial Services'sServices' equity value used to calculate such liquidity event payment will be reduced proportionately.
In lieu of receiving such liquidity event payment, the Company may elect to continue to receive the Amended IPLAProfit Share Payments in perpetuity, subject to the receipt of regulatory approvals. In connection with a Qualified IPO and if the Company so elects, Ant Financial Services must use its commercially reasonable efforts to obtain the required approvals for continued payments under the Amendedamended Alipay IPLA. If such approvals are not obtained, Ant Financial Services will pay the liquidity event payment as described above to the Company.
The 2014 SAPA provides for future potential equity issuances to the Company by Ant Financial Services. In the event that Ant Financial Services applies for and receives certain PRC regulatory approvals in the future, Ant Financial Services will issue and the Company will purchase newly issued equity interests in Ant Financial
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(b) Restructuring of Payment Services (Continued)
Services up to a 33% equity interest, or such lesser equity interest as may be permitted by the regulatory approvals. If the liquidity event payment described above has not become payable upon a Qualified IPO of Ant Financial Services, the Company's right to acquire equity interests up to the full 33% equity interest will continue after such Qualified IPO. However, the maximum equity interest that the Company is entitled to acquire will be reduced in proportion to any dilutive equity issuances by Ant Financial Services in and following such Qualified IPO. If the Company acquires an equity interest in Ant Financial Services pursuant to this arrangement which is below 33%, the liquidity event payment amount and the profit sharing arrangement under the Amendedamended Alipay IPLA will be proportionately reduced based on the amount of equity interests acquired by the Company.
Concurrently with the 2014 SAPA, the Company entered into other ancillary agreements, including a data sharing agreement, an SME loan cooperation agreement, a trademark agreement, and an amended and restated shared services agreement. The Company also entered into a binding term sheet in respect of a technology services agreement, pursuant to which the Company agreed to provide certain cloud computing, database service and storage, large-scale computing services and certain other services to Ant Financial Services on a cost-plus basis. In addition, the existing Alipay Commercial Agreement will continue as currently in effect.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
The terms of the 2014 SAPA, the Amendedamended Alipay IPLA and other ancillary agreements took effect immediately upon their execution in August 2014. The transfer of the Transferred Business was completed in February 2015, a gain on disposal of RMB306 million was recorded in interest and investment income, net of the consolidated financial statements for the year ended March 31, 2015. Certain assets and liabilities, such as restricted cash and escrow receivables of RMB3,495 million, loan receivables, net of RMB23,363 million, secured borrowings of RMB15,417 million and escrow money payable of RMB3,495 million were derecognized from the consolidated balance sheet of the Company upon the completion of the transfer of the Transferred Business.
For accounting purposes, the fair value of the restructured arrangement exceeded the fair value of the pre-existing arrangement with Ant Financial Services by RMB1.3 billion. As Ant Financial Services is controlled by a director and major shareholder of the Company, the excess value provided to the Company in this related party transaction is accounted for as an equity contribution by the shareholder as restructuring reserve in the statement of changes in shareholders' equity. Given the nature of this transaction, the corresponding asset representing the excess value receivable by the Company is accounted for as a deduction from equity and amortized as an expense in the consolidated income statements over the expected term of the restructured arrangement which is estimated to be 5 years. The amortization of the excess value of RMB166 million wasand RMB264 million were recorded in the other income, net ofin the consolidated income statementstatements for the yearyears ended March 31, 2015.2015 and 2016, respectively. Furthermore, the Company accounts for the Amended IPLAProfit Share Payments and the SME Annual Fee in the periods when the services are provided, where such payments are expected to approximate the estimated fair values of the services provided.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
Mergers and acquisitions
(c) PrivatizationAcquisition of Alibaba.comAlibaba Health Information Technology Limited ("Alibaba Health")
In May 2012,April 2014, the proposal to privatize Alibaba.com Limited by wayCompany and Yunfeng Capital, of a scheme of arrangement under Section 86which the executive chairman of the Cayman Islands Companies Law was approved byCompany has a sufficient majority40% interest in its general partner, completed an acquisition of the independent shareholders of Alibaba.com Limited. As part of the privatization, all outstandingnewly issued ordinary shares of Alibaba.com Limited, other than those held by the Company were cancelled in exchange for a cash payment of HK$13.50 per share, forrepresenting a total amountequity and voting interest of RMB15.1 billion. On June 20, 2012, the scheme of arrangement was approved and the listing of the sharesapproximately 54% in Alibaba.com LimitedAlibaba Health through their investments in a special purpose entity. Alibaba Health, a company that is listed on the Hong Kong Stock Exchange, is primarily engaged in the business of developing the technology for product identification, authentication and tracking system for pharmaceutical and medical products in the PRC. The Company holds a 70% equity interest in the special purpose entity and Yunfeng Capital holds the remaining 30% equity interest. Cash consideration of HK$932 million (RMB741 million) was withdrawn. The rationale forpaid upon the privatization was to enable Alibaba.com Limited to enhance and realign its strategies with a focus on longer term benefits to its business. Further, all outstanding share-based awards relating to shares of Alibaba.com Limited were cancelled in exchange for an agreement to make a cash payment to the holdersclosing of the awards. Thetransaction by the Company offered HK$13.50 for each RSUto acquire its equity interest in the special purpose entity. Although the Company controls the board of the special purpose entity, the investment and restricted share and an amount equal to HK$13.50 minus the relevant exercise price for each share option. Theshareholders agreement provided that the cash payment to former holders of such awards would be madeunderlying shares in Alibaba Health are voted by the Company and Yunfeng Capital separately based on their respective effective equity interest, including voting rights. The Company had an effective equity and voting interest of approximately 38% in accordanceAlibaba Health, exercised significant influence over and accounted for Alibaba Health as an equity method investee.
In July 2015, in preparation of the transfer of the Tmall online pharmacy business operations of the Company to Alibaba Health (of which the agreement was subsequently terminated), the investment and shareholders agreement was amended under which Yunfeng Capital agreed to irrevocably give up its separate voting rights with the pre-existing vesting schedulesrespect to its indirect interest in Alibaba Health at no consideration. Such control is important for the original grantsCompany to execute its digital and data-driven healthcare strategy through Alibaba Health as its flagship vehicle in this sector, indirectly economically benefiting all shareholders including Yunfeng Capital. As a result of the awards. As of March 31, 2013, 2014 and 2015,amendment, the Company had commitments to pay RMB384obtained control over the entire 54% equity interest in Alibaba Health through its control over the board of the special purpose entity. Consequently, Alibaba Health became a consolidated subsidiary while the Company's effective equity interest in Alibaba Health remains at approximately 38%.
The equity value of Alibaba Health of HK$64,319 million RMB133 million and RMB34 million, respectively, upon vesting of such cancelled share-based awards, of which RMB238 million, RMB87 million and RMB25 million was accrued expenses, accounts payable and other current liabilities(RMB50,723 million), estimated based on the market price of the issued shares of Alibaba Health listed on the Hong Kong Stock Exchange which was the more readily ascertainable fair value as of the deemed acquisition date, was used to allocate the fair value of net assets acquired, the fair value of noncontrolling interests and calculate the gain of RMB18,603 million which was recognized in relation to the revaluation of previously held equity interest relating to obtaining control of Alibaba Health in interest and investment income, net in the consolidated balance sheets, respectively. Duringincome statement for the year ended March 31, 2013, the incremental share-based compensation expense of RMB64 million was recognized in the consolidated income statement in connection with the modification with respect to the cash settlement of the vested awards. Following the privatization, Alibaba.com Limited became a wholly-owned subsidiary of the Company, which resulted in a reduction in noncontrolling interest of RMB2,636 million.2016.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(d) Repurchase(c) Acquisition of Ordinary Shares from Yahoo
In September 2012, the Company completed the repurchase of 523 million ordinary shares from Yahoo for a total consideration of US$7.1 billion (RMB44.9 billion) (the "Initial Repurchase"). Out of the total consideration, US$6.3 billion (RMB39.8 billion) was paid in cash and the balance was settled in preference shares of the Company with a liquidation preference amount of US$800 million (RMB5.1 billion) (the "Redeemable Preference Shares"). The shares repurchased from Yahoo were subsequently retired by the Company during the year ended March 31, 2013. Further, the repurchase agreement, as amended, provided that upon a qualified initial public offering of the Company meeting certain specified criteria (a "Qualified IPO of the Company"), Yahoo must sell or transfer, at the Company's election, up to 140 million ordinary shares either in the Qualified IPO of the Company or to the Company at the initial public offering price per share in the Qualified IPO of the Company less certain specified fees and commissions. In connection with the Company's initial public offering in September 2014, Yahoo sold 140 million ADSs representing 140 million ordinary shares of the Company.
The holders of the Redeemable Preference Shares were entitled to cumulative, semi-annual dividends at a rate of up to 10% per annum, subject to certain adjustments tied to the credit assessment of the Company, with at least 3% per annum payable in cash on pre-determined dividend payment dates and the remaining amount accrued to the liquidation preference. The Redeemable Preference Shares were redeemable at an amount equal to the liquidation preference plus accrued and unpaid dividends at the Company's option at any time, and were mandatorily redeemable at the earlier of the tenth anniversary of the closing date of their issuance or the occurrence of certain specified events. The Redeemable Preference Shares had no voting rights and are not convertible into ordinary shares. For accounting purposes, the Redeemable Preference Shares were classified as liabilities because they are mandatorily redeemable by the Company. Dividends on the Redeemable Preference Shares amounting to RMB271 million and RMB96 million for the years ended March 31, 2013 and 2014, respectively, were recognized as interest expense in the consolidated income statements and credited to accrued expenses, accounts payable and other current liabilities on the balance sheets. The Redeemable Preference Shares were subsequently redeemed in May 2013.
Concurrent with the closing of the Initial Repurchase, the Company and Yahoo amended the existingAlibaba Health Information Technology and Intellectual Property Licensing AgreementLimited ("TIPLA"Alibaba Health"), pursuant to which the Company made a lump sum payment in the amount of US$550 million (RMB3,487 million) to Yahoo. Under the amended agreement, the existing royalty payment arrangement now continues until the fourth anniversary of the effective date of the amendment, unless a Qualified IPO of the Company is consummated at an earlier date which would terminate the royalty payment arrangement upon the consummation of a Qualified IPO of the Company. The lump sum payment of US$550 million (RMB3,487 million) was recognized as an expense in full immediately.
The Initial Repurchase and the lump sum royalty payment described above were financed by the Redeemable Preference Shares as well as by (i) the issuance of ordinary shares of the Company for total proceeds of US$2.6 billion (RMB16.4 billion); (ii) the issuance of convertible preference shares of the Company with a liquidation preference of US$1.7 billion (RMB10.7 billion) (the "Convertible Preference Shares"), net of issuance cost of RMB157 million; (iii) certain loan facilities obtained by the Company; and (iv) existing cash of the Company.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
The Convertible Preference Shares were redeemable at an amount equal to their liquidation preference plus accrued and unpaid dividendsallocation of the equity value of Alibaba Health at the Company's option at any time subsequentdate of the deemed acquisition is summarized as follows:
Amounts | |||||
---|---|---|---|---|---|
(in millions of RMB) | |||||
Net assets acquired | 1,290 | ||||
Amortizable intangible assets (i) | |||||
User base and customer relationships | 8 | ||||
Trade names, trademarks and domain names | 35 | ||||
Developed technology and patents | 70 | ||||
Goodwill | 49,320 | ||||
Deferred tax assets | 19 | ||||
Deferred tax liabilities | (19 | ) | |||
| | | | | |
Total | 50,723 | ||||
| | | | | |
| | | | | |
| | | | | |
The equity value comprised of: | |||||
- fair value of previously held equity interests | 19,264 | ||||
- fair value of noncontrolling interests | 31,459 | ||||
| | | | | |
Total | 50,723 | ||||
| | | | | |
| | | | | |
| | | | | |
The rationale for this transaction is to enable the Company to expand its products and services. This transaction will enable the Company to benefit from the focused healthcare expertise of Alibaba Health in the operation of the online pharmacy business and foster consumer trust through the sale of genuine pharmaceuticals through Alibaba Health's verification and authentication technology. Goodwill arising from this acquisition was attributable to the first anniversary ofsynergies expected from the issue date if certain conditions were met,combined business which will create a technology enabled solution provider to consumers and were mandatorily redeemable onother participants in the fifth anniversary ofhealthcare industry in the issue date unless previously redeemed. The holders ofPRC.
Subsequent to March 31, 2016, the Convertible Preference Shares were entitled to semi-annual dividends atCompany and Alibaba Health entered into a pre-determined rate until such shares were redeemed. Such dividend rate shall be 2.0% per annum prior to the second anniversary of the issuance date, 5.0% per annum commencing on the second anniversary of the issuance date until the mandatory redemption date, and 8.0% per annum thereafter until the Convertible Preference Shares were redeemed or converted into ordinary shares. The Convertible Preference Shares were convertible at the holder's option at any time at an initial conversion price of US$18.50 per share subjectservices agreement under which Alibaba Health will provide outsourced services in relation to certain adjustments, and shall be mandatorily converted concurrently with the closing of a qualified IPO as definedproduct categories in the Convertible Preference Share purchase agreement. The holders of such shares had no voting rights. The Convertible Preference Shares were classified in the mezzanine section between liabilities and equity on the balance sheets due to their mandatory redemption provision. Costs incurred in connection with the issuance of the Convertible Preference Shares were recorded as a reduction of the related proceeds received, and the related accretion was charged against additional paid-in capital over the period from the issuance date until the mandatory redemption date of such shares. The Convertible Preference Shares were subsequently converted into ordinary shares of the Company upon the closing of the Company's initial public offering in September 2014 (Note 4(a)).
Mergers and acquisitionsTmall online pharmacy.
(e)(d) Acquisition of AutoNavi Holdings Limited ("AutoNavi")
In May 2013, the Company completed an investment of newly issued ordinary shares and convertible preferred shares in AutoNavi representing a 28% equity interest on a fully-diluted basis. AutoNavi is a provider of digital map content and navigation and location based solutions in the PRC that was listed on the Nasdaq Global Select Stock Market ("Nasdaq"). The investment in convertible preferred shares of RMB1,285 million was accounted for under the cost method given that the convertible preferred shares were not considered in-substance common stock due to the existence of certain terms such as liquidation preference over ordinary shares, and the investment in ordinary shares of RMB533 million was accounted for under the equity method given the existence of significant influence.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(d) Acquisition of AutoNavi Holdings Limited ("AutoNavi") (Continued)
In July 2014, the Company completed an acquisition of all of the issued and outstanding shares of AutoNavi that the Company did not previouslyalready own. Following the completion of the transaction, AutoNavi became a wholly-owned subsidiary of the Company and the listing of the ADS of AutoNavi on the Nasdaq was withdrawn.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
The total cash consideration of US$1,032 million (RMB6,348 million) was paid upon the closing of the transaction. The allocation of the purchase price at the date of acquisition is summarized as follows:
| Amounts | |||||
---|---|---|---|---|---|---|
| (in millions of RMB) | |||||
Net assets acquired | 2,236 | |||||
Amortizable intangible assets (i) | ||||||
User base and customer relationships | 255 | |||||
Trade names, trademarks and domain names | 249 | |||||
Developed technology and patents | 1,387 | |||||
Goodwill | 4,380 | |||||
Deferred tax assets | 72 | |||||
Deferred tax liabilities | (284 | ) | ||||
| | | | | | |
Total | 8,295 | |||||
| | | | | | |
| | | | | | |
| | | | | ||
|
| Amounts | ||||
---|---|---|---|---|---|
| (in millions of RMB) | ||||
Total purchase price comprised of: | |||||
- cash consideration | 6,348 | ||||
- fair value of previously held equity interests | 1,947 | ||||
| | | | | |
Total | 8,295 | ||||
| | | | | |
| | | | | |
| | | | | |
|
A gain of RMB284 million was recognized in relation to the revaluation of previously held equity interest relating to the step acquisition of AutoNavi in interest and investment income, net in the consolidated income statement for the year ended March 31, 2015. As AutoNavi was a publicly listed company prior to this step acquisition, the fair value of the previously held equity interest was estimated based onwith reference to the market price upon the completion of the transaction, with an adjustment made to remove the effect of control premium embedded in the transaction price.reflect other factors that may affect such fair value estimation.
The rationale for this transaction is to enable the Company to expand its products and services. The Company believes the acquisition will help to develop and provide online-to-offline/offline-to-online commerce and location-based services to its mobile commerce user base. Goodwill arising from this acquisition was attributable to the synergies expected from the combined operations of AutoNavi and the Company, the assembled workforce and the future development initiatives of the assembled workforce to enhance the mobile offerings of the Company beyond e-commerce.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(f)(e) Acquisition of Alibaba Pictures Group Limited (formerly known as ChinaVision Media Group Ltd.) ("Alibaba Pictures")
In June 2014, the Company completedacquired control of Alibaba Pictures by completing an investment in newly issued ordinary shares representing an approximately 60% equity interest in Alibaba Pictures.Pictures for a total cash consideration of HK$6,244 million (RMB4,955 million). Alibaba Pictures is a producer of movies and television programs in the PRC that is listed on the Hong Kong Stock Exchange.
