alibaba1.txt

Form 424B4
Alibaba Group Holding Ltd - BABA
Filed: September 22, 2014 (period: )
Prospectus filed under Rule 424(b)(4)
The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
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424B4 - 424(B)(4)
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Filed pursuant to Rule 424(b)(4)
Registration No. 333-195736
320,106,100 American Depositary Shares
Representing 320,106,100 Ordinary Shares
Alibaba Group Holding Limited
This is the initial public offering of Alibaba Group Holding Limited, or Alibaba Group. We are offering 123,076,931 American Depositary Shares, or ADSs, and the selling shareholders named in this prospectus, including Yahoo, one of our principal shareholders, Jack Ma, our executive chairman, and Joe Tsai, our executive vice chairman, are offering, in the aggregate, 197,029,169 ADSs. Each ADS represents one ordinary share, par value US$0.000025 per share. The initial public offering price of the ADSs is US$68.00 per ADS. We will not receive any proceeds from the ADSs sold by the selling shareholders.
Pursuant to our memorandum and articles of association, a partnership, or the Alibaba Partnership, comprised of certain management members of our company, Small and Micro Financial Services Company and China Smart Logistics, will have the exclusive right to nominate a simple majority of the board of directors of our company. See “Alibaba Partnership” and “Description of Share Capital — Ordinary Shares — Nomination, Election and Removal of Directors.”
Prior to this offering, there has been no public market for our ADSs or ordinary shares. Our ADSs have been approved for listing on the New York Stock Exchange under the symbol “BABA.”
Investing in our ADSs involves risk. See “Risk Factors” beginning on page 25.
Per ADS
Total
Price to public
US$
68.00  
US$
21,767,214,800
Underwriting discounts and commissions
US$
0.816
US$
261,206,578
Proceeds, before expenses, to us
US$
67.184
US$
8,268,800,532
Proceeds, before expenses, to the selling shareholders
US$
67.184
US$
13,237,207,690
We, Yahoo, Jack Ma and Joe Tsai have granted the underwriters the right to purchase up to an aggregate of 48,015,900 additional ADSs.
Neither the United States Securities and Exchange Commission nor any state securities commission or any other regulatory body has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the ADSs against payment in U.S. dollars to purchasers on or about September 24, 2014.
Credit Suisse
Deutsche Bank
Goldman Sachs
J.P. Morgan
Morgan Stanley
Citi
BOCI
CICC
        CLSA
          DBS Bank
HSBC
Mizuho
Pacific Crest    
Stifel
Wells Fargo
BNP PARIBAS
Evercore
Raymond James
SunTrust Robinson Humphrey
September 18, 2014.
Table of Contents
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TABLE OF CONTENTS
Page
Prospectus Summary
1
Risk Factors
25
Special Note Regarding Forward-Looking Statements
69
Operating Metrics
70
Use of Proceeds
71
Dividend Policy
72
Capitalization
73
Dilution
75
Exchange Rate Information
77
Enforcement of Civil Liabilities
78
Letter from Jack Ma
80
Our History and Corporate Structure
83
Selected Consolidated Financial and Operating Data
93
Management’s Discussion and Analysis of Financial Condition and Results of Operations
100
Business
160
Regulation
216
Alibaba Partnership
229
Our Directors
235
Our Executive Officers
242
Principal and Selling Shareholders
250
Related Party Transactions
255
Description of Share Capital
272
Description of American Depositary Shares
288
Shares Eligible for Future Sale
297
Taxation
303
Underwriting
310
Expenses Related to this Offering
317
Legal Matters
318
Experts
318
Where You Can Find More Information
319
Index to Financial Statements
F-1
This prospectus contains estimates and information concerning our industry, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. This prospectus contains statistical data and estimates published by iResearch, the China Internet Network Information Center, or CNNIC, Forrester Research, Euromonitor International, the National Bureau of Statistics of China, State Post Bureau of the PRC, the School of Social Sciences of Tsinghua University and International Data Corporation, or IDC, including a report titled “Global eCommerce Platforms Ranking by Gross Merchandise Volume,” which we requested IDC to prepare and for which we paid a fee and which we refer to in this prospectus as the IDC GMV Report. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in these publications and reports.
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ADSs.
Until October 13, 2014 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
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PROSPECTUS SUMMARY
This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our ADSs. You should carefully read the entire prospectus, including “Risk Factors” and the financial statements, before making an investment decision.
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. Our decisions are guided by how they serve our mission over the long-term, not by the pursuit of short-term gains.
Our Business
We are the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013, according to the IDC GMV Report. We operate our ecosystem as a platform for third parties, and we do not engage in direct sales, compete with our merchants or hold inventory.
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 2013 according to iResearch. These three marketplaces, which comprise our China retail marketplaces, generated a combined GMV of RMB1,833 billion (US$296 billion) from 279 million active buyers and 8.5 million active sellers in the twelve months ended June 30, 2014. A significant portion of our customers have begun transacting on our mobile platform, and we are focused on capturing this opportunity. In the three months ended June 30, 2014, mobile GMV accounted for 32.8% of our GMV, up from 27.4% in the preceding three months and from 12.0% in the same period in the previous year. The number of mobile MAUs increased from 136 million for the month ended December 31, 2013, to 163 million for the month ended March 31, 2014 and to 188 million for the month ended June 30, 2014.
In addition to our three China retail marketplaces, which accounted for 81.6% of our revenues in fiscal year 2014, we operate Alibaba.com, China’s largest global online wholesale marketplace in 2013 by revenue, according to iResearch, 1688.com, our China wholesale marketplace, and AliExpress, our global consumer marketplace, as well as provide cloud computing services.
