Alibaba

Alibaba's December quarter 2022 result is out, lets revisit the sum of parts again:

Alibaba's market cap as of today is US$230.29 billion

Net cash: 55.007 billion

To be even more conservative this time I use their cash + short term investments minus all their borrowings. Excluding escrow receivables + restricted cash

Share investment equity value: 64.387 billion

"Equity securities and other investments" + "Investment in equity method investees" to be more conservative this time, I include their 33% Ant Group stake in it. This means I value Ant as it is in the balance sheet without any IPO prospects.

Cainiao(63% stake): 22.982 billion

Latest cash injection valuation done by Alibaba and size it to 63% stake, article here. That was in 2020, it should be worth more now due to its growing topline and shrinking ebita losses. If we use the same multiple as their 2020 cash injection valuation of 3.8x topline. Base on the 2.4bil usd topline for this quarter, the valuation is around 22.982 billion for Alibaba's 63% stake. This is despite the fact that Cainiao is growing their topline at 27% year on year.

Alicloud + Dingtalk: 58bil usd

Annualized its revenue this quarter and give it a conservative 5x multiple. 1/3 of what Liliani's article is valuing it at. Almost half of Goldman Sachs' valuation in 2020(article here).

Alicloud is ebita profitable, close to being operationally profitable. The 5x multiple I feel is warranted because its 9 months topline can still grow at 5% yoy, despite the draconian restrictions on the Chinese economy in 2022 under the zero covid policy, compared to Tencent which is currently trading more than 5x topline with almost no revenue growth yoy.

Alicloud has the largest market share in China at 36% and ranked third in the world. Cloud works on scale, so the larger market share you have, the higher gradual margin increment you will inherit.

Do note that in terms of Iaas global market share, Alicloud is bigger than Google Cloud and Google Cloud is estimated to be conservatively valued at 200bil usd. I feel 58bil usd for Alicloud is reasonable.

International Commerce(Lazada, Aliexpress, Trendyol): 22.576 usd

From the latest financing round in 2021, during the peak of covid, Trendyol is already valued at 16.5bil usd, article here. Annualize this segment's revenue for this quarter and give it a conservative 2x multiple.

Reason I give a 2x multiple is because Alibaba already has the experience paving a path to profitability for their domestic ecommerce. So despite the competition and difficulty in adapting to different cultures and languages, the potential to profitability is still there.

I feel that 22.576 billion is conservative because Trendyol latest cash raise valued it at 16.5bil already and I don't think Aliexpress and especially Lazada are only worth 6billion usd.

Ele.me, Amap, Fliggy, Digital media, Innovation: 12.513 bil usd

These businesses have unsubstantial revenue and unlikely to turn profitable anytime soon. I group their revenues together(Local consumer service + Innovation + Digital entertainment) for this quarter, annualize it and give it a 1x multiple.

Total sum of parts ex China core commerce: US$235.465 billion

This means Alibaba's most profitable segment, its China core commerce which helped the company churn out close to 12bil usd of fcf for this quarter alone is not only free, but valued at negative 5 billion usd in terms of its total sum of parts.

Even though I try to be conservative as much as I can, there might still be errors due to over valuation from previous cash raise or unknown headwinds for their businesses going forward. But assuming their 12bil free cash flow per quarter continues every quarter at a realistic range, I feel their net cash will keep increasing and hence the potential error will be corrected over time.

Alibaba repurchased 45.4 million ADSs for approximately US$3.3 billion under their share repurchase program. This amount is close to doubled from last quarter.

From mid 2021 onwards, Baba's total issued shares have been decreasing every quarter even after share based compensation. This gives me an impression that the management knows the company is cheap and hence wants to actively close the gap through share buy back.

To give you a gist of how low Chinese tech companies are valued now. Nvidia churns out 4-5bil usd of fcf in a year, Alibaba churns out 12bil usd fcf in a quarter(3 months) yet Nvidia's market cap is 2.5x that of Alibaba. The reason is likely due to geo politics, domestic governance risk and macro outlook, hence it depends on you whether you want to consider these factors into your investing strategy. Own view.