The total purchase price consisted of cash consideration of HK$6,244 million (RMB4,955 million) which represented a price of HK$0.50 per share. The allocation of the purchase price at the date of acquisition is summarized as follows:
| Amounts | ||||
---|---|---|---|---|---|
| (in millions of RMB) | ||||
Net assets acquired (i) | 5,899 | ||||
Amortizable intangible assets (ii) | |||||
User base and customer relationships | 4 | ||||
Trade names, trademarks and domain names | 95 | ||||
Others | 38 | ||||
Goodwill | 9,759 | ||||
Deferred tax assets | 13 | ||||
Deferred tax liabilities | (17 | ) | |||
Noncontrolling interests | (10,836 | ) | |||
| | | | | |
Total | 4,955 | ||||
| | | | | |
| | | | | |
| | | | | |
|
The rationale for this transaction is to enable the Company to expand its products and services. The Company believes the acquisition will help to advance the Company's vision of making media entertainment available to its customers. Goodwill arising from this acquisition was attributable to the synergies expected from the combined operations of Alibaba Pictures and the Company, the assembled workforce and their knowledge and experience in the entertainment and media industry in the PRC.
In June 2015, Alibaba Pictures placed newly issued ordinary shares to unrelated third-party investors with aggregate gross proceeds of HK$12,179 million (RMB9,647 million). The Company's equity interest in Alibaba Pictures was therefore diluted to 49.5% upon completion of the placing.
As a result of the dilution, the Company deconsolidated the financial results of Alibaba Pictures and accounted for the investment in the remaining equity interest under the equity method. A gain of RMB24,734 million arising from the revaluation of the Company's remaining equity interest in Alibaba Pictures was recognized in interest and investment income, net in the consolidated income statement for the year ended March 31, 2016. As Alibaba Pictures is a publicly listed company, the fair value of the remaining equity interest was estimated with reference to the market price upon the completion of the placing.
In addition, during the year ended March 31, 2016, the Company disposed of its online movie ticketing business and movie and TV series financing platform to Alibaba Pictures at a cash consideration of US$350 million (RMB2,259 million) plus certain reimbursement amounts. A disposal gain of RMB2,214 million was recognized in interest and investment income, net in the consolidated income statement for the year ended March 31, 2016.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
Subsequently in June 2015, Alibaba Pictures entered into a placing agreement with certain independent placing agents in relation to the placing for certain ordinary shares at the placing price of HK$2.90 per share. The aggregate gross proceeds from such placing amounted to approximately HK$12,179 million (RMB9,647 million). The Company's equity interest in Alibaba Pictures was diluted from 59.4% to 49.5% upon completion of this transaction.
(g)(f) Acquisition of UCWeb Inc. ("UCWeb")
In June 2014, the Company exchanged all of the issued and outstanding shares in UCWeb held by the other shareholders that the Company did not previouslyalready own. Prior to this transaction, UCWeb was an equity investee which was accounted for under the cost method and was 66% owned by the Company with a carrying amount of RMB4,394 million. UCWeb is a developer of leading mobile web browsers in the PRC.PRC, India and Indonesia.
The total exchange consideration consisted of 12.3 million restricted shares and RSUs of the Company and approximately US$458 million (RMB2,826 million) in cash. Out of the total exchange consideration, 3.4 million restricted shares and RSUs which is classified as equity, as well as approximately cash consideration of US$126 million (RMB777 million) to beare settled on a deferred basis. The fair value of restricted shares and RSUs approximate US$613 million (RMB3,782 million) as of the acquisition date.
The allocation of the purchase price at the date of acquisition is summarized as follows:
| Amounts | |||||
---|---|---|---|---|---|---|
| (in millions of RMB) | |||||
Net assets acquired (i) | 1,159 | |||||
Amortizable intangible assets (ii) | ||||||
User base and customer relationships | 106 | |||||
Trade names, trademarks and domain names | 591 | |||||
Developed technology and patents | 561 | |||||
Non-compete agreements | 1,823 | |||||
Goodwill | 10,376 | |||||
Deferred tax liabilities | (21 | ) | ||||
| | | | | | |
Total | 14,595 | |||||
| | | | | | |
| | | | | | |
| | | | | | |
Total purchase price comprised of: | ||||||
- cash consideration | 2,826 | |||||
- share-based consideration | 3,782 | |||||
- fair value of previously held equity interests | 7,987 | |||||
| | | | | | |
Total | 14,595 | |||||
| | | | | | |
| | | | | | |
| | | | | ||
|
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
A gain of RMB3,593 million was recognized in relation to the revaluation of previously held equity interest relating to the step acquisition of UCWeb in interest and investment income, net in the consolidated income statementsstatement for the year ended March 31, 2015. The fair value of the previously held equity interest was measured using an income approach determined by the Company. As UCWeb is a private company, the fair value of the previously held equity interest is estimated based on significant inputs that market participants would consider, which mainly include revenue growth rate, operating margin, discount rate and adjustmentsother factors that may affect such fair value estimation.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(f) Acquisition of UCWeb Inc. ("UCWeb") (Continued)
UCWeb is an important part of the Company's ecosystem to offer mobile services to users from the PRC as well as other parts of the world, thereby strengthening user engagement as well as enabling a new marketing channel for lack of control.
The rationalethe merchants in the Company's ecosystem. Furthermore, UCWeb creates additional revenue sources for this transaction is to enable the Company to increase user acquisitionfrom mobile search and engagement. The Company believes the acquisition will help to provide the Company with access to mobile users.advertising and others. Goodwill arising from this acquisition was attributable to the synergies expected from the combined operations of UCWeb and the Company, the assembled workforce and the future development initiatives of the assembled workforce to enhance the mobile offerings of the Company beyond e-commerce.
(h)(g) Acquisition of Shenzhen OneTouch Business Services Ltd. ("OneTouch")
In May 2014, the Company completed an acquisition of the remaining interests of OneTouch. The total purchase price consisted of cash consideration of RMB790 million and contingent consideration with a fair value of RMB1,094 million. Prior to this transaction, the Company had previously invested 65% interest in OneTouch by cash consideration and contingent consideration in 2011 and OneTouch was an equity investee which was accounted for under the equity method with a carrying amount of RMB196 million. OneTouch is a provider of comprehensive export-related services tailored to the needs of small businesses in the PRC, including customs clearance, logistics, cargo insurance, currency exchange, tax refund, financing and certification.
The allocation of the purchase price at the date of acquisition is summarized as follows:
| Amounts | |||||
---|---|---|---|---|---|---|
| (in millions of RMB) | |||||
Net assets acquired | 105 | |||||
Amortizable intangible assets (i) | ||||||
User base and customer relationships | 25 | |||||
Trade names, trademarks and domain names | 196 | |||||
Developed technology and patents | 4 | |||||
Non-compete agreements | 703 | |||||
Goodwill | 3,998 | |||||
Deferred tax liabilities | (232 | ) | ||||
| | | | | | |
Total | 4,799 | |||||
| | | | | | |
| | | | | | |
| | | | | ||
| ||||||
Total purchase price comprised of: | ||||||
- cash consideration | 790 | |||||
- contingent cash consideration | 1,094 | |||||
- fair value of previously held equity interests | 2,915 | |||||
| | | | | | |
Total | 4,799 | |||||
| | | | | | |
| | | | | | |
| | | | | ||
|
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(g) Acquisition of Shenzhen OneTouch Business Services Ltd. ("OneTouch") (Continued)
The amount of the contingent consideration will be determined based on a formula tied to certain future operating targets of OneTouch for the year ending March 31, 2017, which will not exceed RMB3,420 million. The fair value of the contingent consideration included in the total purchase price represents a probability-weighted outcome based on the Company's analysis of the likelihood of the various scenarios underlying this arrangement. A gain of RMB2,719 million was recognized in relation to the revaluation of previously held equity interest relating to the step acquisition of OneTouch in interest and investment income, net in the consolidated income statementsstatement for the year ended March 31, 2015.
The fair value of the previously held equity interest was measured using an income approach determined by the Company. As OneTouch is a private company, the fair value of the previously held equity interest is estimated based on significant inputs that market participants would consider, which mainly include revenue growth rate, operating margin, discount rate and adjustments for lack of control.other factors that may affect such fair value estimation.
The rationale for this transaction is to enable the Company to expand its products and services. The Company believes the acquisition will help to serve the wholesale sellers on the international wholesale marketplace by adding a wide range of export-related value-added services. Goodwill arising from this acquisition was attributable to the synergies expected from the combined operations of OneTouch and the Company, the assembled workforce and their knowledge and experience surrounding export-related services to small businesses in the PRC.
As of March 31, 2013, 2014, 2015 and 20152016, the Company assessed the operating and financial targets in connection with the previous and current contingent consideration arrangements, and revised the fair value of the contingent consideration payable. As a result, the Company recognized in the consolidated income statements an increase in fair value of contingent consideration of RMB22 million, RMB178 million, and RMB85 million in the consolidated income statementsand RMB17 million for the years ended March 31, 2013, 2014, 2015 and 2015, respectively.2016.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(i)(h) Other acquisitions
Other acquisitions that constitute business combinations are summarized in the following table:
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
Net assets | 540 | 24 | 266 | ||||||||
Identifiable intangible assets | 104 | 486 | 421 | ||||||||
Deferred tax assets | — | — | 5 | ||||||||
Deferred tax liabilities | (23 | ) | (29 | ) | (95 | ) | |||||
| | | | | | | | | | | |
621 | 481 | 597 | |||||||||
Noncontrolling interests | (294 | ) | — | (269 | ) | ||||||
| | | | | | | | | | | |
Net identifiable assets acquired | 327 | 481 | 328 | ||||||||
Goodwill | 152 | 543 | 1,806 | ||||||||
| | | | | | | | | | | |
Total purchase consideration | 479 | 1,024 | 2,134 | ||||||||
Fair value of previously held equity interests | (300 | ) | — | (107 | ) | ||||||
Purchase consideration settled | (96 | ) | (731 | ) | (1,927 | ) | |||||
| | | | | | | | | | | |
Contingent/deferred consideration as of year end | 83 | 293 | 100 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Total purchase consideration comprised of: | |||||||||||
- cash consideration | 140 | 843 | 2,027 | ||||||||
- fair value of previously held equity interests | 300 | — | 107 | ||||||||
- share-based consideration | 39 | 181 | — | ||||||||
| | | | | | | | | | | |
Total | 479 | 1,024 | 2,134 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
Net assets | 24 | 266 | 350 | ||||||||
Identifiable intangible assets | 486 | 421 | 876 | ||||||||
Deferred tax assets | — | 5 | — | ||||||||
Deferred tax liabilities | (29 | ) | (95 | ) | (198 | ) | |||||
| | | | | | | | | | | |
481 | 597 | 1,028 | |||||||||
Noncontrolling interests | — | (269 | ) | (10 | ) | ||||||
| | | | | | | | | | | |
Net identifiable assets acquired | 481 | 328 | 1,018 | ||||||||
Goodwill | 543 | 1,806 | 1,403 | ||||||||
| | | | | | | | | | | |
Total purchase consideration | 1,024 | 2,134 | 2,421 | ||||||||
Fair value of previously held equity interests | — | (107 | ) | — | |||||||
Purchase consideration settled | (731 | ) | (1,927 | ) | (2,360 | ) | |||||
| | | | | | | | | | | |
Contingent/deferred consideration as of year end | 293 | 100 | 61 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total purchase consideration comprised of: | |||||||||||
- cash consideration | 843 | 2,027 | 2,421 | ||||||||
- fair value of previously held equity interests | — | 107 | — | ||||||||
- share-based consideration | 181 | — | — | ||||||||
| | | | | | | | | | | |
Total | 1,024 | 2,134 | 2,421 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
In addition, during the year ended March 31, 2013, the Company completed an acquisition of the remaining noncontrolling interests of a partially owned subsidiary of which the Company held 79.1% of the economic interests immediately prior to the acquisition. The total purchase price consisted of cash consideration of RMB335 million, as well as ordinary shares, the fair value of which equaled RMB141 million as of the acquisition date which was recorded as an equity transaction.
A loss of RMB4nil, RMB61 million nil and RMB61 millionnil in relation to the revaluation of previously held equity interest was recognized in the consolidated income statementstatements for the years ended March 31, 2013, 2014, 2015 and 2015.2016, respectively, for the above business combinations.
Pro forma results of operations for the acquisitions described above have not been presented because they are not material to the consolidated income statements, either individually or in aggregate.
Equity investments and others
(i) Investment in Rajax Holding ("Ele.me")
In March 2016, the Company and Ant Financial Services completed a portion of the subscription for newly issued convertible preferred shares in Ele.me based on a total combined commitment of US$1,250 million, of which the Company's total commitment is US$900 million (RMB5,891 million). Ele.me is an operator of one of the largest mobile food ordering and delivery services in the PRC. Ele.me complements the Company's investment in Koubei (Note 4(n)) in local services, focusing on food ordering and delivery characterized by high-frequency usage and last-mile logistics within a city.
The total cash consideration paid was US$540 million (RMB3,512 million). The effective equity interest in Ele.me that is held by the Company will be approximately 22% on a fully-diluted basis once the full
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(i) Investment in Rajax Holding ("Ele.me") (Continued)
commitment is funded. The convertible preferred shares are not considered in-substance common stock given that such shares contain certain terms such as dividend and liquidation preferences over ordinary shares. As a result, the investment in Ele.me is accounted for under the cost method (Note 14).
(j) Investment in Magic Leap, Inc. ("Magic Leap")
In December 2015, the Company completed an investment in newly issued convertible preferred shares of Magic Leap, representing an approximately 10% equity interest on a fully-diluted basis. Magic Leap is a technological company that focuses on the development of augmented reality technology. The total cash consideration paid was US$430 million (RMB2,775 million). Such investment is accounted for under the cost method (Note 14).
(k) Investment in CMC Holdings Limited ("CMC")
In December 2015, the Company completed an investment in preferred shares, representing a 21% equity interest, of CMC. CMC is a new investment platform that focuses on the media and entertainment sectors. The total cash consideration paid was US$197 million (RMB1,270 million). The preferred shares are not considered in-substance common stock given that such shares contain certain terms such as dividend and liquidation preferences over ordinary shares. As a result, the investment in preferred shares is accounted for under the cost method (Note 14).
In addition, the Company acquired in a 20% equity interest in a limited partnership in the PRC which is managed by the founder of CMC. The objective of the limited partnership is consistent with that of CMC. Total cash consideration of RMB1,250 million was paid upon the closing of the transaction in December 2015. Such investment is accounted for under the equity method (Note 14).
(l) Investment in Beijing Shiji Information Technology Co., Ltd. ("Shiji Information")
In November 2015, the Company completed an investment in newly issued ordinary shares of Shiji Information, representing an approximately 13% equity interest in Shiji Information. Shiji Information, a company that is listed on the Shenzhen Stock Exchange, is primarily engaged in the development and sale of hotel information management system software, system integration and technical service. The total cash consideration of RMB2,389 million was paid upon the closing of the transaction. Such investment is accounted for as an available-for-sale security (Note 12).
(m) Investment in Huayi Brothers Media Corporation ("Huayi Brothers")
In August 2015, the Company completed an investment in newly issued ordinary shares of Huayi Brothers, representing an approximately 4% equity interest in Huayi Brothers. Yunfeng Capital is also one of the minority shareholders of Huayi Brothers. Huayi Brothers, a company that is listed on the Shenzhen Stock Exchange, is primarily engaged in the production of television programs and movies in the PRC. The total cash consideration of RMB1,533 million was paid upon the closing of the transaction. Such investment is accounted for as an available-for-sale security (Note 12).
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(n) Investment in Koubei Holding Limited ("Koubei")
In June 2015, the Company and Ant Financial Services agreed to set up Koubei, a joint venture in which the Company and Ant Financial Services each hold a 49.6% equity interest, while an unrelated third party affiliated with a major Chinese restaurant chain holds the remaining minority equity interest. Koubei integrates the convenience aspects of mobile commerce and big data to provide consumers with information and promotional benefits from local restaurants in the PRC.
The capital injection from the Company includes cash of RMB3.0 billion as well as the injection of certain related businesses. The cash and businesses injection were completed as of March 31, 2016. A gain of RMB128 million which approximated the fair value of the businesses being injected, was recognized in relation to the contribution of the businesses of which the carrying amount was insignificant to Koubei in interest and investment income, net in the consolidated income statement for the year ended March 31, 2016. For accounting purposes, the investment in Koubei is accounted for under the equity method (Note 14).
(o) Investment in YTO Express (Logistics) Co., Ltd. ("YTO Express")
In May 2015, the Company made a contribution to the registered capital representing an ownership interest of 12% in YTO Express. YTO Express is one of the leading express courier companies in the PRC. YTO Express is one of the strategic express courier companies participating in the data system of Cainiao Network to fulfill orders from the Company's core commerce business. The cash consideration of RMB1,500 million was paid upon the closing of the transaction. Yunfeng Capital is also a co-investor of YTO Express. Such investment is accounted for under the cost method (Note 14).
During the year ended March 31, 2016, a company listed on the Shanghai Stock Exchange filed an application to purchase all of the equity interest in YTO Express through an asset swap and share issue, resulting in a reverse takeover of the company by YTO Express. The completion of the reverse takeover is subject to the approval by certain regulatory authorities.
(p) Investment in wealth management products in relation to a founder's investment in Wasu Media Holding Co., Ltd. ("Wasu")
In April 2015, the Company entered into an arrangement with a bank in the PRC to invest in wealth management products with an aggregate principal amount of RMB7.3 billion. The wealth management products carry an interest rate of 5% per annum, with a maturity of five years and the return of principal and interest income on the products is guaranteed by the bank. The wealth management products have been served as collateral to the issuing bank for the issuance of a financing amounting to RMB6.9 billion to one of the founders of the Company to support his minority investment through a PRC limited partnership in Wasu, a company listed on the Shenzhen Stock Exchange which is engaged in the business of digital media broadcasting and distribution in the PRC. The financing has also been collateralized by the equity interests of Wasu held by such PRC limited partnership. The founder has also pledged his interest in the PRC limited partnership to the Company. The founder is exposed to the risks and rewards of the Wasu shares held by the PRC limited partnership. The Company does not have the power to direct the activities of the PRC limited partnership. The Company entered into strategic cooperation agreements with a major shareholder of Wasu in order to enhance the Company's capabilities and profile in the entertainment sector in the PRC. Such investment in the wealth management products is accounted for as a held-to-maturity security (Note 12).