As a platform, 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. 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.
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.
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Through contractual arrangements with Alipay, we offer payment and escrow services for buyers and sellers, providing security, trust and convenience to our users. Since 2011, we have not held any interest in or control over Alipay or its parent company. Following the divestment of our interest in and control over Alipay, effective in the first calendar quarter of 2011, we have maintained long-term commercial arrangements with Alipay, which we believe align both companies’ interests in the success of our ecosystem. We also continue to derive economic benefits from our contractual arrangements with Alipay. For further details regarding our relationship with Alipay and its parent company, including the recent restructuring of our contractual arrangements with them in August 2014, see “Related Party Transactions — Agreements and Transactions Related to Small and Micro Financial Services Company and its Subsidiaries — Ownership of Small and Micro Financial Services Company.”
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 Zhejiang Cainiao Supply Chain Management Co., Ltd., or China Smart Logistics, our 48%-owned affiliate. Through our acquisition of UCWeb, we are able to leverage its expertise as a developer and operator of mobile web browsers to enhance our mobile offerings beyond e-commerce, such as general mobile search, which gives us access to UCWeb’s large base of mobile users and offers our existing user base additional mobile solutions.
Our revenue is primarily generated from merchants through online marketing services (via Alimama, our proprietary online marketing platform), commissions on transactions and fees for online services. We also generate revenues through fees from memberships, value-added services and cloud computing services. GMV generated on our China retail marketplaces increased by 55.8% from RMB1,077 billion in fiscal year 2013 to RMB1,678 billion (US$270 billion) in fiscal year 2014. Our total revenue increased by 52.1% from RMB34,517 million in fiscal year 2013 to RMB52,504 million (US$8,463 million) in fiscal year 2014. Our total revenue increased by 46.3% from RMB10,778 million in the three months ended June 30, 2013 to RMB15,771 million (US$2,542 million) in the same period in 2014. We do not allocate revenue among each of our China retail marketplaces. Our net income increased by 170.6% from RMB8,649 million in fiscal year 2013 to RMB23,403 million (US$3,772 million) in fiscal year 2014. Our net income increased by 179.6% from RMB4,448 million in the three months ended June 30, 2013 to RMB12,438 million (US$2,005 million) in the same period in 2014. For the three months ended June 30, 2014, our net income included a net gain of RMB6,251 million (US$1,008 million) from step-up acquisitions arising from revaluations of previously held equity interest. Our fiscal year ends on March 31.
Our Key Metrics
We have experienced significant growth across various key metrics for our China retail marketplaces:
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Our business and our ecosystem as a whole have achieved significant scale and size:
Our Scale and Size
Scale and Size of Our Ecosystem Participants
Unless otherwise indicated, all figures in the above charts are for the twelve months ended, or as of, June 30, 2014, and in the case of our scale and size, on our China retail marketplaces.
(1)
For the three months ended June 30, 2014.
(2)
According to iResearch for the three months ended June 30, 2014.
(3)
For the month ended June 30, 2014. Based on the aggregate mobile MAUs of apps that contribute to GMV on our China retail marketplaces. The number of mobile MAUs increased from 136 million in the month ended December 31, 2013 to 163 million in the month ended March 31, 2014 and to 188 million in the month ended June 30, 2014.
(4)
For the twelve months ended June 30, 2014. Representing 54% of the 11.3 billion packages delivered in the twelve months ended June 30, 2014 by delivery services in China meeting certain minimum revenue thresholds, according to the State Post Bureau of the PRC.
(5)
Alibaba Cloud Computing processing capability as of December 31, 2013.
(6)
The sum of merchants on our (i) China retail marketplaces who paid fees and/or commissions to us in the twelve months ended June 30, 2014, plus (ii) wholesale marketplaces with current paid memberships as of June 30, 2014. A merchant may have more than one paying relationship with us.
(7)
Includes registered countries and territories of (i) buyers that sent at least one inquiry to a seller on Alibaba.com and (ii) buyers that settled at least one transaction on AliExpress through Alipay, in each case in the twelve months ended June 30, 2014, demonstrating the global reach and the potential for cross-border commerce opportunities across our marketplaces.
(8)
For the twelve months ended June 30, 2014. Approximately 29.7% of Alipay’s total payment volume in the twelve months ended June 30, 2014 represented payments processed for our China retail marketplaces.
(9)
Marketing affiliates who received a revenue share from us in the three months ended December 31, 2013.
(10)
Based on data provided by our 14 strategic delivery partners as of June 30, 2014.
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The Network Effect on and across Our Marketplaces
The interactions between buyers and sellers create network effects in that more merchants attract more consumers, and more consumers attract more merchants. In addition, our marketplaces are interconnected in that many buyers and sellers on one marketplace also participate in the activities on our other marketplaces, thereby creating a second-order network effect that further strengthens our ecosystem.
The chart below depicts this network effect dynamic in our ecosystem.
