Alibaba

Yes. Investing in Alibaba does mean that you need to put faith in the Chinese government long term to continue growing, engaging with, and gaining the trust of the international community.

This is why I'm bullish, but my allocation is low. My trust in China in the mid-term is lower than Charlie Munger, and is at the lowest point it has ever been.

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(24-06-2021, 10:38 PM)Wildreamz Wrote: Yes. Investing in Alibaba does mean that you need to put faith in the Chinese government long term to continue growing, engaging with, and gaining the trust of the international community.

This is why I'm bullish, but my allocation is low. My trust in China in the mid-term is lower than Charlie Munger, and is at the lowest point it has ever been.

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I think the two most important considerations for investing in Alibaba are:

1) Whether China will continue to prosper and grow in a stable manner. And I thought Xi had been a blessing to China in this regard.

2) Whether Alibaba will continue to be relevant and useful to customers and communities. A concept simple in its articulation but can easily be missed in implementation. Chinese tend to do things to the extreme and I am worried if Tmall/Taobao is festering a culture of excessive consumption and overspending beyond one's means.

To do well in an investment in Alibaba, I think one has to take a very long-term approach. And in the very long-term, above 2 I think would be the most important considerations.

In terms of confidence in the Chinese govt / China's economy, I have no doubts. I believe the Chinese govt is committed to ensure the stability of its economy/currency, and doing the right things to grow its stature in the world. In fact, I have been holding BOC/ICBC for a long time.

However, Alibaba is not a state-owned enterprise; it is just another for-profit organization. Imo, there are other critical aspects than whether Alibaba's business or the purchasing power will continue to grow in China.

I see a huge amount of similarity in Alibaba growth strategy as compared to Amazon's; in terms of pivot to providing cloud data software services and the complete integration of the logistics supply chain and movement towards fresh foods.

The significant difference is the political environment they operate in. I am not sure if China's political environment is more conducive to that of the US's. Based on Mr. Market, Amazon is being priced at higher P/E than Alibaba. What I am sensing is that investors are interpreting the Chinese Government as stifling private Chinese business growth. This is what Jack Ma tried to voice out against but was put down by the Chinese Communist Government, resulting in low P/E for Alibaba and other private China companies such as Tencent and Huya, as compared to their Western peers

Diving deeper to the business model of Amazon and Alibaba, would explain most of the discrepancy of their P/E ratios; it's not solely politics.

Amazon net margin is 0-6% while Alibaba is 20-35%.

The perception is that Amazon is suppressing the net margin, so as to maximize growth rates; hence, the shares are trading as a function of it's "true profitability at maturity" likely much higher than the 6% would suggest. It has less to do with politics (though it is a factor). Case in point, Amazon also trades at much higher PE multiples than it's FAAMNG peers (with the exception of Netflix, which is also perceived to be suppressing it's profitability, by charging a much lower annual subscription than consumers are willing to pay for).

But it's true that Alibaba multiples are currently suppressed, even when compared to it's Chinese peers like Tencent (about 10-15% discount), and comparable US peers like Alphabet, due to the current political climate. (about 20-25% discount) This will likely revert to the mean IMO, in the short to mid term.

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(25-06-2021, 06:25 PM)Wildreamz Wrote: Diving deeper to the business model of Amazon and Alibaba, would explain most of the discrepancy of their P/E ratios; it's not solely politics.

Amazon net margin is 0-6% while Alibaba is 20-35%.

The perception is that Amazon is suppressing the net margin, so as to maximize growth rates; hence, the shares are trading as a function of it's "true profitability at maturity" likely much higher than the 6% would suggest. It has less to do with politics (though it is a factor). Case in point, Amazon also trades at much higher PE multiples than it's FAAMNG peers (with the exception of Netflix, which is also perceived to be suppressing it's profitability, by charging a much lower annual subscription than consumers are willing to pay for).

But it's true that Alibaba multiples are currently suppressed, even when compared to it's Chinese peers like Tencent (about 10-15% discount), and comparable US peers like Alphabet, due to the current political climate. (about 20-25% discount) This will likely revert to the mean IMO, in the short to mid term.

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How do you assess Alibaba current multiples? I find that that multiples quoted by public websites to be grossly misleading. For example, Alibaba in 2020 recorded a huge investment income of RMB73B. The nature of this investment income is however one-time and M&A / revaluation (see attached). Thus stripping this RM73B out, PE multiple would be higher than 40X.

I am also conservatively assuming that while Amazon retailing margins will improve, Alibaba retailing margins will only deteriorate. 

• That is because Amazon is moving more and more towards third-party sales (i.e. becoming more and more like Alibaba's Taobao and Tmall);
  
• While Alibaba is moving more and more towards first-party sales such as FreshHippo (i.e. becoming more and more like Amazon).
  

Still, as a very long-term investment (>10 years), I think the odds at current price are not too bad.

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(28-06-2021, 08:20 AM)Choon Wrote: How do you assess Alibaba current multiples?

I think Free-Cash-Flow yield (about 5-6%) for it's current growth rate (30-40%) in gross profit is good enough indication for me that it is cheap. Net profits will work itself out.

https://stockanalysis.com/stocks/baba/fi...ls/ratios/

I'm not an investor in Amazon, but been a long-time investor in it's competitor in the e-commerce space: Shopify (since 2017). I think Amazon's business model, doesn't benefit stakeholders (specifically, third-party sellers, if they keep using the platform) long-term. Eventually, successful sellers would want to move away from Amazon, and sell directly to consumers, and Shopify helps people do that; reference:

Shopify Is 40% As Big as Amazon Marketplace (https://www.marketplacepulse.com/article...arketplace)
15 Biggest Companies That Use Shopify (https://finance.yahoo.com/news/15-bigges...57960.html)

Now I am interested. How you or the site calculate the 5 to 6% FCF yield? Current Market cap is about USD620B. A 6% yield = USD37B FCF. As far as i know, the co. has never earn anywhere near USD37B CF in the past, let alone FCF.

(28-06-2021, 02:47 PM)donmihaihai Wrote: Now I am interested. How you or the site calculate the 5 to 6% FCF yield? Current Market cap is about USD620B. A 6% yield = USD37B FCF. As far as i know, the co. has never earn anywhere near USD37B CF in the past, let alone FCF.

I posted a link in my original post. Here is two more:

https://ycharts.com/companies/BABA/free_cash_flow_ttm
https://seekingalpha.com/article/4434229...stay-cheap

Sorry, I took a shortcut (use online resources for FCF calculation). But I cross-referenced multiple websites, should be not too far off.

My mistake, wasn't looking at FY21 result.

But how do you reconcile it, net profit was just above USD20B and FCF about USD36B.

I don't know much about Alibaba, so I offer the company comment here.

Cash flow from operating activities and free cash flow
Net cash provided by operating activities in fiscal year 2021 was RMB231,786 million (US$35,378 million),
an increase of 28% compared to RMB180,607 million in fiscal year 2020. Free cash flow increased by 32%
in fiscal year 2021 to RMB172,662 million (US$26,353 million), from RMB130,914 million in fiscal year
2020, mainly due to our profit growth. A reconciliation of net cash provided by operating activities to free
cash flow is included at the end of this results announcement.