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(p) Investment in wealth management products in relation to a founder's investment in Wasu Media Holding Co., Ltd. ("Wasu") (Continued)
In addition, the Company entered into a loan agreement for a principal amount of up to RMB2.0 billion with the founder in April 2015 to finance the repayment by the founder of the interest under the above financing.
(q) Investment in Meizu Technology Corporation Limited ("Meizu")
In February 2015, the Company completed an investment in convertible preferred shares of Meizu representing an equity interest of approximately 29% on a fully-diluted basis. Meizu is one of the leading smartphonesmart phone manufacturers in the PRC. The total cash consideration of US$590 million (RMB3,619 million) was paid upon the closing of the transaction. The convertible preferred shares are not considered in-substance
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
common stock given that such shares contain certain terms such as dividend and liquidation preferences over ordinary shares. As a result, the investment in convertible preferred shares is accounted for under the cost method (Note 14).
(k)(r) Investment in Intime Retail (Group) Company Limited ("Intime")
In July 2014, the Company completed the subscription for newly issued ordinary shares representing a 9.9% equity interest in Intime. Intime is one of the leading department store operators in the PRC that is listed on the Hong Kong Stock Exchange. In addition, the Company completed a subscription for a convertible bond which is convertible into ordinary shares of Intime and upon conversion would increase the Company's equity interest in Intime to approximately 26%. The convertible bond has a maturity date which is the third anniversary of the issue date of the bond unless previously converted or redeemed upon the occurrence of certain redemption events, and bears an interest of 1.5% per annum on the principal amount of the bond. The total cash consideration of HK$5,368 million (RMB4,264 million) was paid upon the closing of the transaction. The investment in ordinary shares in Intime is accounted for as an available-for-sale security and the investment in the convertible bond is accounted for under the fair value option and recorded under investment securities (Note 12).
(l)(s) Investment in Singapore Post Limited ("SingPost")
In July 2014, the Company completed the acquisition of ordinary shares in SingPost, which consists of newly issued ordinary shares and existing ordinary shares held in treasury by SingPost, representing approximately 10% of the issued share capital of SingPost. SingPost is a national post service provider in Singapore and a leading provider of e-commerce logistics solutions in the Asia-Pacific region that is listed on the Singapore Exchange. The total purchase price of approximately S$313 million (RMB1,548 million) has been paid upon the closing of the transaction. Such investment is accounted for as an available-for-sale security (Note 12).
In July 2015, the Company entered into a joint venture agreement with SingPost, pursuant to which the Company will invest up to S$92 million (RMB440 million) for a 34% equity interest in a wholly-owned subsidiary of SingPost, which provides end-to-end e-commerce logistics and fulfillment services across the Asia Pacific region. The completion of this transaction is subject to a number of customary closing conditions.
In addition, the Company agreed to subscribe for newly issued ordinary shares of SingPost, representing approximately 5% of the existing issued share capital of SingPost. Upon completion, the Company's equity interest in SingPost would increase to approximately 15%. The total cash consideration for the subscription is
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(s) Investment in Singapore Post Limited ("SingPost") (Continued)
S$187 million (RMB895 million). The completion of this transaction is subject to a number of conditions including the approval by the shareholders of SingPost and certain regulatory authorities.
(m)(t) Investment in Youku Tudou Inc. ("Youku Tudou")
In May 2014, the Company completed an acquisition of ordinary shares representing an effective equity interest of 16.5% on a fully-diluted basis in Youku Tudou. Youku Tudou, a company that iswas previously listed on the New York Stock Exchange, is one of the Internet television companiesa leading multi-screen entertainment and media company in the PRC. The cash consideration of US$1,090 million (RMB6,723 million) was paid and the Company appointed one director to Youku Tudou upon the closing of the transaction. SuchThe Company made this investment on the same terms together with Yunfeng Capital, which is also a co-investor in Youku Tudou. The Company appointed one director to the board of Youku Tudou and the investment in Youku Tudou is accounted for under the equity method (Note 14). Out of the total purchase consideration, RMB918 million was allocated to amortizable intangible assets, RMB4,158 million was allocated to goodwill, RMB230 million was allocated to deferred tax liabilities and RMB1,877 million was allocated to net assets acquired.
(n) Investment in Alibaba Health Information Technology Limited (formerly known as CITIC 21CN Company Limited) ("Alibaba Health")
In April 2014,2016, the Company completed an acquisition of newlyall of the issued ordinaryand outstanding shares representingof Youku Tudou that the Company or Yunfeng Capital did not already own, at a purchase price of US$27.60 per ADS. Following the completion of the transaction, Youku Tudou became a consolidated subsidiary of the Company, with Yunfeng Capital holding an effective equityapproximately 2% minority interest and the management of approximately 38% in Alibaba Health. Alibaba Health, a company that is listedYouku Tudou retaining an option to purchase up to 15% of its equity. The listing of the ADS of Youku Tudou on the Hong KongNew York Stock Exchange was withdrawn.
Youku Tudou is primarily engageda core part of the Company's strategy to offer digital entertainment to consumers in the business of developing product identification, authentication and tracking systemCompany's ecosystem, thereby strengthening user engagement as well as enabling a new marketing channel for pharmaceutical and medical productsthe merchants in the PRC. Company's ecosystem. Further, Youku Tudou creates additional revenue sources for the Company from advertising and membership subscriptions.
The total cash consideration of HK$932 million (RMB741 million)US$4.4 billion (RMB28.4 billion) was paid upon the closing of the transaction. Such investment is accounted
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
4. Significant equity transactions and acquisitions (Continued)
for underUpon the equity method (Note 14). Outissuance of the totalconsolidated financial statements, the accounting for such business combination, including the purchase consideration, RMB100 million was allocated to amortizable intangible assets, RMB157 million was allocated to goodwill, RMB25 million was allocated to deferred tax liabilitiesprice allocation and RMB509 million was allocated to net assets acquired.the gain or loss arising from this transaction, has not been finalized.
(o)(u) Investment in Weibo Corporation ("Weibo")
In April 2014, in connection with Weibo's initial public offering, the Company acquired additional shares of Weibo for an aggregate purchase price of US$449 million (RMB2,764 million) pursuant to the option to increase the equity interest by the Company in Weibo to approximately 30% on a fully-diluted basis (including the shares to be issued in connection with Weibo's initial public offering). Weibo is a social media platform in the PRC that is listed on the Nasdaq. All preferred shares previously held by the Company were automatically converted into ordinary shares upon completion of Weibo's initial public offering. Prior to the transaction, Weibo was an equity investee accounted for under the cost method in which the Company initially acquired an 18% equity interest on a fully-diluted basis for a cash consideration of US$586 million (RMB3,645 million) in April 2013. After the transaction in April 2014, such investment is accounted for under the equity method (Note 14). Out of the total purchase consideration, which included the cash purchase price and the carrying amount of the previously held interest in Weibo, RMB1,126 million was allocated to amortizable intangible
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(u) Investment in Weibo Corporation ("Weibo") (Continued)
assets, RMB3,978 million was allocated to goodwill, RMB282 million was allocated to deferred tax liabilities and RMB1,548 million was allocated to net assets acquired.
(p)(v) Investment in Haier Electronics Group Co., Ltd. ("Haier")
In March 2014, the Company completed an acquisition of ordinary shares representing an approximately 2% equity interest in Haier, a company that is listed on the Hong Kong Stock Exchange, which is principally engaged in the research, development, manufacture and sale of electrical appliances, especially largehome electrical appliances such as refrigerators and air conditioners. The purchase price consisted of cash consideration of HK$965 million (RMB763 million). Such investment is accounted for as an available-for-sale investment security (Note 12).
In addition, the Company completed an acquisition of a 9.9% equity interest in a wholly-owned subsidiary of Haier whichthat is engaged in the logistics business in the PRC and the purchase price consisted offor cash consideration of HK$540 million (RMB427 million). Such investment is accounted for under the equity method given the existence of significant influence (Note 14). RMB252 million of the purchase price was allocated to amortizable intangible assets and goodwill, RMB20 million was allocated to deferred tax liabilities and RMB195 million was allocated to net assets acquired.
Furthermore, the Company completed athe subscription for a convertible bond for a purchase price of HK$1,316 million (RMB1,044 million) which is either convertible into ordinary shares of Haier or exchangeable into a 24% equity interest in the logistics business of Haier, subject to the receipt of certain regulatory approvals. The entire convertible bond is accounted for under the fair value option and recorded under investment securities (Note 12).
(w) Investment in Cainiao Smart Logistics Network Limited ("Cainiao Network")
During the year ended March 31, 2014, the Company took part in establishing Cainiao Network Technology Co. Ltd. together with other parties with significant operational experience in logistics, retail, and real estate in the PRC. Cainiao Network Technology Co. Ltd. is a joint venture which is a logistics data platform that leverages the capacity and capabilities of a network of logistics partners to fulfill the logistics needs of the Company's core commerce business. A total amount of RMB2,400 million was invested in the joint venture, in which the Company owned a 48% equity interest as of March 31, 2014 and 2015.
In March 2016, Cainiao Network Technology Co. Ltd. completed a restructuring process to establish a new holding company and it became a wholly owned subsidiary of Cainiao Network. In March 2016, the Company participated in Cainiao Network's equity financing round, after which the Company's investment increased from RMB2,400 million initially in Cainiao Network Technology Co. Ltd. to RMB6,992 million in Cainiao Network, the Company's equity interest in Cainiao Network was diluted to approximately 47%. A gain of RMB448 million arising from such deemed disposal was recognized in share of results of equity investees in the consolidated income statement for the year ended March 31, 2016.
For accounting purpose, the investment in Cainiao Network is accounted for under the equity method (Note 14).
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(q) Investment in Zhejiang Cainiao Supply Chain Management Co., Ltd. ("Cainiao")
In May 2013, the Company made a commitment to invest RMB2,150 million in a newly formed joint venture together with other third parties which owns Cainiao. In February 2014, the Company made a further commitment to invest an additional RMB250 million in the joint venture. Cainiao is the operator of a nationwide logistics infrastructure and information sharing system in the PRC, in which the Company owns a 48% equity interest. As of March 31, 2015, the Company invested a total amount of RMB2,400 million in Cainiao. For accounting purposes, the joint venture is accounted for under the equity method (Note 14).
Equity transactions and acquisitions that were not completed as of March 31, 20152016
(r) Establishment of a joint venture with Ant Financial Services(x) Investment in Lazada Group S.A. ("Lazada")
In June 2015,April 2016, the Company completed an acquisition of a controlling stake in Lazada for a total cash consideration of US$1.0 billion (RMB6.5 billion). Lazada operates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, with local language websites and mobile apps in each of the six markets.
Lazada offers third-party brands and merchants a marketplace solution with simple and direct access to consumers in these six countries through one retail channel. It also sells products owned by its retail operations and has developed its own logistics infrastructure with warehouses and a last-mile delivery fleet to offer quick and reliable delivery to its customers. The Company intends that Lazada will be the vehicle for expansion into the Southeast Asia consumer market, including potential cross-border opportunities introducing Chinese merchants and international brands to Southeast Asian consumers.
Lazada became a consolidated subsidiary of the Company after the completion of the transaction. In connection with the transaction, the Company entered into a put and call arrangement with certain Lazada shareholders, giving the Company the right to purchase, and the shareholders the right to sell collectively, their remaining equity interest in Lazada at fair market value during a six-month period after the first anniversary of the closing of the transaction. Upon the issuance of these consolidated financial statements, the accounting for such business combination, including the purchase price allocation, has not been finalized.
(y) Investment in media business of SCMP Group Limited
In April 2016, the Company completed an acquisition of the media business of SCMP Group Limited, a company that is listed on the Hong Kong Stock Exchange, at a cash consideration of HK$2.1 billion (RMB1.8 billion). Apart from the flagship South China Morning Post, the premier English newspaper in Hong Kong, the Company also acquired the magazine, recruitment, outdoor media, events and conferences, education and digital media businesses of SCMP Group Limited. The acquired companies became wholly-owned subsidiaries of the Company after the completion of the transaction. Upon the issuance of these consolidated financial statements, the accounting for such business combination, including the purchase price allocation, has not been finalized.
(z) Investment in AGTech Holdings Limited ("AGTech")
In March 2016, an investment vehicle which is 60% owned by the Company and 40% owned by Ant Financial Services, agreedentered into a subscription agreement to set up a joint venture under the brand name Koubeisubscribe for newly issued ordinary shares of AGTech representing an approximately 51% equity interest in which the Company's capital injection will include cash of RMB3.0 billion as well as injection of certain businesses. The joint venture will target to capture opportunitiesAGTech. AGTech is an integrated lottery technology and services company in the local services market with an initial focusPRC that is listed on the food and beverage marketHong Kong Growth Enterprise Market. The total cash consideration is expected to approximate HK$1,675 million (RMB1,397 million). In addition, the investment vehicle will subscribe for convertible bonds for a purchase price of approximately HK$713 million (RMB595 million), which are convertible into ordinary shares of AGTech. Upon the conversion of the convertible bonds, the investment vehicle's equity interest in the PRC.AGTech would be increased to approximately 59%. The completion of this transaction is subject to a number of customary closing conditions.
(s) Restructuring of Alibaba Health
In April 2015, the Company entered into a share purchase agreement with Alibaba Health pursuant to which the Company agreed to sell the operations of the Company's Tmall online pharmacy business to Alibaba Health. Immediately prior to the closing of this transaction, the Company owned an approximately 90% equity interest in Tmall online pharmacy business. The consideration for the sale of the Company's interests in Tmall online pharmacy business will be satisfied at completion by the issuance of certain ordinary shares and convertible bonds of Alibaba Health. The aggregate principal amount of the convertible bonds will be HK$2,160 million (RMB1,711 million). Upon the completion of the transaction, the Company's effective equity interest in Alibaba Health will be increased from approximately 38% to approximately 53%, and will be further increased to approximately 55% upon the conversion of the convertible bonds. The completion of this transaction is subject to a number of conditions including the approval by the shareholders of Alibaba Health and the listing committee of the Hong Kong Stock Exchange.
(t) Investment in Beijing Shiji Information Technology Co., Ltd. ("Shiji Information")
In September 2014, the Company entered into a share purchase agreement Shiji Information, pursuant to which the Company agreed to invest in newly issued ordinary shares which represent a 15% ownership interest in Shiji Information. Shiji Information, a company that is listed on Shenzhen Stock Exchange, is primarily engaged in the development and sale of hotel information management system software, system integration and technical service. The total cash consideration is expected to approximate RMB2,810 million. The completion of this transaction is subject to a number of customary closing conditions.certain regulatory authorities.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
4. Significant equity transactions, restructuring transactions, mergers and acquisitions and equity investments (Continued)
(aa) Investment in Suning Commerce Group Co., Ltd. ("Suning")
In August 2015, the Company entered into an investment agreement with Suning, pursuant to which the Company agreed to invest in newly issued ordinary shares which represent a 19.99% equity interest in Suning. Suning, a company that is listed on the Shenzhen Stock Exchange, is one of the largest consumer electronics retail chains in the PRC. The total cash consideration is expected to approximate RMB28.2 billion.
Concurrent with the Company's investment in Suning, Suning will subscribe for approximately 26.3 million newly issued ordinary shares of the Company which represent a 1.1% equity interest in the Company for a cash consideration of US$81.51 per ordinary share. As part of the transaction, the Company and Suning have entered into a strategic collaboration agreement to build on synergies in e-commerce, logistics and incremental business through joint omni-channel initiatives. The completion of these transactions is subject to a number of customary closing conditions.