Buyers
•   Chinese consumers buy on Taobao Marketplace, Tmall and Juhuasuan
•   While browsing or searching on Taobao Marketplace, consumers see product listings from both Taobao Marketplace and Tmall
•   Global consumers buy on AliExpress
•   Global wholesalers buy on Alibaba.com
Retail sellers
•   Small sellers in China sell on Taobao Marketplace and AliExpress
•   Chinese brands sell on Taobao Marketplace, Tmall, Juhuasuan and AliExpress and global brands sell on Tmall Global
•   Sellers source products on 1688.com
Wholesale sellers
•   Chinese wholesalers and manufacturers supply retail merchants in China on 1688.com and global wholesale buyers on Alibaba.com
•   Chinese wholesalers and manufacturers supply directly to global consumers on AliExpress
•   Global wholesalers and manufacturers supply global wholesale buyers on Alibaba.com
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Our Market Opportunity
Our market opportunity is primarily driven by the following factors:
•
Our business benefits from the rising spending power of Chinese consumers. China’s real consumption in 2013 was 35.8% of total GDP, which is a rate that is significantly lower than that of other countries, such as the United States, which had a consumption penetration rate of 67.1% in 2013, according to Euromonitor International. We believe that growth in consumption will drive higher levels of online and mobile commerce.
•
China’s online shopping population is relatively underpenetrated. According to CNNIC, China had the world’s largest Internet population with 618 million users as of December 31, 2013. According to CNNIC, China had 302 million online shoppers in 2013. We believe the number of online shoppers will increase, driven by continued growth in the number of Internet users as well as by the higher percentage of Internet users making purchases online.
•
We believe that consumers are expanding the categories of products and services they are purchasing online, which will further increase online and mobile commerce activity.
•
We believe that the increased usage of mobile devices will make access to the Internet even more convenient, drive higher online shopper engagement and enable new applications. China has the world’s largest mobile Internet user base with 500 million users as of December 31, 2013, according to CNNIC, and mobile usage is expected to increase, driven by the growing adoption of mobile devices.
•
China’s offline retail market faces significant challenges due to few nationwide brick and mortar retailers, an underdeveloped physical retail infrastructure, limited product selection and inconsistent product quality. These challenges in China’s retail infrastructure, which we believe are particularly acute outside of tier 1 and 2 cities, are causing consumers to leapfrog the offline retail market in favor of online and mobile commerce.
•
China has an increasingly extensive and rapidly improving logistics infrastructure consisting of nationwide, regional and local delivery services. We believe that the rapid development of China’s distributed logistics infrastructure and nationwide express delivery networks has been driven in part by the growth of e-commerce and will continue to support the unique demands of consumers and merchants conducting e-commerce transactions on marketplaces.
Overall, online shopping, which represented 8.0% of total China consumption in 2013, is projected to grow at a compound annual growth rate, or CAGR, of 36.1% from 2013 to 2016, according to iResearch, as more consumers shop online and e-commerce spending per consumer increases.
Our Strengths
We believe that the following strengths contribute to our success and are differentiating factors that set us apart from our peers.
•
Management Team with Owner Mentality and Proven Track Record. Our management team’s clear sense of mission, long-term focus and commitment to the values that define the Alibaba culture have been central to our successful track record. Our management team has created and grown leading businesses organically, including Taobao Marketplace, Tmall, Alibaba.com, Alibaba Cloud Computing and Alipay.
•
Trusted Brands. Alibaba, Taobao, Tmall and Alipay are well recognized and trusted brands in China. Due to the strength of these brands, a majority of our customers navigate directly to our China retail marketplaces to find the products and services they are seeking instead of via third-party search engines.
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•
Thriving Ecosystem with Powerful Network Effects. We are the steward of a thriving ecosystem, which provides us with the following key advantages:
•
participants in our ecosystem are invested in its success and growth;
•
interactions among participants create value for one another as our ecosystem expands and generates strong network effects; and
•
the scope of our ecosystem and the network effects it creates, including the significant buyer traffic generated by our Taobao Marketplace, provide low-cost organic traffic for our other marketplaces and services and significantly reduce our reliance on a sales force for our marketing services.
•
Mobile Leadership. We are the leader in mobile commerce in China in terms of mobile retail GMV, with mobile GMV transacted on our China retail marketplaces accounting for 86.1% of total mobile retail GMV in China in the three months ended June 30, 2014, according to iResearch. Our Mobile Taobao App has been the most popular mobile commerce app in China by mobile MAUs every month since August 2012, according to iResearch. We had 188 million mobile MAUs on our China retail marketplaces in June 2014.
•
Scalable Logistics Platform. We offer sellers on our marketplaces the benefits of a distributed and scalable logistics platform and information system to provide high quality delivery services to sellers and buyers on a large scale. Our platform approach helps to address the requirements of facilitating the delivery of packages across a wide range of product categories from millions of sellers to millions of buyers in dispersed locations across China. The scalability of this network was demonstrated by its success in the handling of 156 million packages generated on our Singles Day promotion in 2013 compared to a daily average of 16.6 million packages generated from transactions on our China retail marketplaces in the twelve months ended June 30, 2014.
•
Reliable, Scalable and Cost-effective Proprietary Technology. We have developed proprietary technology that is reliable, scalable and cost-effective. Our technology is designed to handle the large volume of transactions on our marketplaces. For example, we successfully processed 254 million orders within 24 hours during our Singles Day promotion on November 11, 2013.
•
Data Insights. Data from consumer behavior and transactions completed on our marketplaces and interactions among participants in our ecosystem provide us with valuable insights to help us and our sellers improve the buyer experience, operate more efficiently and create innovative products and services.
•
Third-party Platform Business Model. Our exclusively third-party platform business model allows us to scale rapidly without the risks and capital requirements of sourcing, merchandising and holding inventory borne by direct sales companies. This business model drives our profitability and strong cash flow, which give us the flexibility to further invest in and improve our platform, expand our ecosystem and aggressively invest in people, technology, innovative products and strategically important assets.
