Mail.ru Group - Role in AliExpress Russia to Exceed Formal Stake

The AliExpress Russia JV (AER) deal has moved another step toward closing, as the partners have signed the definitive documents. Mail.ru Group (MRG) is expected to get a 15% economic stake and 16.3% voting stake (assuming the Russian Direct Investment Fund exercises its option). We are pleased to see that MRG will play a leading in the JV despite its minor stake: the co-CEO from the Russian side will be nominated by MRG; AER will be deeply and exclusively integrated into MRG's social networks and other properties, while the revenues will be shared; and a sizable share of AER's advertising and marketing budget will be spent on MRG platforms on an arm's-length basis. MRG will have to contribute $182 mln in cash (on top of Pandao) to the JV once it starts operations. MRG's cash injection was above our expectations and is the largest contribution out of all the partners. However, part of the cash is to be spent on MRG ad platforms. The implied valuation of the JV is about a $2.2 bln EV, which is below the $3.6 bln that we use in our SOTP valuation for deriving the target price (with a 2019E EV/S of 6; $2.5 per MRG share). We think AER will be well positioned to achieve our valuation target if it delivers, which would ultimately benefit MRG via an additional revenue stream and indirectly through the appreciation of AER. We reiterate our BUY rating and $29.70 target price for MRG.