5. Revenue
Revenue breakdown is as follows:
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
China commerce | |||||||||||
Retail (i) | |||||||||||
Online marketing services | 19,697 | 29,729 | 37,509 | ||||||||
Commission | 6,161 | 12,023 | 21,201 | ||||||||
Others | 1,112 | 1,080 | 1,022 | ||||||||
| | | | | | | | | | | |
26,970 | 42,832 | 59,732 | |||||||||
Wholesale (ii) | 2,197 | 2,300 | 3,205 | ||||||||
| | | | | | | | | | | |
Total China commerce | 29,167 | 45,132 | 62,937 | ||||||||
| | | | | | | | | | | |
International commerce | |||||||||||
Retail (iii) | 392 | 938 | 1,768 | ||||||||
Wholesale (iv) | 3,768 | 3,913 | 4,718 | ||||||||
| | | | | | | | | | | |
Total international commerce | 4,160 | 4,851 | 6,486 | ||||||||
| | | | | | | | | | | |
Cloud computing and Internet infrastructure (v) | 650 | 773 | 1,271 | ||||||||
Others (vi) | 540 | 1,748 | 5,510 | ||||||||
| | | | | | | | | | | |
Total | 34,517 | 52,504 | 76,204 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
China commerce | |||||||||||
Retail (i) | |||||||||||
Online marketing services | 29,729 | 37,509 | 52,396 | ||||||||
Commission | 12,023 | 21,201 | 25,829 | ||||||||
Others | 1,080 | 1,022 | 1,808 | ||||||||
| | | | | | | | | | | |
42,832 | 59,732 | 80,033 | |||||||||
Wholesale (ii) | 2,300 | 3,205 | 4,288 | ||||||||
| | | | | | | | | | | |
Total China commerce | 45,132 | 62,937 | 84,321 | ||||||||
| | | | | | | | | | | |
International commerce | |||||||||||
Retail (iii) | 938 | 1,768 | 2,204 | ||||||||
Wholesale (iv) | 3,913 | 4,718 | 5,425 | ||||||||
| | | | | | | | | | | |
Total international commerce | 4,851 | 6,486 | 7,629 | ||||||||
| | | | | | | | | | | |
Cloud computing (v) | 773 | 1,271 | 3,019 | ||||||||
Others (vi) | 1,748 | 5,510 | 6,174 | ||||||||
| | | | | | | | | | | |
Total | 52,504 | 76,204 | 101,143 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
5. Revenue (Continued)
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
5. Revenue (Continued)
Revenue by type of service is as follows:
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
Online marketing services | |||||||||||
P4P and display marketing | 18,130 | 27,869 | 36,197 | ||||||||
Other online marketing services | 2,551 | 3,059 | 3,938 | ||||||||
| | | | | | | | | | | |
Total online marketing services | 20,681 | 30,928 | 40,135 | ||||||||
Commission | 6,412 | 12,778 | 22,705 | ||||||||
Membership fees and value-added services | 5,086 | 5,135 | 6,431 | ||||||||
Others (i) | 2,338 | 3,663 | 6,933 | ||||||||
| | | | | | | | | | | |
Total | 34,517 | 52,504 | 76,204 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
Online marketing services | |||||||||||
P4P and display marketing | 27,869 | 36,197 | 53,185 | ||||||||
Other online marketing services | 3,059 | 3,938 | 3,963 | ||||||||
| | | | | | | | | | | |
Total online marketing services | 30,928 | 40,135 | 57,148 | ||||||||
Commission | 12,778 | 22,705 | 27,793 | ||||||||
Membership fees and value-added services | 5,135 | 6,431 | 7,627 | ||||||||
Others (i) | 3,663 | 6,933 | 8,575 | ||||||||
| | | | | | | | | | | |
Total | 52,504 | 76,204 | 101,143 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
6. Other income, net
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
Royalty fee and software technology services fee charged to Ant Financial Services and Alipay (Note 22) | 277 | 1,764 | 1,667 | ||||||||
Government grants (i) | 388 | 252 | 327 | ||||||||
Amortization of the excess value in relation to the restructuring of Payment Services (Note 4(b)) | — | — | (166 | ) | |||||||
Others | 229 | 413 | 658 | ||||||||
| | | | | | | | | | | |
Total | 894 | 2,429 | 2,486 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
Royalty fee and software technology services fee charged to Ant Financial Services and Alipay (Note 23) | 1,764 | 1,667 | 1,122 | ||||||||
Government grants (i) | 252 | 327 | 401 | ||||||||
Amortization of the excess value in relation to the restructuring of Payment Services (Note 4(b)) | — | (166 | ) | (264 | ) | ||||||
Others | 413 | 658 | 799 | ||||||||
| | | | | | | | | | | |
Total | 2,429 | 2,486 | 2,058 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
7. Income tax expenses
Composition of income tax expenses
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
Current income tax expense | 1,353 | 1,730 | 4,757 | ||||||||
Deferred taxation | 104 | 1,466 | 1,659 | ||||||||
| | | | | | | | | | | |
1,457 | 3,196 | 6,416 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
7. Income tax expenses (Continued)
Composition of income tax expenses
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
Current income tax expense | 1,730 | 4,757 | 7,223 | ||||||||
Deferred taxation | 1,466 | 1,659 | 1,226 | ||||||||
| | | | | | | | | | | |
3,196 | 6,416 | 8,449 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Under the current laws of the Cayman Islands, the Company is not subject to tax on its income or capital gains. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax is imposed. The Company's subsidiaries incorporated in Hong Kong were subject to the Hong Kong profits tax rate at 16.5% for the years ended March 31, 2013, 2014, 2015 and 2015.2016. The Company's subsidiaries incorporated in other jurisdictions such as the United States, Singapore and Japan were subject to income tax charges calculated on the basis of the tax laws enacted or substantially enacted in the countries where the Company's subsidiaries operate and generate income.
Current income tax expense primarily represents the provision for PRC Enterprise Income Tax ("EIT") for subsidiaries operating in the PRC. These subsidiaries are subject to EIT on their taxable income as reported in their respective statutory financial statements adjusted in accordance with the relevant tax laws, rules and regulations in the PRC.
Under the PRC Enterprise Income Tax Law (the "EIT Law"), the standard enterprise income tax rate for domestic enterprises and foreign invested enterprises is 25%. In addition, the EIT Law provides for, among others, a preferential tax rate of 15% for enterprises qualified as High and New Technology Enterprises. Further, certain subsidiaries were recognized as having status as a Software Enterprise and thereby entitled to enjoy full exemption from EIT for two years beginning with their first profitable year and a 50% reduction for the subsequent three years. In addition, a duly recognized Key Software Enterprise within China's national plan can enjoy a preferential EIT rate of 10%. The Key Software Enterprise status is subject to review by the relevant authorities every two years. The timing of the annual review and notification by the relevant authorities may vary from year to year, and the related tax adjustments in relation to the change in applicable EIT rate are accounted for in the period in which the Key Software Enterprise status is recognized.
The tax status of the subsidiaries of the Company with major taxable profits is described below:
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
7. Income tax expenses (Continued)
The consolidated financial statements did not reflect the potential tax rate adjustments that may arise from the renewal of the Key Software Enterprises status by Alibaba China and Taobao China for the taxation yearyears of 2015 and 2016 because official process forthe annual review and renewal didnotification has not yet commence as ofbeen obtained up to March 31, 2015.2016. Accordingly, Alibaba China and Taobao China, which continued to qualify as a High and New Technology Enterprise, applied an EIT rate of 15% in the consolidated financial statements in respect of such period.during these periods.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
7. Income tax expenses (Continued)
Most of the remaining PRC entities of the Company are subject to EIT at 25% for the years ended March 31, 2013, 2014, 2015 and 2015.2016.
Pursuant to the EIT Law, a 10% withholding tax is levied on dividends declared by PRC companies to their foreign investors. A lower withholding tax rate of 5% is applicable if direct foreign investors with at least 25% equity interest in the PRC company are incorporated in Hong Kong and meet the relevant requirements pursuant to the tax arrangement between the PRC and Hong Kong. Since the equity holders of the major PRC subsidiaries of the Company are Hong Kong incorporated companies, the Company has used 5% to provide for deferred tax liabilities on retained earnings which are anticipated to be distributed. As of March 31, 2015,2016, the amountsCompany had fully accrued in deferred tax liabilities relating tothe withholding tax on dividends were determined on the assumption that 100%earnings distributable by all of the distributable reservessubsidiaries of the majorCompany in the PRC, subsidiaries will be distributed as dividends.except for those undistributed earnings that the Company intends to invest indefinitely in the PRC of RMB13.6 billion.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
7. Income tax expenses (Continued)
Composition of deferred tax assets and liabilities
| March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Deferred tax assets | ||||||||
Current: | ||||||||
Deferred revenue and customer advances | 29 | 24 | ||||||
Tax losses carried forward and others (i) | 283 | 381 | ||||||
| | | | | | | | |
312 | 405 | |||||||
Less: Valuation allowance | (121 | ) | (149 | ) | ||||
| | | | | | | | |
Total deferred tax assets, current portion (Note 13) | 191 | 256 | ||||||
| | | | | | | | |
Non-current: | ||||||||
Deferred revenue and customer advances | 30 | 31 | ||||||
Property and equipment | 14 | 14 | ||||||
Tax losses carried forward and others (i) | 908 | 1,139 | ||||||
| | | | | | | | |
952 | 1,184 | |||||||
Less: Valuation allowance | (886 | ) | (1,027 | ) | ||||
| | | | | | | | |
Total deferred tax assets, non-current portion (Note 13) | 66 | 157 | ||||||
| | | | | | | | |
Total deferred tax assets | 257 | 413 | ||||||
| | | | | | | | |
Deferred tax liabilities | ||||||||
Current: | ||||||||
Others | — | (17 | ) | |||||
Non-current: | ||||||||
Withholding tax on undistributed earnings (ii) | (2,034 | ) | (3,891 | ) | ||||
Identifiable intangible assets | (72 | ) | (575 | ) | ||||
Others | (30 | ) | (27 | ) | ||||
| | | | | | | | |
Total deferred tax liabilities, non current portion | (2,136 | ) | (4,493 | ) | ||||
| | | | | | | | |
Total deferred tax liabilities | (2,136 | ) | (4,510 | ) | ||||
| | | | | | | | |
Net deferred tax liabilities | (1,879 | ) | (4,097 | ) | ||||
| | | | | | | | |
| | | | | | | | |
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Deferred tax assets | ||||||||
Current: | ||||||||
Deferred revenue and customer advances | 24 | 15 | ||||||
Tax losses carried forward and others (i) | 381 | 767 | ||||||
| | | | | | | | |
405 | 782 | |||||||
Less: Valuation allowance | (149 | ) | (331 | ) | ||||
| | | | | | | | |
Total deferred tax assets, current portion (Note 13) | 256 | 451 | ||||||
| | | | | | | | |
Non-current: | ||||||||
Deferred revenue and customer advances | 31 | 17 | ||||||
Property and equipment | 14 | 25 | ||||||
Tax losses carried forward and others (i) | 1,139 | 1,021 | ||||||
| | | | | | | | |
1,184 | 1,063 | |||||||
Less: Valuation allowance | (1,027 | ) | (1,033 | ) | ||||
| | | | | | | | |
Total deferred tax assets, non-current portion (Note 13) | 157 | 30 | ||||||
| | | | | | | | |
Total deferred tax assets | 413 | 481 | ||||||
| | | | | | | | |
Deferred tax liabilities | ||||||||
Current: | ||||||||
Others | (17 | ) | (9 | ) | ||||
Non-current: | ||||||||
Withholding tax on undistributed earnings (ii) | (3,891 | ) | (5,452 | ) | ||||
Identifiable intangible assets | (575 | ) | (508 | ) | ||||
Available-for-sale securities | — | (488 | ) | |||||
Others | (27 | ) | (23 | ) | ||||
| | | | | | | | |
Total deferred tax liabilities, non current portion | (4,493 | ) | (6,471 | ) | ||||
| | | | | | | | |
Total deferred tax liabilities | (4,510 | ) | (6,480 | ) | ||||
| | | | | | | | |
Net deferred tax liabilities | (4,097 | ) | (5,999 | ) | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
7. Income tax expenses (Continued)
Valuation allowances have been provided on the deferred tax assets mainly related to the tax losses carried forward due to the uncertainty surrounding their realization. If events occur in the future that improve the certainty of realization, an adjustment to the valuation allowances will be made and consequently reduce the income tax expenses.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
7. Income tax expenses (Continued)
As of March 31, 2015,2016, the accumulated tax losses of subsidiaries incorporated in Hong Kong, the United States and Japan,Singapore, subject to the agreement of the relevant tax authorities, of RMB1,310RMB1,175 million, RMB984RMB696 million and RMB7RMB220 million, respectively, are allowed to be carried forward to offset against future taxable profits. Such carry forward of tax losses in Hong Kong and Singapore has no time limit, while the tax losses in the United States will expire, if unused, in the years ending March 31, 2019 through 2035. The tax losses in Japan will expire, if unused, in the years ending March 31, 2019 through 2024.2036. The accumulated tax losses of subsidiaries incorporated in PRC, subject to the agreement of the PRC tax authorities, of RMB2,311RMB2,917 million as of March 31, 20152016 will expire, if unused, in the years ending March 31, 20162017 through 2020.2021.
Reconciliation of the differences between the statutory EIT rate applicable to profits of the consolidated entities and the income tax expenses of the Company:
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB, except per share data) | ||||||||||
Income before income tax and share of results of equity investees | 10,112 | 26,802 | 32,326 | ||||||||
Income tax computed at statutory EIT rate (25%) | 2,528 | 6,701 | 8,082 | ||||||||
Effect of different tax rates available to different jurisdictions | 79 | (9 | ) | 33 | |||||||
Effect of tax holiday and preferential tax benefit on assessable profits of subsidiaries incorporated in the PRC | (3,744 | ) | (6,414 | ) | (5,881 | ) | |||||
Non-deductible expenses and non-taxable income, net (i) | 1,806 | 1,657 | 3,368 | ||||||||
Tax savings from additional deductions on certain research and development expenses available for subsidiaries incorporated in the PRC (ii) | (293 | ) | (483 | ) | (1,096 | ) | |||||
Withholding tax on the earnings remitted and anticipated to be remitted | 863 | 1,445 | 1,898 | ||||||||
Change in valuation allowance and others | 218 | 299 | 12 | ||||||||
| | | | | | | | | | | |
Income tax expenses | 1,457 | 3,196 | 6,416 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Effect of tax holidays inside the PRC on basic earnings per share/ADS (RMB) | 1.64 | 2.95 | 2.57 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB, except per share data) | ||||||||||
Income before income tax and share of results of equity investees | 26,802 | 32,326 | 81,468 | ||||||||
Income tax computed at statutory EIT rate (25%) | 6,701 | 8,082 | 20,367 | ||||||||
Effect of different tax rates available to different jurisdictions | (9 | ) | 33 | (869 | ) | ||||||
Effect of tax holiday and preferential tax benefit on assessable profits of subsidiaries incorporated in the PRC | (6,414 | ) | (5,881 | ) | (6,680 | ) | |||||
Non-deductible expenses and non-taxable income, net (i) | 1,657 | 3,368 | (4,994 | ) | |||||||
Tax savings from additional deductions on certain research and development expenses available for subsidiaries incorporated in the PRC (ii) | (483 | ) | (1,096 | ) | (1,205 | ) | |||||
Withholding tax on the earnings remitted and anticipated to be remitted | 1,445 | 1,898 | 1,573 | ||||||||
Change in valuation allowance, deduction of certain share-based compensation expense and others | 299 | 12 | 257 | ||||||||
| | | | | | | | | | | |
Income tax expenses | 3,196 | 6,416 | 8,449 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Effect of tax holidays inside the PRC on basic earnings per share/ADS (RMB) | 2.95 | 2.57 | 2.72 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
8. Share-based awards
Share-based awards such as incentive and non-statutory options, restricted shares, RSUs, dividend equivalent rights, share appreciation rights and share payments may be granted to any directors, employees and consultants of the Company or affiliated companies under the employee share option plans adopted in 1999, 2004, 2005, anthe incentive plan adopted in 2007 and anthe equity incentive plan adopted in 2011, which govern the terms of the awards. In September 2014, the Company adopted a post-IPO equity incentive plan (the
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
8. Share-based awards (Continued)
(the "2014 Plan"). Share-based awards are only available for issuance under our 2014 Plan. If an award under the previous plan terminates, expires or lapses, or is cancelled for any reason, ordinary shares subject to the award become available for the grant of a new award under the 2014 Plan. On April 1, 2015 and each anniversary thereof, an additional amount equal to the lesser of (A) 25,000,000 ordinary shares, and (B) such lesser number of ordinary shares determined by the board of directors will become available for the grant of a new award under the 2014 Plan. The 2014 Plan has a ten-year term. All share awards granted under the 2014 Plan are subject to dilution protection should the capital structure of the Company be affected by a share split, reverse share split, share dividend or other dilutive action. The 2014 Plan has substantially similar terms as the plan adopted in 2011 and other previous plans except that (i) the 2014 Plan is administered by the compensation committee of the board (or a subcommittee thereof), or such other committee of the board to which the board has delegated power to act, or the board in absence of any such committee and some definitions, and (ii) certain terms are adjusted for the purposes of compliance with the Sarbanes-Oxley Act of 2002, U.S. Securities Act of 1933 and the regulations thereunder, as amended from time to time and U.S. Securities Exchange Act of 1934 and the regulations thereunder, as amended from time to time, among others.
The aggregate number of shares issuable under the plans adopted in 1999, 2004, 2005, 2007 and 2011 and the 2014 Plan is 619,922,272 ordinary shares. As of March 31, 2015,2016, the number of shares authorized but unissued was 22,111,16923,050,439 ordinary shares.
Share options and RSUs granted are generally subject to a four-year vesting schedule as determined by the administrator of the plans. Under the four-year vesting schedule, depending on the nature and the purpose of the grant, share options and RSUs in general vest 25% or 50% upon the first or second anniversary of the vesting commencement date, or 50% upon the second anniversary of the vesting commencement date,respectively, as defined in the grant agreement, and thereafter 25% every year. No outstanding share options or RSUs will be exercisable or subject to vesting after the expiry of a maximum of six years from the date of grant. Starting from the year ended March 31, 2015, certain share options and RSUs granted to senior management members of the Company were subject to a six-year pro rata vesting schedule. Under the six-year vesting schedule, share options and RSUs in general vest 16.7% upon the first anniversary of the vesting commencement date. No outstanding share options or RSUs will be exercisable or subject to vesting after the expiry of a maximum of eight years from the date of grant.