Our Strategies
The key elements of our strategy to grow our business include:
•
Increase Active Buyers and Wallet Share. In the twelve months ended June 30, 2014, the average active buyer on our China retail marketplaces placed 52 orders, up from 45 orders in the same period in 2013 and 35 orders in the same period in 2012. We will continue to develop and market the value proposition of our retail marketplaces to attract new buyers as well as to 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, marketing and promotional campaigns, and expansion of marketing affiliates, as well as by promoting the usage of our various mobile commerce apps such as our Mobile Taobao App.
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•
Expand Categories and Offerings. We aim to enhance the shopping experience for consumers, increase consumer engagement and create additional opportunities for merchants by developing and promoting additional categories and offerings. We believe that growth in the number of product and service categories and products and services purchased within each category contributes to higher average spending per customer and increases GMV.
•
Extend Our Mobile Leadership. We intend to build upon our strength in mobile commerce to develop a broader spectrum of consumer offerings, such as location-based services, O2O services and digital content, in order to fulfill our vision of becoming central to the everyday lives of our customers. We will also continue to look for ways to increase our mobile user base and engagement through strategic alliances, investments and acquisitions, such as our acquisition of UCWeb.
•
Enhance the Success of Sellers on 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 data science applications to manage their relationships with customers.
•
Enhance Data and Cloud Computing Technologies. We will continue to implement our data strategy through the application of data intelligence and deep learning technologies to several fields, including marketplace design, user interface, search, targeted marketing, logistics, location-based services and financial services, among others. In addition, 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 markets without significant capital investments while providing Chinese manufacturers and merchants with a platform to reach businesses and consumers across the world. For example, we will continue to grow our international business by connecting overseas branded retailers to Chinese consumers (Tmall Global) and connecting Chinese suppliers to international retail markets (AliExpress) and international wholesale markets (Alibaba.com).
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 this 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 30 members comprised of 24 members of our management, five members of management of Small and Micro Financial Services Company and one member of management of China Smart Logistics. Two partners who are members of our management are also members of management of Small and Micro Financial Services Company. The partnership operates under principles, policies and procedures that have evolved with our business and are described below.
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.
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•
New partners are elected annually after a nomination process based on a number of criteria including not less than five years of tenure with Alibaba Group, one of our affiliates and/or certain companies with which we have a significant relationship such as Small and Micro Financial Services Company, and require a 75% approval of all of the partners. Partnership votes are made on a one-partner-one-vote basis.
•
Partners are evangelists for our mission, vision and values, both within our organization and externally to customers, business partners and other participants in our ecosystem.
•
We require each partner to maintain a meaningful level of equity interests in our company during such individual’s tenure as a partner.
•
The Alibaba Partnership will have the exclusive right to nominate for shareholder approval up to a simple majority of the members of our board of directors. If an Alibaba Partnership director nominee is not elected by our shareholders or 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 until our next scheduled annual general meeting of shareholders. We expect that our initial board of directors upon completion of this offering will consist of nine members, and the Alibaba Partnership will designate four of those directors as 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. For example, as the Alibaba Partnership will designate only four out of nine of our initial directors as Alibaba Partnership nominees, the Alibaba Partnership will have the right, following the completion of this offering, to nominate or appoint two additional directors to our board of directors, which would increase the total number of directors to eleven. We expect to enter into a voting agreement that will take effect upon completion of this offering, 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 until SoftBank’s shareholding declines below 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.
Our Challenges
We believe some of the major risks and uncertainties that may materially and adversely affect us include the following:
•
any failure to maintain the trusted status of our ecosystem could severely damage our reputation and brand;
•
we may not be able to maintain or improve the network effects of our ecosystem;
•
our operating philosophy may negatively influence our short-term financial performance;
•
we may not be able to successfully monetize our mobile traffic;
•
we may not be able to maintain our culture, which has been a key to our success;
•
we may not be able to innovate or compete effectively;
•
if the services Alipay provides to us are limited or restricted, our business would be harmed;
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we may not be able to sustain our revenue growth rate, and increased investments in our business may negatively affect our margins;
•
our revenue and net income may be materially and adversely affected by any economic slowdown in China as well as globally;
•
there are risks and uncertainties associated with our variable interest entity structure; and
•
the regulatory and legal system in China is complex and developing, and future regulations may impose additional requirements on our business.
We also face other challenges, risks and uncertainties that may materially and adversely affect our business, financial condition, results of operations and prospects. You should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our ADSs.
Corporate History and Structure
We have a demonstrated track record of successful organic business creation since our founding in 1999.
•
In 1999, we founded Alibaba.com and Alibaba.com.cn, the predecessor of 1688.com.
•
In 2003, we launched Taobao Marketplace.
•
In 2004, we established Alipay to address the issue of trust between buyers and sellers online. We have continued to offer payment and escrow services on our marketplaces through Alipay following divestment of our interest in and control over Alipay in 2011. This divestment resulted from our management’s response to regulations issued in June 2010 by the People’s Bank of China, or the PBOC, 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 prospectus). 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 a share and asset purchase agreement, or the 2014 SAPA, with Small and Micro Financial Services Company and the other parties to the 2011 restructuring, pursuant to which we further restructured the contractual arrangements between us and Small and Micro Financial Services Company.
•
In 2007, we launched Alimama, our online marketing technology platform.
•
In 2008, we launched Tmall to address an increasing consumer need for branded products and a premium shopping experience.