Early exercise of share options is allowable under all the aforementioned plans; however, any unvested shares are subject to repurchase by the Company at the lower of the original exercise price or the fair market value upon termination of service contracts with the grantees.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
8. Share-based awards (Continued)
(a) Share options relating to ordinary shares of the Company
A summary of changes in the share options relating to ordinary shares granted by the Company during the year ended March 31, 20152016 is as follows:
| Number of share options | Weighted average exercise price | Weighted average remaining contractual life | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| | US$ | (in years) | ||||||||
Outstanding at April 1, 2014 | 13,345,902 | 13.86 | 4.1 | ||||||||
Granted | 13,788,000 | 56.64 | |||||||||
Exercised | (5,365,112 | ) | 10.34 | ||||||||
Cancelled/forfeited/expired | (429,380 | ) | 18.47 | ||||||||
| | | | | | | | | | | |
Outstanding at March 31, 2015 (i) | 21,339,410 | 42.29 | 6.0 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Vested and exercisable at March 31, 2015 | 1,293,743 | 8.76 | 2.5 | ||||||||
Vested and expected to vest at March 31, 2015 (ii) | 20,865,685 | 42.68 | 6.1 |
| Number of share options | Weighted average exercise price | Weighted average remaining contractual life | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| | US$ | (in years) | ||||||||
Outstanding at April 1, 2015 | 21,339,410 | 42.29 | 6.0 | ||||||||
Granted | 5,159,400 | 81.55 | |||||||||
Exercised | (3,091,919 | ) | 15.23 | ||||||||
Cancelled/forfeited/expired | (5,699,563 | ) | 54.99 | ||||||||
| | | | | | | | | | | |
Outstanding at March 31, 2016 (i) | 17,707,328 | 54.37 | 5.6 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Vested and exercisable at March 31, 2016 | 4,062,743 | 50.21 | 5.8 | ||||||||
Vested and expected to vest at March 31, 2016 (ii) | 17,255,700 | 54.68 | 5.8 |
As of March 31, 2015 and 2016, 605,340 and 384,116 outstanding share options were held by non-employees.non-employees, respectively. These share options are subject to re-measurement through each vesting date to determine the appropriate share-based compensation expense.
As of March 31, 2015,2016, the aggregate intrinsic value of all outstanding options was RMB5,386RMB2,964 million. As of the same date, the aggregate intrinsic value of options that were vested and exercisable and options that were vested and expected to vest is RMB592RMB757 million and RMB5,199RMB2,801 million, respectively.
During the years ended March 31, 2013, 2014, 2015 and 2015,2016, the weighted average grant date fair value of share options granted was US$5.20,6.14, US$6.1423.07 and US$23.07,28.65, respectively, and the total grant date fair value of options vested during the same years was RMB219 million, RMB123 million, RMB134 million and RMB134RMB602 million, respectively. During the same years, the aggregate intrinsic value of share options exercised was RMB1,034 million, RMB1,698 million, RMB488 million and RMB488RMB556 million, respectively.
Cash received from option exercises under the share option plans, including repayment of loans and interest receivable on employee loans for the exercise of vested options, for the years ended March 31, 2013, 2014, 2015 and 20152016 was RMB362 million, RMB1,543 million, RMB313 million and RMB313RMB693 million, respectively.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
8. Share-based awards (Continued)
(a) Share options relating to ordinary shares of the Company (Continued)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes model and the assumptions below:
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
Risk-free interest rate (i) | 0.67% - 0.70 | % | 0.69% - 1.52 | % | 1.38% - 1.99 | % | |||||
Expected dividend yield (ii) | 0 | % | 0 | % | 0 | % | |||||
Expected life (years) (iii) | 4.38 | 4.25 - 4.38 | 4.25 - 5.75 | ||||||||
Expected volatility (iv) | 41.7% - 44.9 | % | 37.0% - 39.3 | % | 35.04% - 40.76 | % |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
Risk-free interest rate (i) | 0.69% - 1.52 | % | 1.38% - 1.99 | % | 1.24% - 1.79 | % | |||||
Expected dividend yield (ii) | 0 | % | 0 | % | 0 | % | |||||
Expected life (years) (iii) | 4.25 - 4.38 | 4.25 - 5.75 | 4.25 - 5.75 | ||||||||
Expected volatility (iv) | 37.0% - 39.3 | % | 35.0% - 40.8 | % | 33.4% - 35.7 | % |
As of March 31, 2015,2016, there were RMB1,401RMB1,021 million of unamortized compensation costs related to these outstanding share options, net of expected forfeitures and after re-measurement applicable to share options granted to non-employees. These amounts are expected to be recognized over a weighted average period of 3.02.8 years.
During the years ended March 31, 2013, 2014, 2015 and 2015,2016, the Company recognized share-based compensation expense of RMB227 million, RMB417 million, RMB1,152 million and RMB1,152RMB578 million, respectively, in connection with the above share options, net of reimbursement from Ant Financial Services (Note 22)23).
(b) Restricted shares and RSUs relating to ordinary shares of the Company
A summary of the changes in the restricted shares and RSUs related to ordinary shares granted by the Company during the year ended March 31, 20152016 is as follows:
| Number of restricted shares and RSUs | Weighted- average grant- date fair value | ||||||
---|---|---|---|---|---|---|---|---|
| | US$ | ||||||
Awarded and unvested at April 1, 2014 | 42,767,087 | 17.87 | ||||||
Granted | 42,787,283 | 62.53 | ||||||
Vested | (13,159,265 | ) | 14.47 | |||||
Cancelled/forfeited | (4,413,935 | ) | 32.56 | |||||
| | | | | | | | |
Awarded and unvested at March 31, 2015 | 67,981,170 | 45.68 | ||||||
| | | | | | | | |
| | | | | | | | |
Expected to vest at March 31, 2015 (i) | 58,397,443 | 45.63 |
| Number of restricted shares and RSUs | Weighted- average grant date fair value | ||||||
---|---|---|---|---|---|---|---|---|
| | US$ | ||||||
Awarded and unvested at April 1, 2015 | 67,981,170 | 45.68 | ||||||
Granted | 30,865,598 | 72.30 | ||||||
Vested | (20,813,741 | ) | 34.60 | |||||
Cancelled/forfeited | (6,196,662 | ) | 52.35 | |||||
| | | | | | | | |
Awarded and unvested at March 31, 2016 | 71,836,365 | 59.75 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Expected to vest at March 31, 2016 (i) | 62,144,018 | 58.25 |
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
8. Share-based awards (Continued)
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
8. Share-based awards (Continued)
(b) Restricted shares and RSUs relating to ordinary shares of the Company (Continued)
As of March 31, 2015 and 2016, 6,447,715 and 5,880,443 outstanding RSUs were granted to non-employees.non-employees, respectively. These awards are subject to re-measurement through each vesting date to determine the appropriate share-based compensation expense.
As of March 31, 2015,2016, there was RMB11,114were RMB12,688 million of unamortized compensation costcosts related to these outstanding restricted shares and RSUs, net of expected forfeitures and after re-measurement applicable to these awards granted to non-employees. These amounts are expected to be recognized over a weighted average period of 2.2 years, respectively.2.1 years.
During the years ended March 31, 2013, 2014, 2015 and 2015,2016, the Company recognized share-based compensation expense of RMB845 million, RMB2,378 million, RMB7,767 million and RMB7,767RMB9,915 million, respectively, in connection with the above restricted shares and RSUs, net of reimbursement from Ant Financial Services (Note 22)23).
(c) Partner Capital Investment Plan relating to ordinary shares of the Company
During the years ended March 31, 2014 and 2015, the Company offered selected members of the Alibaba Partnership subscription rights to acquire restricted shares of the Company. These rights and the underlying restricted shares are only subject to a non-compete provision but not other vesting conditions (employment or otherwise) and they entitle the holders to purchase restricted shares at US$14.50 per share during a four-year period. Upon the exercise of such rights, the underlying ordinary shares may not be transferred for a period of eight years from the date of subscription of the relevant rights. The number of ordinary shares underlying these rights is 18,000,000 shares of which the rights to subscribe for 5,000,00014,500,000 shares were offered and subscribed up to a management member of the Company who is holding such rights on behalf of future members of the Alibaba Partnership. In September 2014, such rights were repurchased by the Company at the original subscription price. Following the repurchase, the Company offered the rights to subscribe for 1,500,000 shares to certain new members of the Alibaba Partnership under the same terms.March 31, 2016. These rights were accounted for as a noncontrolling interest of the Company as such rights were issued by the subsidiaries and classified as equity at the subsidiary level. Share-based compensation expense of nil, and RMB211 million and nil was recognized in connection with these rights for the years ended March 31, 2014, 2015 and 2015,2016, respectively.
The fair value of each right to acquire restricted shares is estimated on the subscription date using the Black-Scholes model and the assumptions below:
| Year ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
Risk-free interest rate (i) | 1.03 | % | 1.50 | % | ||||
Expected dividend yield (ii) | 0 | % | 0 | % | ||||
Expected life (years) (iii) | 4.00 | 4.00 | ||||||
Expected volatility (iv) | 36.9 | % | 38.1 | % | ||||
Discount for post-vesting sale restrictions (v) | 38.0 | % | 35.0 | % |
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
8. Share-based awards (Continued)
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
8. Share-based awards (Continued)
(c) Partner Capital Investment Plan relating to ordinary shares of the Company (Continued)
(d) Share-based awards relating to Ant Financial Services
In March 2014, Junhan, the general partner of which is controlled indirectly by a shareholderthe executive chairman of the Company and a major equity holder of Ant Financial Services, made a grantgrants of certain share-based awards similar to share appreciation awards linked to the valuation of Ant Financial Services to mosta substantial number of the employees of the Company. The vesting of such awards is conditional upon the fulfillment of requisite service conditions to the Company, and such awards will be settled in cash by Junhan upon theirthe disposal by the holders. Junhan has the right to repurchase the vested awards from the holders upon an initial public offering of Ant Financial Services or the termination of the employment of the employees with the Company at a price to be determined based on the then fair market value of Ant Financial Services. The Company has no obligation to reimburse Junhan, Ant Financial Services or its subsidiaries for the cost associated with these awards.
For accounting purposes, the cost relating to such share-based awards granted by the shareholder through Junhan is recognized by the Company as a shareholder contribution as the award will ultimately be settled in cash by Junhan. The award is accounted for as a financial derivative and initially measured at its fair value, and the related expense will be recognized over the requisite service period in the consolidated income statements with a corresponding credit to additional paid-in capital. Subsequent changes in the fair value of the award are recorded in the consolidated income statements through the date on which the underlying award is settled by Junhan.
As of March 31, 2016, there were RMB2,542 million of unamortized compensation costs related to these outstanding share-based awards of Ant Financial Services granted by Junhan, net of expected forfeitures. These amounts are expected to be recognized over a weighted average period of 1.7 years.
During the yearyears ended March 31, 2015 and 2016, the Company recognized an expenseexpenses of RMB3,788 million and RMB5,506 million in respect of the share-based awards relating to Ant Financial Services.Services granted by Junhan, respectively. The expenses recognized for the year ended March 31, 2014 were insignificant.
(e) Share-based compensation expense by function
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
Cost of revenue | 382 | 1,154 | 4,176 | ||||||||
Product development expenses | 453 | 795 | 3,876 | ||||||||
Sales and marketing expenses | 120 | 189 | 1,235 | ||||||||
General and administrative expenses | 304 | 706 | 3,741 | ||||||||
| | | | | | | | | | | |
Total | 1,259 | 2,844 | 13,028 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
Cost of revenue | 1,154 | 4,176 | 4,003 | ||||||||
Product development expenses | 795 | 3,876 | 5,703 | ||||||||
Sales and marketing expenses | 189 | 1,235 | 1,963 | ||||||||
General and administrative expenses | 706 | 3,741 | 4,413 | ||||||||
| | | | | | | | | | | |
Total | 2,844 | 13,028 | 16,082 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
9. Equity-settled donation expense
During the year ended March 31, 2014, the Company granted 50,000,000 share options to a non-profit organization designated by two members of management of the Company, subject to irrevocable instructions to designate and transfer these share options to the separate charitable trusts to be established by these two members of management of the Company. These share options were approved by the directors of the board and such options are not subject to any vesting conditions and are exercisable for a period of four years starting from the grant date. The exercise price of these options is US$25.00 per share and was determined with reference to the fair market value of the ordinary shares of the Company at the time of the grant. For each of the eight years beginning one year after the date of listing of the ordinary shares of the Company on a recognized stock exchange, the charitable trusts are permitted to sell only up to 6,250,000 ordinary shares per year excluding such number of unsold ordinary shares carried forward from previous years.
The fair value of each share option is estimated on the grant date using the Black-Scholes model and the assumptions below:
| Year ended March 31, | ||||
---|---|---|---|---|---|
| 2014 | ||||
Risk-free interest rate (i) | 1.02 | % | |||
Expected dividend yield (ii) | 0 | % | |||
Expected life (years) (iii) | 4.00 | ||||
Expected volatility (iv) | 37.2 | % | |||
Discount for post-vesting sale restrictions (v) | 18.0% - 38.0 | % |
As there are no vesting conditions attached to the above share options, equity-settled donation expense of RMB1,269 million was recognized in full and recorded in general and administrative expenses during the year ended March 31, 2014.
10. Earnings per share
Basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of outstanding ordinary shares, adjusted for outstanding ordinary shares that are subject to repurchase.
For the calculation of diluted earnings per share, net income attributable to ordinary shareholders for basic earnings per share is adjusted by the effect of dilutive securities, including share-based awards, under the treasury stock method. In addition, the computation of the diluted earnings per share assumes the conversion of Convertible Preference Shares (Note 22) since their issuance. Potentially dilutive securities, of which the amounts are insignificant, have been excluded from the computation of diluted net income per share if their inclusion is anti-dilutive.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
10. Earnings per share (Continued)
The following table sets forth the computation of basic and diluted net income per share/ADS for the following periods:
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB, except share data and per share data) | ||||||||||
Numerator: | |||||||||||
Net income attributable to ordinary shareholders for computing net income per ordinary share — basic | 8,404 | 23,076 | 24,149 | ||||||||
Reversal of accretion of Convertible Preference Shares | 17 | 31 | 15 | ||||||||
Reversal of dividend of Convertible Preference Shares | 111 | 208 | 97 | ||||||||
| | | | | | | | | | | |
Net income attributable to ordinary shareholders for computing net income per ordinary share — diluted | 8,532 | 23,315 | 24,261 | ||||||||
Shares (denominator): | |||||||||||
Weighted average number of shares used in calculating net income per ordinary share — basic (million shares) | 2,294 | 2,175 | 2,337 | ||||||||
Adjustments for dilutive share options and RSUs (million shares) | 46 | 66 | 120 | ||||||||
Conversion of Convertible Preference Shares (million shares) | 49 | 91 | 43 | ||||||||
| | | | | | | | | | | |
Weighted average number of shares used in calculating net income per ordinary share — diluted (million shares) | 2,389 | 2,332 | 2,500 | ||||||||
Net income per ordinary share/ADS — basic (RMB) | 3.66 | 10.61 | 10.33 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income per ordinary share/ADS — diluted (RMB) | 3.57 | 10.00 | 9.70 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB, except share data and per share data) | ||||||||||
Numerator: | |||||||||||
Net income attributable to ordinary shareholders for computing net income per ordinary share — basic | 23,076 | 24,149 | 71,460 | ||||||||
Reversal of accretion of Convertible Preference Shares | 31 | 15 | — | ||||||||
Reversal of dividend of Convertible Preference Shares | 208 | 97 | — | ||||||||
| | | | | | | | | | | |
Net income attributable to ordinary shareholders for computing net income per ordinary share — diluted | 23,315 | 24,261 | 71,460 | ||||||||
Shares (denominator): | |||||||||||
Weighted average number of shares used in calculating net income per ordinary share — basic (million shares) | 2,175 | 2,337 | 2,458 | ||||||||
Adjustments for dilutive share options and RSUs (million shares) | 66 | 120 | 104 | ||||||||
Conversion of Convertible Preference Shares (million shares) | 91 | 43 | — | ||||||||
| | | | | | | | | | | |
Weighted average number of shares used in calculating net income per ordinary share — diluted (million shares) | 2,332 | 2,500 | 2,562 | ||||||||
Net income per ordinary share/ADS — basic (RMB) | 10.61 | 10.33 | 29.07 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income per ordinary share/ADS — diluted (RMB) | 10.00 | 9.70 | 27.89 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
11. Restricted cash and escrow receivables
| As at March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Deposits in debt service reserve account (i) | 209 | — | ||||||
Money received or receivable on escrow services in connection with the provision of online and mobile commerce related services (ii) | 2,659 | — | ||||||
Cash pledged for a bank in connection with its loan facilities for option exercise in favor of employees of the Company and its related companies | 1,353 | 997 | ||||||
Cash pledged for treasury management activities | 505 | 1,013 | ||||||
Others | 195 | 287 | ||||||
| | | | | | | | |
4,921 | 2,297 | |||||||
| | | | | | | | |
| | | | | | | | |
| As at March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Cash pledged for a bank in connection with its loan facilities for option exercise in favor of employees of the Company and its related companies | 997 | 302 | ||||||
Cash pledged for treasury management activities | 1,013 | 760 | ||||||
Others | 287 | 284 | ||||||
| | | | | | | | |
2,297 | 1,346 | |||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 2015
2016
12. Investment securities and fair value disclosure
| As of March 31, 2014 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Original cost | Gross unrealized gains | Gross unrealized losses | Provision for decline in value | Fair value | ||||||||||||
| (in millions of RMB) | ||||||||||||||||
Assets | |||||||||||||||||
Trading securities: | |||||||||||||||||
Listed equity securities | 624 | 105 | (61 | ) | — | 668 | |||||||||||
Financial derivatives | 31 | 107 | (4 | ) | — | 134 | |||||||||||
Equity fund | 183 | 18 | — | — | 201 | ||||||||||||
Available-for-sale securities: | |||||||||||||||||
Listed equity securities | 890 | 299 | — | — | 1,189 | ||||||||||||
Held-to-maturity investment securities | 1,229 | — | — | — | 1,229 | ||||||||||||
Convertible bond accounted for under the fair value option | 1,044 | — | — | — | 1,044 | ||||||||||||
| | | | | | | | | | | | | | | | | |
4,001 | 529 | (65 | ) | — | 4,465 | ||||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| As of March 31, 2015 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Original cost | Gross unrealized gains | Gross unrealized losses | Provision for decline in value | Fair value | ||||||||||||
| (in millions of RMB) | ||||||||||||||||
Assets | |||||||||||||||||
Trading securities: | |||||||||||||||||
Listed equity securities | 619 | 115 | (58 | ) | — | 676 | |||||||||||
Financial derivatives | 86 | 532 | (1 | ) | — | 617 | |||||||||||
Available-for-sale securities: | |||||||||||||||||
Listed equity securities and other treasury investments | 8,261 | 3,822 | (446 | ) | — | 11,637 | |||||||||||
Equity fund | 184 | 52 | — | — | 236 | ||||||||||||
Held-to-maturity securities | 1,384 | — | — | — | 1,384 | ||||||||||||
Convertible bonds accounted for under the fair value option | 3,983 | 150 | (414 | ) | — | 3,719 | |||||||||||
| | | | | | | | | | | | | | | | | |
14,517 | 4,671 | (919 | ) | — | 18,269 | ||||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| As of March 31, 2015 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Original cost | Gross unrealized gains | Gross unrealized losses | Provision for decline in value | Fair value | ||||||||||||
| (in millions of RMB) | ||||||||||||||||
Assets | |||||||||||||||||
Trading securities: | |||||||||||||||||
Listed equity securities | 619 | 115 | (58 | ) | — | 676 | |||||||||||
Financial derivatives | 86 | 532 | (1 | ) | — | 617 | |||||||||||
Available-for-sale securities: | |||||||||||||||||
Listed equity securities and other treasury investments | 8,261 | 3,822 | (446 | ) | — | 11,637 | |||||||||||
Equity fund | 184 | 52 | — | — | 236 | ||||||||||||
Held-to-maturity investment securities | 1,384 | — | — | — | 1,384 | ||||||||||||
Convertible bonds accounted for under the fair value option | 3,983 | 150 | (414 | ) | — | 3,719 | |||||||||||
| | | | | | | | | | | | | | | | | |
14,517 | 4,671 | (919 | ) | — | 18,269 | ||||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| As of March 31, 2016 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Original cost | Gross unrealized gains | Gross unrealized losses | Provision for decline in value | Fair value | ||||||||||||
| (in millions of RMB) | ||||||||||||||||
Assets | |||||||||||||||||
Trading securities: | |||||||||||||||||
Listed equity securities | 646 | 230 | (105 | ) | — | 771 | |||||||||||
Financial derivatives | 7 | 171 | — | — | 178 | ||||||||||||
Available-for-sale securities: | |||||||||||||||||
Listed equity securities and other treasury investments | 12,701 | 5,940 | (438 | ) | (957 | ) | 17,246 | ||||||||||
Held-to-maturity securities | 10,760 | — | — | (7 | ) | 10,753 | |||||||||||
Convertible bonds accounted for under the fair value option | 4,256 | 366 | — | — | 4,622 | ||||||||||||
| | | | | | | | | | | | | | | | | |
28,370 | 6,707 | (543 | ) | (964 | ) | 33,570 | |||||||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
During the years ended March 31, 20142015 and 2015,2016, the Company completed several investments accounted for as investment securities. Details of these significant investments are summarized in Note 4.