•
In 2009, we established Alibaba Cloud Computing to handle the increasing data management needs on our platform.
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In 2010, we launched the Mobile Taobao App.
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.
Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added telecommunications services, which include 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
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wholly-foreign owned enterprises, majority-owned entities and variable interest entities. The relevant variable interest entities, which are 100% owned by PRC citizens or by PRC entities owned by PRC citizens, hold the ICP licenses and operate the various websites for our Internet businesses. Specifically, our material variable interest entities are majority-owned by Jack Ma, our lead founder, executive chairman and one of our principal shareholders, and minority-owned by Simon Xie, one of our founders and a vice president on our China investment team where he works on projects related to our China acquisition and investment activities. These contractual arrangements collectively enable us to exercise effective control over, and realize substantially all of the economic risks and benefits arising from, the variable interest entities. See “Our History and Corporate Structure — Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders.” The contractual arrangements may not be as effective in providing operational control as direct ownership. See “Risk Factors — Risks Related to Our Corporate Structure.”
As a result, we include the financial results of each of the variable interest entities in our consolidated financial statements in accordance with generally accepted accounting principles in the United States, or 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 foreign owned enterprises, which primarily provide technology and other services to our customers.
We conduct our business operations across approximately 290 subsidiaries and other consolidated entities. The chart below summarizes our corporate legal structure and identifies our significant subsidiaries as that term is defined under Rule 1-02 of Regulation S-X under the Securities Act, as well as our variable interest entities that are material to our business, and the number of their respective subsidiaries, as of the date of this prospectus:
(1)
Includes approximately 70 subsidiaries and consolidated entities incorporated in China and approximately 120 subsidiaries incorporated in other jurisdictions that are not illustrated in this chart. In addition, the entities pictured in this chart hold, directly and indirectly,
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an aggregate of approximately 40 additional subsidiaries and consolidated entities incorporated in China and approximately 40 additional subsidiaries incorporated outside of China not pictured in the chart.
(2)
Primarily involved in the operation of Taobao Marketplace.
(3)
Primarily involved in the operation of Tmall and Juhuasuan.
(4)
Primarily involved in the operation of Alimama.
(5)
Primarily involved in the operation of Alibaba.com, 1688.com and AliExpress.
(6)
Primarily involved in the operation of cloud computing services.
(7)
Each of these variable interest entities is 80%-owned by Jack Ma and 20%-owned by Simon Xie, other than Zhejiang Taobao Network Co., Ltd., which is 90%-owned by Jack Ma and 10%-owned by Simon Xie.
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. In fiscal year 2014, RMB6,170 million (US$995 million), or 11.8%, of our revenue was generated by our variable interest entities, and as of March 31, 2014, RMB18,874 million (US$3,042 million), or 16.9%, of our assets were held by our variable interest entities. These assets included RMB13,159 million (US$2,121 million) in micro loans we made in connection with our SME loan business, which loans were principally funded by borrowings of RMB10,364 million (US$1,670 million). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations.” We recently agreed to sell the SME loan business to Small and Micro Financial Services Company. The sale is subject to the receipt of certain regulatory approvals and other customary closing conditions. See “Related Party Transactions — Agreements and Transactions Related to Small and Micro Financial Services Company and its Subsidiaries — 2014 Restructuring of Our Relationship with Small and Micro Financial Services Company and Alipay.”
Our Corporate Information
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 is  www.alibabagroup.com.  The information contained in our websites is not a part of this prospectus.
Conventions that Apply to this Prospectus
Unless the context otherwise requires, references in this prospectus to:
•
“active buyers” in a given period are to user accounts that confirmed one or more orders on the relevant marketplace in that period, regardless of whether or not the buyer and seller settle the transaction;
•
“active sellers” in a given period are to seller accounts (representing storefronts) that had one or more orders confirmed by a buyer on the relevant marketplace in that period and that were active at the end of the period, regardless of whether the buyer or seller settle the transaction;
•
“Alipay” are to Alipay.com Co., Ltd., a company with which we have a long-term contractual relationship and is a wholly-owned subsidiary of Small and Micro Financial Services Company or, where the context requires, its predecessor entities. We do not have any interest in or control over either Small and Micro Financial Services Company or Alipay;
•
“ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;
•
“ADSs” are to our American depositary shares, each of which represents one ordinary share;
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•
“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau;
•
“China retail marketplaces” are to Taobao Marketplace, Tmall and Juhuasuan, collectively. Promotional slots on Juhuasuan may only be purchased by Taobao Marketplace and Tmall merchants, and transactions from traffic originating on Juhuasuan are completed on the merchants’ storefronts on Taobao Marketplace or Tmall. For this reason, depending on the context, we may refer only to Taobao Marketplace and Tmall when discussing certain aspects of our China retail marketplaces business;
•
“GMV” are to the value of confirmed orders of products and services on our marketplaces, regardless of how, or whether, the buyer and seller settle the transaction. Unless otherwise stated, GMV in reference to our marketplaces includes only GMV transacted on our China retail marketplaces. GMV generated from traffic through Juhuasuan is recorded as either Taobao Marketplace GMV or Tmall GMV depending on which of these two marketplaces the transaction is completed. Our calculation of GMV for our China retail marketplaces includes shipping charges paid by buyers to sellers and excludes vehicle and property transactions with list prices exceeding RMB500,000 (US$80,598) and any other products or services with list prices above RMB100,000 (US$16,120), as well as transactions conducted by buyers who make purchases exceeding RMB1,000,000 (US$161,197) in the aggregate in a single day;
•
“ISVs” are to independent software vendors;
•
“mobile GMV” are to that portion of GMV generated by orders that were confirmed using a mobile app or wireless application protocol, or WAP, website;
•
“mobile MAUs” in a given month are to the number of unique mobile devices that were used to visit or access certain of our mobile applications at least once during that month;
•
“mobile monetization rate” are to mobile revenue from China commerce retail expressed as a percentage of mobile GMV for a given period;
•
“mobile revenue” are to that portion of revenue generated by online marketing services delivered on a mobile app or WAP website, and commissions on mobile GMV settled through Alipay, as captured by our online auction system, real-time bidding system and other settlement systems;
•
“monetization rate” are to revenue from China commerce retail expressed as a percentage of GMV for a given period;
•
“O2O” are to online-to-offline and offline-to-online commerce;
•
“orders” are to each confirmed order from a transaction between a buyer and a seller for products and services on our China retail marketplaces, even if such order includes multiple items, during the specified period, whether or not the transaction is settled;
•
“retail marketplaces” are to Taobao Marketplace, Tmall, Juhuasuan and AliExpress, collectively;
•
“RMB” and “Renminbi” are to the legal currency of China;
•
“Small and Micro Financial Services Company” are to Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. (formerly known as Zhejiang Alibaba E-Commerce Co., Ltd.), a company organized under the laws of the PRC;
•
“SMEs” are to small- and medium-sized enterprises;
•
“SoftBank” are to SoftBank Corp., SoftBank BB Corp. and SB China Holdings Pte Ltd., collectively;
•
“tier 1 cities” are to the term used by the National Bureau of Statistics of China and refer to Beijing, Shanghai, Shenzhen and Guangzhou;
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•
“tier 2 cities” are to the 32 major cities, other than tier 1 cities, as categorized by the National Bureau of Statistics of China, including provincial capitals, administrative capitals of autonomous regions, direct-controlled municipalities and other major cities designated as “municipalities with independent planning” by the State Council;
•
“total payment volume” are to the total value amount of the transactions from, to or through any service, offering, system or platform of Alipay during the period;
•
“unique daily visitors” are to the number of users who visited our websites per day as measured by (i) in the case of personal computers, the number of users that logged in or, in the case of those who did not log in, the “cookie” tracked on their personal computer device or (ii) in the case of mobile phone devices, the device’s unique identifier;
•
“variable interest entities” are to our variable interest entities that are 100% owned by PRC citizens or by PRC entities owned by PRC citizens, where applicable, that hold the Internet content provider licenses, or ICP licenses or other business operation licenses or approvals, and generally operate the various websites for our Internet businesses or other businesses in which foreign investment is restricted or prohibited, and are consolidated into our consolidated financial statements in accordance with U.S. GAAP as if they were our wholly-owned subsidiaries;
•
“we,” “us,” “our company” and “our” are to Alibaba Group Holding Limited and its consolidated subsidiaries and its affiliated consolidated entities, including our variable interest entities and their subsidiaries;
•
“wholesale marketplaces” are to 1688.com and Alibaba.com, collectively;
•
“Yahoo” are to Yahoo! Inc. and Yahoo! Hong Kong Holdings Limited, collectively; and
•
“US$,” “dollars” and “U.S. dollars” are to the legal currency of the United States.
Our reporting currency is the Renminbi. This prospectus also contains translations of certain foreign currency 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 RMB6.2036 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on June 30, 2014. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus 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 September 12, 2014, the noon buying rate for Renminbi was RMB6.1344 to US$1.00.
The number of our ordinary shares that will be outstanding after this offering is calculated based on 2,341,316,373 ordinary shares (which includes conversion of all outstanding convertible preference shares and 7,054,073 issued but unvested restricted shares as of June 30, 2014) outstanding as of June 30, 2014, and excludes:
•
53,692,833 ordinary shares issuable upon the exercise of outstanding options to purchase ordinary shares as of June 30, 2014;
•
45,899,831 ordinary shares subject to unvested restricted share units, or RSUs, as of June 30, 2014; and
•
an additional 71,562,581 ordinary shares reserved for future issuance under our equity incentive plans (which includes 13,333,000 ordinary shares issuable upon the exercise of options to purchase ordinary shares and 31,662,768 ordinary shares subject to RSUs granted after June 30, 2014).
Except as otherwise indicated, all information in this prospectus assumes:
•
the automatic conversion of all outstanding convertible preference shares into 91,243,312 of our ordinary shares concurrently with the completion of this offering;
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•
the filing and effectiveness of our amended and restated memorandum and articles of association, which will occur immediately prior to the completion of this offering; and
•
no exercise by the underwriters of their option to purchase up to an additional 48,015,900 ADSs representing 48,015,900 ordinary shares from us and certain selling shareholders.
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THE OFFERING
Offering price
US$68.00 per ADS
ADSs offered by us
123,076,931 ADSs
ADSs offered by the selling shareholders
197,029,169 ADSs
ADSs outstanding immediately after this offering
320,106,100 ADSs (or 368,122,000 ADSs if the underwriters exercise in full their option to purchase additional ADSs), not including 128,417,070 of our ordinary shares, representing 5.2% of our outstanding ordinary shares immediately after this offering, that will not be subject to lock-up agreements and may be freely converted into ADSs from time to time.
Ordinary shares outstanding immediately after this offering
2,465,005,966 ordinary shares (based on 2,341,929,035 ordinary shares outstanding immediately prior to this offering).