During the years ended March 31, 2013, 2014, 2015 and 2015,2016, gross realized gain of RMB198 million, RMB148 million, RMB141 million and RMB141RMB1,012 million and gross realized loss of RMB145 million, RMB160 million, RMB97 million and RMB97RMB410 million from disposals of investment securities were recognized in the consolidated income statements, respectively. During the same periods, noyears ended March 31, 2014, 2015 and 2016, impairment loss wasof nil, nil and RMB962 million were charged in the consolidated income statements, respectively, as a result of other than temporary decline in valuevalues related to a listed equity security and fixed income securities.a held-to-maturity security.
As of March 31, 2013, 2014, 2015 and 2015,2016, net unrealized gains of nil, RMB299 million, RMB3,384 million and RMB3,384RMB5,502 million on available-for-sale investment securities were recorded in accumulated other comprehensive income, respectively. For the investmentavailable-for-sale securities with unrealized loss, their related aggregate fair values amounted to nil and RMB4,929 million as of March 31, 2014 and 2015. The carrying amounts of investment securities that were in a loss position over twelve months were insignificant as of the same dates.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
12. Investment securities and fair value disclosure (Continued)
to RMB4,929 million and RMB1,751 million as of March 31, 2015 and 2016, respectively. The carrying amounts of available-for-sale securities that were in a loss position over twelve months were insignificant as of the same dates.
The carrying amount of long-term held-to-maturity investments approximates their fair value due to the fact that the related interest rates approximate rates currently offered by financial institutions for similar debt instruments of comparable maturities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1 | - | Valuations based on unadjusted quoted prices for identical assets and liabilities in active markets. | |||
Level 2 | - | Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. | |||
Level 3 | - | Valuations based on unobservable inputs reflecting assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. |
Fair value of fixed deposits, corporate bonds, fixed income fundsshort-term investments and listed equity securities are based on quoted prices in active markets for identical assets or liabilities. All other financial instruments, such as derivative instruments wereand forward exchange contracts, are valued based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. Convertible bonds are valued using binomial model with unobservable inputs including risk-free interest rate, expected volatility and dividend yield. Contingent consideration is valued using an expected cashflow method with unobservable inputs including the probability to achieve the operating and financial targets, which is assessed by the Company, in connection with the contingent consideration arrangements.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
12. Investment securities and fair value disclosure (Continued)
The following table summarizes the Company's assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
| As of March 31, 2014 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | ||||||||||
| (in millions of RMB) | |||||||||||||
Assets | ||||||||||||||
Short-term investments | 10,587 | — | — | 10,587 | ||||||||||
Restricted cash | 4,921 | — | — | 4,921 | ||||||||||
Trading securities: | ||||||||||||||
Listed equity securities | 668 | — | — | 668 | ||||||||||
Financial derivatives | — | 134 | — | 134 | ||||||||||
Equity fund | 201 | — | — | 201 | ||||||||||
Available-for-sale securities: | ||||||||||||||
Listed equity securities | 1,189 | — | — | 1,189 | ||||||||||
Interest rate swaps | — | 138 | — | 138 | ||||||||||
Convertible bond accounted for under the fair value option | — | — | 1,044 | 1,044 | ||||||||||
| | | | | | | | | | | | | | |
17,566 | 272 | 1,044 | 18,882 | |||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Liabilities | ||||||||||||||
Contingent consideration in relation to investments and acquisitions | — | — | 326 | 326 | ||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| As of March 31, 2015 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | ||||||||||
| (in millions of RMB) | |||||||||||||
Assets | ||||||||||||||
Short-term investments | 14,148 | — | — | 14,148 | ||||||||||
Restricted cash | 2,297 | — | — | 2,297 | ||||||||||
Trading securities: | ||||||||||||||
Listed equity securities | 676 | — | — | 676 | ||||||||||
Financial derivatives | — | 617 | — | 617 | ||||||||||
Available-for-sale securities: | ||||||||||||||
Listed equity securities | 11,637 | — | — | 11,637 | ||||||||||
Equity fund | 236 | — | — | 236 | ||||||||||
Convertible bond accounted for under the fair value option | — | — | 3,719 | 3,719 | ||||||||||
| | | | | | | | | | | | | | |
28,994 | 617 | 3,719 | 33,330 | |||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Liabilities | ||||||||||||||
Contingent consideration in relation to investments and acquisitions | — | — | 1,278 | 1,278 | ||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| As of March 31, 2016 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | ||||||||||
| (in millions of RMB) | |||||||||||||
Assets | ||||||||||||||
Short-term investments | 4,700 | — | — | 4,700 | ||||||||||
Restricted cash | 1,346 | — | — | 1,346 | ||||||||||
Trading securities: | ||||||||||||||
Listed equity securities | 771 | — | — | 771 | ||||||||||
Financial derivatives | — | 178 | — | 178 | ||||||||||
Available-for-sale securities: | ||||||||||||||
Listed equity securities | 17,246 | — | — | 17,246 | ||||||||||
Convertible bond accounted for under the fair value option | — | — | 4,622 | 4,622 | ||||||||||
| | | | | | | | | | | | | | |
24,063 | 178 | 4,622 | 28,863 | |||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Liabilities | ||||||||||||||
Forward exchange contracts | — | 461 | — | 461 | ||||||||||
Contingent consideration in relation to investments and acquisitions | — | — | 1,264 | 1,264 | ||||||||||
| | | | | | | | | | | | | | |
— | 461 | 1,264 | 1,725 | |||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
12. Investment securities and fair value disclosure (Continued)
| As of March 31, 2015 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | ||||||||||
| (in millions of RMB) | |||||||||||||
Assets | ||||||||||||||
Short-term investments | 14,148 | — | — | 14,148 | ||||||||||
Restricted cash | 2,297 | — | — | 2,297 | ||||||||||
Trading securities: | ||||||||||||||
Listed equity securities | 676 | — | — | 676 | ||||||||||
Financial derivatives | — | 617 | — | 617 | ||||||||||
Available-for-sale securities: | ||||||||||||||
Listed equity securities | 11,637 | — | — | 11,637 | ||||||||||
Equity fund | 236 | — | — | 236 | ||||||||||
Convertible bond accounted for under the fair value option | — | — | 3,719 | 3,719 | ||||||||||
| | | | | | | | | | | | | | |
28,994 | 617 | 3,719 | 33,330 | |||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Liabilities | ||||||||||||||
Contingent consideration in relation to investments and acquisitions | — | — | 1,278 | 1,278 | ||||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Convertible bonds accounted for under the fair value option:
| Amounts | |||||
---|---|---|---|---|---|---|
| (in millions of RMB) | |||||
Balance at April 1, | ||||||
| ||||||
| ||||||
| 1,044 | |||||
Additions (Note | 2,944 | |||||
Decrease in fair value | (264 | ) | ||||
Foreign currency translation adjustments | (5 | ) | ||||
| | | | | | |
Balance at March 31, 2015 | 3,719 | |||||
Increase in fair value | 630 | |||||
Foreign currency translation adjustments | 273 | |||||
| | | | | | |
Balance at March 31, 2016 | 4,622 | |||||
| | | | | | |
| | | | | | |
| | | | | ||
|
Convertible bonds are valued using binomial model with unobservable inputs including risk-free interest rate, expected volatility and dividend yield.
Contingent consideration and put liability in relation to investments and acquisitions:
| Amounts | |||||
---|---|---|---|---|---|---|
| (in millions of RMB) | |||||
Balance at April 1, | ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| 326 | |||||
Repayment | (227 | ) | ||||
Additions (Note | 1,094 | |||||
Increase in fair value | 85 | |||||
| | | | | | |
Balance at March 31, 2015 | 1,278 | |||||
Decrease in fair value | (14 | ) | ||||
| | | | | | |
Balance at March 31, 2016 | 1,264 | |||||
| | | | | | |
| | | | | | |
| | | | | | |
Other than contingent cash consideration disclosed in Note 4(g), items included in contingent consideration as of March 31, 2016 are individually insignificant.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
13. Prepayments, receivables and other assets
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Current: | ||||||||
Amounts due from related companies (i) | 2,160 | 4,842 | ||||||
VAT receivables (ii) | 78 | 3,457 | ||||||
Accounts receivable, net of allowance | 269 | 1,067 | ||||||
Deferred direct selling costs (iii) | 810 | 809 | ||||||
Interest receivables | 231 | 561 | ||||||
Prepaid cost of revenue, sales and marketing expenses and others | 134 | 433 | ||||||
Loans and interest receivables from producers of movies and television programs | — | 401 | ||||||
Deferred tax assets (Note 7) | 191 | 256 | ||||||
Employee loans and advances (iv) | 109 | 153 | ||||||
Advances to customers | 43 | 128 | ||||||
Prepaid staff costs and individual income tax withholding tax | 49 | 101 | ||||||
Deposits for the acquisition on land use rights | 211 | — | ||||||
Others | 394 | 770 | ||||||
| | | | | | | | |
4,679 | 12,978 | |||||||
| | | | | | | | |
| | | | | | | | |
Non-current: | ||||||||
Prepayment for acquisition of property and equipment | 1,099 | 1,883 | ||||||
Employee loans (iv) | 503 | 534 | ||||||
Prepayment for film rights, script agreements and in-production movies and TV episodes | 36 | 375 | ||||||
Prepaid upfront fees and debt issuance costs related to long-term borrowings and unsecured senior notes | — | 311 | ||||||
Deferred direct selling costs (iii) | 144 | 149 | ||||||
Deferred tax assets (Note 7) | 66 | 157 | ||||||
Interest rate swaps | 138 | — | ||||||
Others | 101 | 676 | ||||||
| | | | | | | | |
2,087 | 4,085 | |||||||
| | | | | | | | |
| | | | | | | | |
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Current: | ||||||||
VAT receivables (i) | 3,457 | 6,589 | ||||||
Amounts due from related companies (ii) | 4,842 | 3,236 | ||||||
Prepaid cost of revenue, sales and marketing expenses and others | 433 | 1,242 | ||||||
Accounts receivable, net of allowance | 1,067 | 1,209 | ||||||
Deferred direct selling costs (iii) | 809 | 948 | ||||||
Deferred tax assets (Note 7) | 256 | 451 | ||||||
Advances to customers and merchants | 373 | 435 | ||||||
Loan receivables, net | 835 | 390 | ||||||
Interest receivables | 561 | 314 | ||||||
Employee loans and advances (iv) | 153 | 124 | ||||||
Others | 1,027 | 2,090 | ||||||
| | | | | | | | |
13,813 | 17,028 | |||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Non-current: | ||||||||
Prepayment for acquisition of property and equipment | 1,883 | 4,358 | ||||||
Employee loans (iv) | 534 | 451 | ||||||
Prepaid upfront fees and debt issuance costs related to long-term borrowings and unsecured senior notes | 311 | 354 | ||||||
Deferred direct selling costs (iii) | 149 | 148 | ||||||
Deferred tax assets (Note 7) | 157 | 30 | ||||||
Prepayment for film rights, script agreements and in-production movies and TV episodes | 375 | — | ||||||
Others | 676 | 666 | ||||||
| | | | | | | | |
4,085 | 6,007 | |||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
13. Prepayments, receivables and other assets (Continued)
rendered. As such, the related costs are also initially deferred and recognized in the consolidated income statements in the same period as the related service fees are recognized.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
13. Prepayments, receivables and other assets (Continued)
14. Investment in equity investees
| Cost method | Equity method | Total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions of RMB) | ||||||||||
Balance at April 1, 2012 | 1,316 | 326 | 1,642 | ||||||||
Additions | 392 | 190 | 582 | ||||||||
Share of results and other comprehensive income | — | (14 | ) | (14 | ) | ||||||
Less: disposals and transfers | (99 | ) | (306 | ) | (405 | ) | |||||
Less: impairment loss | (245 | ) | — | (245 | ) | ||||||
Foreign currency translation adjustments | (5 | ) | — | (5 | ) | ||||||
| | | | | | | | | | | |
Balance at March 31, 2013 | 1,359 | 196 | 1,555 | ||||||||
Additions | 12,655 | 3,908 | 16,563 | ||||||||
Share of results and other comprehensive income (i) | — | (34 | ) | (34 | ) | ||||||
Less: disposals and transfers | (262 | ) | — | (262 | ) | ||||||
Less: impairment loss | (119 | ) | — | (119 | ) | ||||||
Foreign currency translation adjustments | (44 | ) | 7 | (37 | ) | ||||||
| | | | | | | | | | | |
Balance at March 31, 2014 | 13,589 | 4,077 | 17,666 | ||||||||
Additions | 12,304 | 16,518 | 28,822 | ||||||||
Share of results and other comprehensive income (i) | — | (1,148 | ) | (1,148 | ) | ||||||
Less: disposals and transfers (ii) | (9,818 | ) | (806 | ) | (10,624 | ) | |||||
Less: impairment loss | (419 | ) | (438 | ) | (857 | ) | |||||
Foreign currency translation adjustments | 17 | 1 | 18 | ||||||||
| | | | | | | | | | | |
Balance at March 31, 2015 | 15,673 | 18,204 | 33,877 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Cost method | Equity method | Total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions of RMB) | ||||||||||
Balance at April 1, 2014 | 13,589 | 4,077 | 17,666 | ||||||||
Additions | 12,304 | 16,518 | 28,822 | ||||||||
Share of results and other comprehensive income (i) | — | (1,148 | ) | (1,148 | ) | ||||||
Less: disposals and transfers (ii) | (9,818 | ) | (806 | ) | (10,624 | ) | |||||
Less: impairment loss | (419 | ) | (438 | ) | (857 | ) | |||||
Foreign currency translation adjustments | 17 | 1 | 18 | ||||||||
| | | | | | | | | | | |
Balance at March 31, 2015 | 15,673 | 18,204 | 33,877 | ||||||||
Additions (iii) | 19,764 | 41,968 | 61,732 | ||||||||
Share of results and other comprehensive income (i) | — | (1,296 | ) | (1,296 | ) | ||||||
Less: disposals and transfers (ii) | (2,150 | ) | (751 | ) | (2,901 | ) | |||||
Less: impairment loss | (902 | ) | — | (902 | ) | ||||||
Foreign currency translation adjustments | 879 | 72 | 951 | ||||||||
| | | | | | | | | | | |
Balance at March 31, 2016 | 33,264 | 58,197 | 91,461 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
During the year ended March 31, 2016, disposals under the cost method were primarily related to the partial disposal of the Company's investment in an equity investee. A gain of approximately US$471 million (RMB3,078 million) arising from such disposal was recognized in interest and investment income, net in the consolidated income statement. Transfers under the equity method were primarily related to the consolidation of Alibaba Health upon which the control was obtained by the Company (Note 4(c)).