Option to purchase additional ADSs
We and certain selling shareholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an additional 26,143,903 ADSs from us, up to an additional 18,260,870 ADSs from Yahoo, up to an additional 2,708,345 ADSs from Jack Ma and up to an additional 902,782 ADSs from Joe Tsai.
The ADSs
Each ADS represents one ordinary share.
The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.
You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.
We may amend or terminate the deposit agreement for any reason without your consent. Any amendment that imposes or increases fees or certain charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.
To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.
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Directed Share Program
At our request, the underwriters have reserved up to 6% of the ADSs being offered by this prospectus (assuming exercise in full by the underwriters of their option to purchase additional ADSs) for sale at the initial public offering price to certain of our directors, executive officers, employees, business associates and members of their families. The directed share program will be administered by Credit Suisse Securities (USA) LLC. We do not know if these individuals will choose to purchase all or any portion of these reserved ADSs, but any purchases they do make will reduce the number of ADSs that are available to the general public. Any reserved ADSs that are not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs offered by this prospectus.
Use of proceeds
We estimate that we will receive net proceeds of approximately US$8,250 million from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We plan to use the net proceeds we will receive from this offering for general corporate purposes.
We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders.
Risk factors
See “Risk Factors” and other information included in this prospectus for a discussion of the risks relating to investing in our ADSs. You should carefully consider these risks before deciding to invest in our ADSs.
New York Stock Exchange trading symbol
BABA
Lock-up
We, our directors, independent director appointees and executive officers, the selling shareholders, SoftBank, the partners of the Alibaba Partnership and certain of the other holders of our ordinary shares have agreed with the underwriters to certain lock-up restrictions in respect of our ordinary shares or ADSs, or any securities convertible into or exchangeable or exercisable for any of our ordinary shares or ADSs, for various periods from 90 days up to one year after the date of this prospectus, subject to certain exceptions. Immediately after the completion of this offering, a total of 2,016,482,796 ordinary shares (representing approximately 81.8% of our ordinary shares then issued and outstanding) will be subject to the lock-up agreements and other restrictions on transfer as described under “Shares Eligible for Future Sale” and “Underwriting.” These ordinary shares will become available for sale in the public market during the one-year period following the date of this prospectus as follows:
•
91 days after the date of this prospectus, 8,108,115 ordinary shares will be available for sale in the public market;
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•
181 days after the date of this prospectus, 429,052,673 ordinary shares will be available for sale in the public market; and
•
366 days after the date of this prospectus, 1,579,322,008 ordinary shares will be available for sale in the public market.
See “Shares Eligible for Future Sale” and “Underwriting.”
Depositary
Citibank, N.A.
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Summary Consolidated Financial and Operating Data
The summary consolidated statements of operations data for the years ended March 31, 2012, 2013 and 2014 and the summary consolidated balance sheet data as of March 31, 2012, 2013 and 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our financial statements have been prepared in accordance with U.S. GAAP.
The summary consolidated statements of operations data for the three months ended June 30, 2013 and 2014 and the summary consolidated balance sheet data as of June 30, 2014 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all normal recurring adjustments that we consider necessary for a fair statement of our financial position and operating results for the periods presented.
The following summary 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.
Our historical results for any prior period do not necessarily indicate our results to be expected for any future period.
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Summary Consolidated Statements of Operations Data:
Year ended March 31,
Three months ended June 30,
2012
2013
2014
2013
2014
RMB
RMB
RMB
US$
RMB
RMB
US$
(in millions, except per share data)
Revenue
China commerce
15,637
29,167
45,132
7,275
9,193
13,348
2,152
International commerce
3,765
4,160
4,851
782
1,117
1,469
237
Cloud computing and Internet infrastructure
515
650
773
125
174
236
38
Others
108
540
1,748
281
294
718
115
Total
20,025
34,517
52,504
8,463
10,778
15,771
2,542
Cost of revenue
(6,554
) 
(9,719
) 
(13,369
) 
(2,155
) 
(2,727
) 
(4,585
) 
(739
) 
Product development expenses
(2,897
) 
(3,753
) 
(5,093
) 
(821
) 
(1,018
) 
(1,952
) 
(315
) 
Sales and marketing expenses
(3,058
) 
(3,613
) 
(4,545
) 
(733
) 
(713
) 
(1,212
) 
(195
) 
General and administrative expenses (1)
(2,211
) 
(2,889
) 
(4,218
) 
(679
) 
(865
) 
(944
) 
(152
) 
Amortization of intangible assets
(155
) 
(130
) 
(315
) 
(51
) 
(35
) 
(234
) 
(38
) 
Impairment of goodwill and intangible assets
(135
) 
(175
) 
(44
) 
(7
) 
—  
—  
—  
Yahoo TIPLA amendment payment (2)
—  
(3,487
) 
—  
—  
—  
—  
—  
Income from operations
5,015
10,751
24,920
4,017
5,420
6,844
1,103
Interest and investment income, net (5)
258
39
1,648
266
466
6,828
1,100
Interest expense
(68
) 
(1,572
) 
(2,195
) 
(354
) 
(1,081
) 
(410
) 
(66
) 
Other income, net
327
894
2,429
391
241
711
115
Income before income tax and share of results of equity investees
5,532
10,112
26,802
4,320
5,046
13,973
2,252
Income tax expenses
(842
) 
(1,457
) 
(3,196
) 
(515
) 
(591
) 
(1,445
) 
(233
) 
Share of results of equity investees
(25
) 
(6
) 
(203
) 
(33
) 
(7
) 
(90
) 
(14
) 
Net income
4,665
8,649
23,403
3,772
4,448
12,438
2,005
Net income attributable to noncontrolling interests
(437
) 
(117
) 
(88
) 
(14
) 
(4
) 
(34
) 
(6
) 
Net income attributable to Alibaba Group Holding Limited
4,228
8,532
23,315
3,758
4,444
12,404
1,999
Accretion of convertible preference shares
—  
(17
) 
(31
) 
(5
) 
(8
) 
(8
) 
(1
) 
Dividends accrued on convertible preference shares
—  
(111
) 
(208
) 
(33
) 
(52
) 
(52
) 
(8
) 
Net income attributable to ordinary shareholders
4,228
8,404
23,076
3,720
4,384
12,344
1,990
Earnings per share attributable to ordinary shareholders:
Basic
1.71
3.66
10.61
1.71
2.02
5.62
0.91
Diluted
1.67
3.57
10.00
1.61
1.93
5.20
0.84
Pro forma earnings per share attributable to ordinary shareholders: (3)
Basic
10.29
1.66
5.42
0.87
Diluted
10.00
1.61
5.20
0.84
Supplemental information:(4)
Adjusted EBITDA
7,274
16,607
30,731
4,954
6,094
8,574
1,382
Adjusted net income
6,452
13,869
27,610
4,451
4,583
7,317
1,179
Free cash flow
8,752
19,745
32,269
5,201
6,090
10,594
1,708
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(1)
In fiscal year 2014, these expenses included an equity-settled donation expense of RMB1,269 million (US$205 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.
(2)
We entered into the Technology and Intellectual Property Licensing Agreement with Yahoo, or the Yahoo TIPLA, in October 2005, pursuant to which we pay royalty fees to Yahoo. We and Yahoo amended the existing TIPLA in September 2012, pursuant to which we made a lump sum payment in the amount of US$550 million.
(3)
Pro forma earnings per share attributable to ordinary shareholders is calculated as if our convertible preference shares had been converted into ordinary shares at the beginning of the period, or when the convertible preference shares were issued, if later.
(4)
See “— Non-GAAP Measures” below.
(5)
For the three months ended June 30, 2014, includes a net gain of RMB6,251 million (US$1,008 million) from step-up acquisitions arising from revaluations of previously held equity interest. See note 4 to our unaudited interim condensed consolidated financial statements for the three months ended June 30, 2014.
Non-GAAP Measures
We use adjusted EBITDA, adjusted net income 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 adjusted EBITDA and adjusted net income help identify underlying trends in our business that could otherwise be distorted by the effect of the expenses that we include in income from operations and net income. We believe that adjusted EBITDA and adjusted net income provide useful information about our 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.
Adjusted EBITDA, adjusted net income and free cash flow should not be considered in isolation or construed as an alternative to net income, cash flows or any other measure of performance or as an indicator of our operating performance. Adjusted EBITDA, adjusted net income and free cash flow 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.
Adjusted EBITDA represents income from operations (which excludes interest and investment income (loss), net, interest expense, other income, net, income tax expenses and share of results of equity investees) before (i) certain non-cash expenses, consisting of share-based compensation expense, amortization, depreciation and impairment of goodwill and intangible assets as well as (ii) 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 period presented.
Adjusted 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, and one-time expense items consisting of the Yahoo TIPLA amendment payment, as well as an equity-settled donation expense.
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Free cash flow represents net cash provided by operating activities as presented in our consolidated cash flow statement less purchases of property and equipment (excluding acquisition of land use rights for, and construction of, our office campuses in China) and intangible assets, adjusted for changes in loan receivables relating to micro loans of our SME loan business and the Yahoo TIPLA amendment payment. 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 table below sets forth a reconciliation of our income from operations to adjusted EBITDA for the periods indicated:
Year ended March 31,
Three months ended
 June 30,
2012
2013
2014
2013
2014
RMB
RMB
RMB
US$
RMB
RMB
US$
(in millions)
Income from operations
5,015
10,751
24,920
4,017
5,420
6,844
1,103
Add: Share-based compensation expense
1,254
1,259
2,844
458
396
1,073
173
Add: Amortization of intangible assets
155
130
315
51
35
234
38
Add: Depreciation and amortization of property and equipment and land use rights
715
805
1,339
216
243
423
68
Add: Impairment of goodwill and intangible assets
135
175
44
7
—  
—  
—  
Add: Yahoo TIPLA amendment payment
—  
3,487
—  
—  
—  
—  
—  
Add: Equity-settled donation expense
—  
—  
1,269
205
—  
—  
—  
Adjusted EBITDA
7,274
16,607
30,731
4,954
6,094
8,574
1,382
The following table sets forth a reconciliation of our net income to adjusted net income for the periods indicated:
Year ended March 31,
Three months ended June 30,
2012
2013
2014
2013
2014
RMB
RMB
RMB
US$
RMB
RMB
US$
(in millions)
Net income
4,665
8,649
23,403
3,772
4,448
12,438
2,005
Add: Share-based compensation expense
1,254
1,259
2,844
458
396
1,073
173
Add: Amortization of intangible assets
155
130
315
51
35
234
38
Add: Impairment of goodwill, intangible assets and investments
399
420
163
27
16
—  
—  
Less: Gain on deemed disposals/disposals/ revaluation of investments (1)
(21
) 
(76
) 
(384
) 
(62
) 
(312
) 
(6,428
) 
(1,037
) 
Add: Yahoo TIPLA amendment payment
—  
3,487