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
14. Investment in equity investees (Continued)
During the years ended March 31, 2015 and 2016, the Company completed several investments accounted for as equity investees. Details of the significant investments are summarized in Note 4.
The Company continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company's carrying value; the financial condition, operating performance and the prospects of the equity investee; and other company specific information such as recent financing rounds. If the decline in fair value is deemed to be other than temporary, the carrying value of the equity investee is written down to fair value. Impairment charges in connection with the equity method investments of nil, RMB438 million and nil were recorded in share of results of equity investees in the consolidated income statements for the years ended March 31, 2014, 2015 and 2016, respectively. Impairment charges in connection with the cost method investments of RMB119 million, RMB419 million and RMB902 million were recorded in interest and investment income, net in the consolidated income statements for the years ended March 31, 2014, 2015 and 2016, respectively. The fair value measurements with respect to such impairment losses were individually insignificant and utilized a number of different unobservable inputs not subject to meaningful aggregation.
As of March 31, 2015,2016, the equity method investments with an aggregate carrying amount of RMB13,218RMB42,395 million that are publicly traded have appreciateddecreased in value and the total open market values of these investments amounted to RMB24,332RMB38,344 million. A decline in the quoted market price below the carrying amount is not necessarily indicative of a loss in value that is other than temporary. The Company evaluated all factors and no impairment charge was recognized for these publicly traded equity method investments.
As of March 31, 20142015 and 2015,2016, the cost method investments with an aggregate carrying amount of RMB9,917RMB6,046 million and RMB6,046RMB9,223 million have appreciated in value and the Company estimated the fair value to approximate RMB14,455RMB14,965 million and RMB14,965RMB25,639 million, respectively. As of the same dates, for certain other cost method investments with carrying amounts of RMB3,672RMB9,627 million and RMB9,627RMB24,041 million, the Company identified no events or changes in circumstances that may have a significant adverse effect on the fair values of the investments and determined that it is not practicable to estimate their fair values, respectively.
During the years ended March 31, 2014 and 2015, the Company completed several investments accounted for as equity investees. Details of the significant investments are summarized in Note 4. During the same periods, the Company recorded impairment losses on certain cost method and equity method investments. The non-recurring fair value measurements with respect to such impairment losses were individually insignificant and utilized a number of different unobservable inputs not subject to meaningful aggregation.
15. Property and equipment, net
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Computer equipment and software | 5,675 | 9,829 | ||||||
Buildings and leasehold improvements | 2,434 | 2,828 | ||||||
Construction in progress | 780 | 1,818 | ||||||
Furniture, office and transportation equipment | 272 | 430 | ||||||
| | | | | | | | |
9,161 | 14,905 | |||||||
Less: accumulated depreciation and amortization | (3,580 | ) | (5,766 | ) | ||||
| | | | | | | | |
Net book value | 5,581 | 9,139 | ||||||
| | | | | | | | |
| | | | | | | | |
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Computer equipment and software | 9,829 | 13,289 | ||||||
Buildings and leasehold improvements | 2,828 | 6,155 | ||||||
Construction in progress | 1,818 | 1,883 | ||||||
Furniture, office and transportation equipment | 430 | 483 | ||||||
| | | | | | | | |
14,905 | 21,810 | |||||||
Less: accumulated depreciation and amortization | (5,766 | ) | (8,181 | ) | ||||
| | | | | | | | |
Net book value | 9,139 | 13,629 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Depreciation and amortization expenses recognized for the years ended March 31, 2013, 2014, 2015 and 20152016 were RMB764 million, RMB1,295 million, RMB2,282 million and RMB2,282RMB3,699 million, respectively.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
16. Intangible assets
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Non-compete agreements | 1,050 | 3,630 | ||||||
Developed technology and patents | 1,041 | 3,331 | ||||||
Trade names, trademarks and domain names | 768 | 2,007 | ||||||
User base and customer relationships | 264 | 855 | ||||||
Copyrights and others | — | 295 | ||||||
Less: accumulated amortization and impairment | (1,217 | ) | (3,543 | ) | ||||
| | | | | | | | |
Net book value | 1,906 | 6,575 | ||||||
| | | | | | | | |
| | | | | | | | |
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Non-compete agreements | 3,630 | 4,284 | ||||||
Developed technology and patents | 3,331 | 3,652 | ||||||
Trade names, trademarks and domain names | 2,007 | 2,222 | ||||||
User base and customer relationships | 855 | 1,234 | ||||||
Licenses and copyrights and others | 295 | 787 | ||||||
Less: accumulated amortization and impairment | (3,543 | ) | (6,809 | ) | ||||
| | | | | | | | |
Net book value | 6,575 | 5,370 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Amortization expenses for the years ended March 31, 2014, 2015 and 2016 amounted to RMB315 million, RMB2,089 million and RMB2,931 million, respectively. During the same periods, no impairment charge was recognized in the consolidated income statements.
The estimated aggregate amortization expenses for each of the five succeeding fiscal years and thereafter are as follows:
| Amounts | ||||
---|---|---|---|---|---|
| (in millions of RMB) | ||||
For the year ending March 31, | |||||
2017 | 3,103 | ||||
2018 | 1,734 | ||||
2019 | 449 | ||||
2020 | 71 | ||||
2021 | 8 | ||||
Thereafter | 5 | ||||
| | | | | |
5,370 | |||||
| | | | | |
| | | | | |
| | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
16. Intangible assets (Continued)
Amortization expenses for the years ended March 31, 2013, 2014 and 2015 amounted to RMB130 million, RMB315 million and RMB2,089 million, respectively. During the same periods, impairment charges of RMB18 million, nil and nil were recognized in the consolidated income statements, respectively.
The estimated aggregate amortization expenses for each of the five succeeding fiscal years and thereafter are as follows:
| Amounts | ||||
---|---|---|---|---|---|
| (in millions of RMB) | ||||
For the year ending March 31, | |||||
2016 | 2,629 | ||||
2017 | 2,333 | ||||
2018 | 1,186 | ||||
2019 | 342 | ||||
2020 | 71 | ||||
Thereafter | 14 | ||||
| | | | | |
6,575 | |||||
| | | | | |
| | | | | |
17. Goodwill
The changes in the carrying amount of goodwill for the years ended March 31, 2013, 20142015 and 20152016 were as follows:
| Amounts | |||||
---|---|---|---|---|---|---|
| (in millions of RMB) | |||||
Balance as of April 1, | ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| 11,793 | |||||
Additions | 30,319 | |||||
Deconsolidation of a subsidiary | (4 | ) | ||||
Impairment | (175 | ) | ||||
Foreign currency translation adjustments | — | |||||
| | | | | | |
Balance as of March 31, 2015 | 41,933 | |||||
Additions | 50,723 | |||||
Deconsolidation of a subsidiary (Note 4(e)) | (10,556 | ) | ||||
Impairment | (455 | ) | ||||
Foreign currency translation adjustments | — | |||||
| | | | | | |
Balance as of March 31, 2016 | 81,645 | |||||
| | | | | | |
| | | | | | |
| | | | | ||
|
Gross goodwill balances were RMB14,613RMB44,928 million and RMB44,928RMB85,095 million as of March 31, 20142015 and 2015,2016, respectively. Accumulated impairment losses were RMB2,820RMB2,995 million and RMB2,995RMB3,450 million as of the same dates.dates, respectively.
In the annual impairment assessment of goodwill, the Company concluded that the carrying amounts of respective reporting units exceeded its fair value and recorded an impairment charge of RMB157 million, RMB44 million, RMB175 million and RMB175RMB455 million during the years ended March 31, 2013, 2014, 2015 and 2015,2016, respectively. The impairment losses were resulted from a revision of long-term financial outlook and the change in business model of those reporting units. The impairment charge was determined by comparing the carrying amount of goodwill associated with that reporting unit with the implied fair value of the goodwill.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
18. Deferred revenue and customer advances
Deferred revenue and customer advances primarily represent service fees prepaid by merchants for which the relevant services have not been provided. The respective balances are as follows:
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Deferred revenue | 4,766 | 5,781 | ||||||
Customer advances | 2,158 | 2,578 | ||||||
| | | | | | | | |
6,924 | 8,359 | |||||||
Less: current portion | (6,496 | ) | (7,914 | ) | ||||
| | | | | | | | |
Non-current portion | 428 | 445 | ||||||
| | | | | | | | |
| | | | | | | | |
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Deferred revenue | 5,781 | 7,236 | ||||||
Customer advances | 2,578 | 3,479 | ||||||
| | | | | | | | |
8,359 | 10,715 | |||||||
Less: current portion | (7,914 | ) | (10,297 | ) | ||||
| | | | | | | | |
Non-current portion | 445 | 418 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
All service fees received in advance are initially recorded as customer advances. These amounts are transferred to deferred revenue upon commencement of the provision of services by the Company and are recognized in the consolidated income statements in the period in which the services are provided. In general, service fees received in advance are non-refundable after such amounts are transferred to deferred revenue.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
19. Accrued expenses, accounts payable and other liabilities
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Current: | ||||||||
Accrued bonus and staff costs, including sales commission | 3,412 | 6,377 | ||||||
Accrued cost of revenue and sales and marketing expenses | 2,046 | 5,158 | ||||||
Other deposits received in rendering services on e-commerce marketplaces | 1,156 | 1,391 | ||||||
Amounts due to related companies (i) | 300 | 927 | ||||||
Liabilities arising from treasury management activities | 250 | 776 | ||||||
Accruals for purchases of property and equipment | 454 | 701 | ||||||
Payable due to third party marketing affiliates | 649 | 667 | ||||||
Other taxes payable (ii) | 705 | 635 | ||||||
Accrual for interest expense | 402 | 535 | ||||||
Unvested share options exercised | 850 | 518 | ||||||
Accrued donations | 262 | 339 | ||||||
Contingent and deferred consideration in relation to investments and acquisitions | 443 | 329 | ||||||
Accrued professional services expenses | 126 | 302 | ||||||
Others | 832 | 1,179 | ||||||
| | | | | | | | |
11,887 | 19,834 | |||||||
| | | | | | | | |
| | | | | | | | |
Non-current: | ||||||||
Contingent and deferred consideration and put liability in relation to investments and acquisitions | 54 | 1,953 | ||||||
Others | 18 | 197 | ||||||
| | | | | | | | |
72 | 2,150 | |||||||
| | | | | | | | |
| | | | | | | | |
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Current: | ||||||||
Accrued cost of revenue and sales and marketing expenses | 5,158 | 8,328 | ||||||
Accrued bonus and staff costs, including sales commission | 6,377 | 8,210 | ||||||
Other deposits received in rendering services on e-commerce marketplaces | 1,391 | 1,503 | ||||||
Amounts due to related companies (i) | 927 | 1,456 | ||||||
Accruals for purchases of property and equipment | 701 | 1,248 | ||||||
Payable to third party marketing affiliates | 667 | 1,051 | ||||||
Other taxes payable (ii) | 635 | 943 | ||||||
Accrued professional services expenses | 302 | 603 | ||||||
Accrual for interest expense | 535 | 571 | ||||||
Accrued donations | 339 | 549 | ||||||
Liabilities arising from treasury management activities | 776 | 539 | ||||||
Contingent and deferred consideration in relation to investments and acquisitions | 329 | 322 | ||||||
Unvested share options exercised | 518 | 321 | ||||||
Others | 1,179 | 1,690 | ||||||
| | | | | | | | |
19,834 | 27,334 | |||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Non-current: | ||||||||
Contingent and deferred consideration in relation to investments and acquisitions | 1,953 | 1,851 | ||||||
Others | 197 | 315 | ||||||
| | | | | | | | |
2,150 | 2,166 | |||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
20. Bank borrowings
Bank borrowings are analyzed as follows:
| As of March 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
US$8.0 billion syndicated loan denominated in US$ (i) | 30,761 | — | ||||||
Long-term other borrowings (ii) | 723 | 1,609 | ||||||
Short-term other borrowings (iii) | 1,100 | 1,990 | ||||||
Less: unamortized upfront fees | (773 | ) | — | |||||
| | | | | | | | |
31,811 | 3,599 | |||||||
Less: current portion | (1,100 | ) | (1,990 | ) | ||||
| | | | | | | | |
Borrowings, non-current portion | 30,711 | 1,609 | ||||||
| | | | | | | | |
| | | | | | | | |
| As of March 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Long-term borrowings (i) | 1,609 | 1,871 | ||||||
Short-term borrowings (ii) | 1,990 | 4,304 | ||||||
| | | | | | | | |
3,599 | 6,175 | |||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
In August 2014, the Company entered into a loanrevolving credit facility agreement with certain financial institutions for an amount of US$3.0 billion which has not yet been drawn down. The interest rate foron any outstanding utilized amount under this credit facility is calculated based on LIBOR plus an applicable margin.120 basis points. This facility is reserved for general corporate and working capital purposes.
In March 2016, the Company signed a five-year US$3.0 billion syndicated loan agreement with a group of eight lead arrangers which has been subsequently drawn down in April 2016. The covenants of this credit facility are substantiallyloan was upsized from US$3.0 billion to US$4.0 billion in May 2016 through a general syndication, which the same as thoseupsized portion of the US$8.0 billion credit facility described in (i) above, except thatloan has not yet been drawn down. The loan has a five-year bullet maturity and is priced at 110 basis points over LIBOR. The proceeds of the Company is not required to maintain a minimum level of cash in a debt service reserve account. This facilityloan will primarily be used for general corporate and working capital purposes.purposes (including acquisitions).
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
20. Bank borrowings (Continued)
As of March 31, 2015,2016, the borrowings will be due according to the following schedule:
| Principal amounts | |||||
---|---|---|---|---|---|---|
| (in millions of RMB) | |||||
Within 1 year | ||||||
Between 1 to 2 years | ||||||
Between 2 to 3 years | ||||||
Between 3 to 4 years | ||||||
Between 4 to 5 years | ||||||
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
21. Unsecured senior notes
In November 2014, the Company issued unsecured senior notes included floating rate and fixed rate notes with varying maturities for an aggregate principal amount of US$8.0 billion. These notes are senior unsecured obligations and interest is payable in arrears, quarterly for the floating rate notes and semiannually for the fixed-rate notes, which are listed on the Hong Kong Stock Exchange. The proceeds from issuance of the unsecured senior notes were used to refinance the US$8.0 billion syndicated loan (Note 20).
The following table provides a summary of the Company's unsecured senior notes as of March 31, 2015:2016:
| Amounts | Effective interest rate | ||||||
---|---|---|---|---|---|---|---|---|
| (in millions of RMB) | | ||||||
US$300 million floating rate notes due 2017 | 1,843 | 0.85 | % | |||||
US$1,000 million 1.625% notes due 2017 | 6,136 | 1.73 | % | |||||
US$2,250 million 2.500% notes due 2019 | 13,770 | 2.64 | % | |||||
US$1,500 million 3.125% notes due 2021 | 9,174 | 3.24 | % | |||||
US$2,250 million 3.600% notes due 2024 | 13,795 | 3.66 | % | |||||
US$700 million 4.500% notes due 2034 | 4,276 | 4.59 | % | |||||
| | | | | | | | |
48,994 | ||||||||
Unamortized discount | 144 | |||||||
| | | | | | | | |
Total senior unsecured notes | 49,138 | |||||||
| | | | | | | | |
| | | | | | | | |
| Amounts | Effective interest rate | ||||||
---|---|---|---|---|---|---|---|---|
| (in millions of RMB) | | ||||||
US$300 million floating rate notes due 2017 | 1,940 | 1.22 | % | |||||
US$1,000 million 1.625% notes due 2017 | 6,462 | 1.73 | % | |||||
US$2,250 million 2.500% notes due 2019 | 14,506 | 2.64 | % | |||||
US$1,500 million 3.125% notes due 2021 | 9,662 | 3.24 | % | |||||
US$2,250 million 3.600% notes due 2024 | 14,524 | 3.66 | % | |||||
US$700 million 4.500% notes due 2034 | 4,502 | 4.59 | % | |||||
| | | | | | | | |
Carrying value | 51,596 | |||||||
Unamortized discount and debt issuance costs | 130 | |||||||
| | | | | | | | |
Total principal amounts of unsecured senior notes | 51,726 | |||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The unsecured senior notes were issued at a discount amounting to US$24 million (RMB150 million). The debt issuance costs of US$29 million (RMB175 million) were presented as a direct deduction from the principal amount of the unsecured senior notes on the consolidated balance sheets. The effective interest rates for the unsecured senior unsecured notes include the interest charged on the notes as well as amortization of the debt discounts and debt issuance costs.
The unsecured senior unsecured notes contain covenants including, among others, limitation on liens, consolidation, merger and sale of the Company's assets. In addition, the notes rank senior in right of payment to all of the Company's existing and future indebtedness expressly subordinated in right of payment to the notes and rank at least equally in right of payment with all of the Company's existing and future unsecured unsubordinated indebtedness (subject to any priority rights pursuant to applicable law).
The proceeds from issuance of the unsecured senior notes were used in full to refinance a previous syndicated loan in the same amount. The related unamortized upfront fees of RMB830 million of such syndicated loan were charged to interest expenses on the consolidated income statements upon the repayment of the syndicated loan during the year ended March 31, 2015.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
21. Unsecured senior notes (Continued)
As of March 31, 2015,2016, the future principal payments for the Company's unsecured senior unsecured notes will be due according to the following schedule:
| Principal amounts | ||||
---|---|---|---|---|---|
| (in millions of RMB) | ||||
Within 1 year | — | ||||
Between 1 to 2 years | |||||
Between 2 to 3 years | |||||
Between 3 to 4 years | |||||
Between 4 to 5 years | |||||
Thereafter | |||||
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
As of March 31, 2015,2016, the fair value of the Company's unsecured senior unsecured notes, based on Level 2 inputs, was US$8,0088,111 million (RMB49,184(RMB52,443 million).
22. Convertible Preferences Shares
As part of the arrangement for the repurchase of ordinary shares from Yahoo in 2012, the Company issued convertible preference shares ("Convertible Preference Shares") to Yahoo with a liquidation preference of US$1.7 billion (RMB10.7 billion) (the "Convertible Preference Shares"), net of issuance cost of RMB157 million.
The Convertible Preference Shares were redeemable at an amount equal to their liquidation preference plus accrued and unpaid dividends at the Company's option at any time subsequent to the first anniversary of the issue date if certain conditions were met, and were mandatorily redeemable on the fifth anniversary of the issue date unless previously redeemed. The holders of the Convertible Preference Shares were entitled to semi-annual dividends at a pre-determined rate until such shares were redeemed. Such dividend rate shall be 2.0% per annum prior to the second anniversary of the issuance date, 5.0% per annum commencing on the second anniversary of the issuance date until the mandatory redemption date, and 8.0% per annum thereafter until the Convertible Preference Shares were redeemed or converted into ordinary shares. The Convertible Preference Shares were convertible at the holder's option at any time at an initial conversion price of US$18.50 per share subject to certain adjustments, and shall be mandatorily converted concurrently with the closing of a qualified IPO as defined in the Convertible Preference Share purchase agreement. The holders of such shares had no voting rights. The Convertible Preference Shares were classified in the mezzanine section between liabilities and equity on the consolidated balance sheets due to their mandatory redemption provision. Costs incurred in connection with the issuance of the Convertible Preference Shares were recorded as a reduction of the related proceeds received, and the related accretion was charged against additional paid-in capital over the period from the issuance date until the mandatory redemption date of such shares. The Convertible Preference Shares were converted into ordinary shares of the Company upon the closing of the Company's initial public offering in September 2014 (Note 4(a)).
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
23. Related party transactions
During the years ended March 31, 2013, 2014, 2015 and 2015,2016, other than disclosed elsewhere, the Company had the following material related party transactions:
Transactions with Yahoo
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
Amount incurred or disbursed by the Company | |||||||||||
Royalty fee (i) | 592 | 748 | 448 | ||||||||
Purchase of patents (ii) | — | 430 | 144 | ||||||||
Yahoo TIPLA amendment payment (Note 4(d)) | 3,487 | — | — |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
Amount incurred or disbursed by the Company | |||||||||||
Royalty fee (i) | 748 | 448 | — | ||||||||
Purchase of patents (ii) | 430 | 144 | — |
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
22. Related party transactions (Continued)
Transactions with Ant Financial Services, Alipay, Koubei and Alipaytheir affiliates
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | ||||||||
| (in millions of RMB) | ||||||||||
Amount earned by the Company | |||||||||||
Royalty fee and software technology services fee (i) | 277 | 1,764 | 1,667 | ||||||||
SME Annual Fee (ii) | — | — | 90 | ||||||||
Reimbursement on options and RSUs (iii) | 146 | 266 | 206 | ||||||||
Other services (iv) | 42 | 46 | 158 | ||||||||
| | | | | | | | | | | |
465 | 2,076 | 2,121 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Amount incurred by the Company | |||||||||||
Payment processing fee (v) | 1,646 | 2,349 | 3,853 | ||||||||
Other services (iv) | 23 | 21 | 306 | ||||||||
| | | | | | | | | | | |
1,669 | 2,370 | 4,159 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended March 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | ||||||||
| (in millions of RMB) | ||||||||||
Amount earned by the Company | |||||||||||
Royalty fee and software technology services fee (i) | 1,764 | 1,667 | 1,122 | ||||||||
SME Annual Fee (ii) | — | 90 | 708 | ||||||||
Reimbursement on options and RSUs (iii) | 266 | 206 | 113 | ||||||||
Other services (iv) | 46 | 158 | 1,086 | ||||||||
| | | | | | | | | | | |
2,076 | 2,121 | 3,029 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Amount incurred by the Company | |||||||||||
Payment processing fee (v) | 2,349 | 3,853 | 4,898 | ||||||||
Other services (iv) | 21 | 306 | 299 | ||||||||
| | | | | | | | | | | |
2,370 | 4,159 | 5,197 | |||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
23. Related party transactions (Continued)
in an amount equal to the costs incurred by the Company in providing the software technology services plus 49.9% of the consolidated pre-tax income of Alipay and its subsidiaries (Note 4(b)), effective from December 2011. In 2014, the Intellectual Property License and Software Technology Services Agreement were terminated and the Company entered into the Amendedamended Alipay IPLA with Ant Financial Services. Under the Amendedamended Alipay IPLA, the Company will receive the Amended IPLAProfit Share Payments amounting to the sum of an expense reimbursement plus 37.5% of the consolidated pre-tax income of Ant Financial Services, subject to certain adjustments (Note 4(b)), effective from August 2014.
Royalty fee and software technology services fee under IPLAthe Intellectual Property License and Software Technology Services Agreement and the Amended IPLAProfit Share Payments were recognized as otherin consolidated income statements, net of the costs incurred for the provision of the software technology services reimbursed by Alipay of RMB218 million,Alipay. The amounts reimbursed by Ant Financial Services to the Company were RMB275 million, RMB486 million and RMB486RMB274 million for the years ended March 31, 2013, 2014, 2015 and 2015,2016, respectively.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
22. Related party transactions (Continued)
As of March 31, 2013, 20142015 and 2015,2016, the Company had certain amounts of cash and short-term investments held in accounts managed by Alipay (Note 2(p) and 2 (q)2(q)). In addition, as of March 31, 2015 and 2016, the Company had certain assets and liabilities with a net amount of RMB1,428 million and RMB1,517 million, respectively, are managed by a subsidiary of Ant Financial Services which primarily comprised of cash and investment securities.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
23. Related party transactions (Continued)
Transactions with management of the Company
TheCertain members of management of the Company entered into an agreement during the year ended March 31, 2013 whereby a management member, through a related company acquired the interest in a businesshave purchased their own aircraft for a cash consideration of US$49.7 million (RMB312 million) which was the original purchase priceboth business and personal use. The use of the aircraft. Thethese managements' own aircraft was subsequently leased to the Company, free of charge, to be used mainly by the management member in connection with the performance of their duties as executive chairman. Theemployees is free of charge, and the Company has also entered into aagreed to assume the cost of maintenance, crew and operations of the aircraft where such cost is allocated for business purposes. Such reimbursement agreement with the related company to reimburseof the maintenance and incidental costs of the aircraft at cost and such cost was insignificant for the years ended March 31, 2013, 2014, 2015 and 2015.2016.
During the year ended March 31, 2014, the Company granted 50,000,000 share options to a non-profit organization designated by two members of management of the Company, subject to irrevocable instructions to designate and transfer these share options to the separate charitable trusts to be established by these two members of management of the Company (Note 9).
Transactions with Cainiao Network
The Company entered into agreements with Cainiao Network during the year ended March 31, 2014 whereby the Company disposed of two wholly-owned subsidiaries to a subsidiary of Cainiao Network for cash consideration of RMB524 million. The major assets of the disposed subsidiaries consist of land use rights in the PRC. The gain on disposals for the year ended March 31, 2014 amounted to RMB74 million. The Company also entered into an agreement with Cainiao Network during the year ended March 31, 2016 whereby the Company disposed of a wholly-owned subsidiary to Cainiao Network for cash consideration of US$33 million (RMB204 million). The major asset of the disposed subsidiary consist of a land use right in the PRC. The gain on disposals for the year ended March 31, 2016 amounted to RMB3 million.
The Company has commercial arrangements with Cainiao Network to receive certain logisticlogistics services. Expenses incurred in connection with the logisticlogistics services provided by Cainiao Network of RMB785 million and RMB2,370 million were recorded in the consolidated income statementstatements for the years ended March 31, 2015 and 2016, respectively.
The Company also has cost sharing and other services arrangements with Cainiao Network and its subsidiaries primarily related to various administrative services and cloud computing services. In connection with these services provided by the Company, RMB20 million and RMB86 million were recorded in the consolidated income statements for the years ended March 31, 2015 and 2016, respectively.
Transactions with Weibo
The Company entered into a strategic collaboration agreement and a marketing cooperation agreement with Weibo during the year ended March 31, 2015.2014. Expenses incurred in connection with the marketing services provided by Weibo of RMB154 million, RMB654 million and RMB715 million were recorded in the traffic acquisition cost and sales and marketing expenses in the consolidated income statements for the years ended March 31, 2014, 2015 and 2016, respectively.
The Company also has other commercial arrangements with Weibo primarily related to cloud computing services. In connection with such services provided by the Company, nil, RMB2 million and RMB38 million were recorded in revenue in the consolidated income statements for the years ended March 31, 2014, 2015 and 2016, respectively.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
23. Related party transactions (Continued)
Other transactions
The Company's ecosystem offers different platforms on which different enterprises operate and the Company believes that all transactions on the Company's platforms are conducted on terms obtained in arms-length transations with similar unrelated parties.
Other than the transactions disclosed above or elsewhere in the consolidated financial statements, the Company has commercial arrangements with SoftBank, Yahoo, its equity investees and other equity investeesrelated parties to provide and receive certain marketing, logistics, traffic acquisition, cloud computing and other services. ForThe amounts relating to these services provided and received represent less than 1% of the Company's revenue and total expenses, respectively, for the years ended March 31, 2013, 2014, 2015 and 2016.
In addition, the Company has made certain acquisitions and equity investments together with related parties from time to time during the years ended March 31, 2014, 2015 and 2016. The acquisitions and equity investments agreements were entered into by the amounts relating to these transactions were not material.parties involved and conducted on fair value basis. The significant acquisitions and equity investments together with related parties are included in Note 4.
23.24. Restricted net assets
PRC laws and regulations permit payments of dividends by the Company's subsidiaries and VIEs incorporated in the PRC only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the Company's subsidiaries and VIEs incorporated in the PRC are required to annually appropriate 10% of their net income to the statutory reserve prior to payment of any
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
23. Restricted net assets (Continued)
dividends, unless such reserve have reached 50% of their respective registered capital. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each subsidiary and VIE. As a result of the restrictions described above and elsewhere under PRC laws and regulations, the Company's subsidiaries and VIEs incorporated in the PRC are restricted in their ability to transfer a portion of their net assets to the Company in the form of dividends. Such restriction amounted to RMB26,902RMB39,116 million as of March 31, 2015.2016. Even though the Company currently does not require any such dividends, loans or advances from the PRC entities for working capital and other funding purposes, the Company may in the future require additional cash resources from them due to changes in business conditions, funding of future acquisitions and development, or merely to declare and pay dividends or distributions to its shareholders. Except for the above or disclosed elsewhere, there is no other restriction on the use of proceeds generated by the Company's subsidiaries and VIEs to satisfy any obligations of the Company.
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
25. Commitments
(a) Capital commitments
Capital expenditures contracted for are analyzed as follows:
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
Contracted but not provided for: | ||||||||
Purchase of property and equipment | 980 | 1,190 | ||||||
Construction of corporate campuses | 1,562 | 2,181 | ||||||
| | | | | | | | |
2,542 | 3,371 | |||||||
| | | | | | | | |
| | | | | | | | |
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
Contracted but not provided for: | ||||||||
Purchase of property and equipment | 908 | 803 | ||||||
Construction of corporate campuses | 2,181 | 1,688 | ||||||
| | | | | | | | |
3,089 | 2,491 | |||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(b) Operating lease commitments for office facility and transportation equipment
The Company has leased office premises and transportation equipment under non-cancellable operating lease agreements. These leases have varying terms and renewal rights. The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
No later than 1 year | 198 | 400 | ||||||
Later than 1 year and no later than 5 years | 214 | 623 | ||||||
More than 5 years | 8 | 33 | ||||||
| | | | | | | | |
Total | 420 | 1,056 | ||||||
| | | | | | | | |
| | | | | | | | |
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
No later than 1 year | 400 | 394 | ||||||
Later than 1 year and no later than 5 years | 623 | 441 | ||||||
More than 5 years | 33 | 65 | ||||||
| | | | | | | | |
Total | 1,056 | 900 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
For the years ended March 31, 2013, 2014, 2015 and 2015,2016, the Company incurred rental expenses under operating leases of RMB251 million, RMB217 million, RMB322 million and RMB322RMB451 million, respectively.
(c) Commitments for co-location, bandwidth fees and marketing expenses
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
No later than 1 year | 2,089 | 2,680 | ||||||
Later than 1 year and no later than 5 years | 3,045 | 4,919 | ||||||
More than 5 years | — | 823 | ||||||
| | | | | | | | |
Total | 5,134 | 8,422 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2013, 2014, 2015 AND 20152016
24.25. Commitments (Continued)
(c) Commitments for co-location, bandwidth fees and marketing expenses
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | ||||||
| (in millions of RMB) | |||||||
No later than 1 year | 884 | 2,089 | ||||||
Later than 1 year and no later than 5 years | 2,523 | 3,045 | ||||||
| | | | | | | | |
Total | 3,407 | 5,134 | ||||||
| | | | | | | | |
| | | | | | | | |
(d) Investment commitments
The Company was obligated to pay up to RMB12,333RMB5,364 million and RMB5,364RMB65,597 million for the acquisition of investment securities and equity investees under various arrangements as of March 31, 20142015 and 2015,2016, respectively. The commitment balance as of March 31, 2016 primarily includes the considerations for the acquisitions of Youku Tudou (Note 4(t)) and Suning (Note 4(aa)).
(e) Other commitmentsCommitments for licenses and copyrights
During the year ended March 31, 2015, theThe Company announced its intentionhas entered into non-cancellable licensing agreements with third-party vendors to establish two not-for-profit foundations of HK$1 billion (RMB792 million)acquire certain licenses and New Taiwan Dollar 10 billion (RMB1,983 million) to support the careercopyrights for mobile media and entrepreneurial aspirations of young people in Hong Kong and Taiwan, respectively.entertainment business. The core mission of these foundations is to help young entrepreneurs start and grow businessesfuture aggregate minimum payments under non-cancellable licensing agreements are as well as to enable them to offer products and services on the marketplaces and platforms in the Alibaba ecosystem. Through these funds, young entrepreneurs can gain access to financial capital and various technical assistance as well as experience sharing to run their early start-up enterprises. As of March 31, 2015, the Company was in the process of setting up the legal structures of these two foundations and the Company intends to fulfill its commitments over an extended period of time.follows:
| As of March 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2015 | 2016 | ||||||
| (in millions of RMB) | |||||||
No later than 1 year | 280 | 885 | ||||||
Later than 1 year and no later than 5 years | 2 | 2,885 | ||||||
| | | | | | | | |
Total | 282 | 3,770 | ||||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
25.26. Risks and contingencies
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
25. Risks and contingencies (Continued)
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
26. Risks and contingencies (Continued)
enterprises, like the Company, may operate. If new or more extensive restrictions were imposed on the segments in which the Company is permitted to operate, the Company could be required to sell or cease to operate or invest in some or all of its current businesses in the PRC.
ALIBABA GROUP HOLDING LIMITEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2013, 2014 AND 2015
25. Risks and contingencies (Continued)
the investee; the economic or technological environment in which the investee operates; and other entity specific information such as recent financing rounds completed by the investee companies. Fair value of the listed securities is subject to volatility and may be materially affected by
ALIBABA GROUP HOLDING LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2014, 2015 AND 2016
26. Risks and contingencies (Continued)
market fluctuations. If the decline in fair value is significant and other than temporary, the carrying value of the investment is written down to its fair value and this may negatively impact the results of operations of the Company.
26. Subsequent events
In April 2015, the Company entered into an arrangement with a bank in the PRC to invest in wealth management products with an aggregate principal amount of RMB7.3 billion. The wealth management products carry an interest rate of 5% per annum and the return of principal and interest income on the products is guaranteed by the bank. The wealth management products have been served as collateral to the issuing bank for the issuance of a financing amounting to RMB6.9 billion to one of the founders of the Company to support his minority investment through a PRC limited partnership in Wasu, a company listed on the Shenzhen Stock Exchange which is engaged in the business of digital media broadcasting and distribution in the PRC. The financing has also been collateralized by the equity interests of Wasu held by such PRC limited partnership. The founder has also pledge his interest in the PRC limited partnership to the Company. The Company entered into strategic cooperation agreements with a major shareholder of Wasu in order to enhance the Company's capabilities and profile in the entertainment sector in the PRC.
In connection with the issuance of the consolidated financial statements for the year ended March 31, 2015, the Company has evaluated subsequent events through June 25, 2015, the date the consolidated financial statements were available to be issued.