Interesting to compare Alibaba (an ecomerce company)'s best seasonal quarter (they are a very seasonal company, due to the nature of ecommerce) with Nvidia (a semiconductor company) at the cyclical trough. 

lol

That said. We all know the reason why Alibaba's down so much. Because of the perceive antagonistic relationship with the Chinese government. And therefore, the recent declines/deceleration in all their core growth verticals, including Cloud Computing.

The valuation of a business in secular growth vs a declining business naturally have a big disparity. Fair?

That said. As long as Alibaba can prove themselves, to be not in secular decline, and reaccelerate their growth, as well as show the ability to return significant capital to shareholders, and not restrained by "common prosperity", I'm sure the stock price will follow.

(2c, not investment advise, ex-investor in Alibaba, no position in Nvidia)

Alibaba to split into 6 units and explore IPOs; shares pop 9%
https://www.cnbc.com/2023/03/28/alibaba-...d-ipo.html
"Alibaba said Tuesday it will split its company into six business groups, each with the ability to raise outside funding and go public, in the most significant reorganization in the Chinese e-commerce giant’s history.

Each business group will be managed by its own CEO and board of directors....."

I have written quite extensively about how cheap Alibaba is in terms of its sum of parts. Buying it equates to getting their China core commerce free. Assuming we give a 10x ebita valuation to its core commerce that is around 300bil usd. This means in a kind and generous market, Alibaba should theoretically be worth 500bil usd.

The recently announced restructuring seems to be trying to address this problem. Splitting into 6 business each with a board and CEO. I would assume this would translate to a few perks.

1) No more blood transfusion from its core commerce segment, ie money is freed up to invest into technology that would benefit the core business. I read an article guessing that Alibaba might invest more into chips and large model AI going forward.

2) Ease of spinning off. Why is the chance of separate IPO higher now? Because these companies will be standalone i.e. the staff working there will be receiving stock option not from Alibaba but from its own business segment. This incentivize the standalone segment to IPO so that the stock option that they get can be en-cashed. If they are really not getting money from Alibaba, then IPO financing is crucial, i.e. the companies have to find ways to raise money by themselves.

3) More diverse business prospects. For example, if Cainiao is a standalone company, it would want to do business not only with Alibaba but with everyone. The goal becomes different because it will no longer be a native family member seeking attention from the parent, but rather a business that wants to grow itself. So I wouldn't be surprise to see Cainiao servicing JD, Pdd or Bytedance in the future. These might mean more business which equates to higher topline growth and valuation.

4) Removal of holding co discount. Maybe a maturing fcf machine like Tmall/Taobao might not impune a high valuation, but that does not mean its other business like Ali cloud, Cainiao, AI and International commerce should be bogged down together with it. Spinning off is a way to unlock the true value of its underlying assets. Dont forget, Alibaba is aggressively buying back shares too. So this two way value optimization can help to unlock its true value overtime if done correctly.

5) I would assume that in China context now, six companies worth 50bil usd are better than one company worth 300bil. More under the radar and looks less monopolistic. Spinning off also means more cash for the parent which may fuels more share buy back.

All these however will only materialize if management actually does something about it. If after this announcement, everything remains status quo, nothing will change. But from the way Zhang Yong the ceo talks about this, it seems like he is quite serious about it. See how it goes.

(17-03-2023, 07:12 PM)Scg8866t Wrote: Alibaba's December quarter 2022 result is out, lets revisit the sum of parts again:

Alibaba's market cap as of today is US$230.29 billion

Net cash: 55.007 billion

To be even more conservative this time I use their cash + short term investments minus all their borrowings. Excluding escrow receivables + restricted cash

Share investment equity value: 64.387 billion

"Equity securities and other investments" + "Investment in equity method investees" to be more conservative this time, I include their 33% Ant Group stake in it. This means I value Ant as it is in the balance sheet without any IPO prospects.

Cainiao(63% stake): 22.982 billion

Latest cash injection valuation done by Alibaba and size it to 63% stake, article here. That was in 2020, it should be worth more now due to its growing topline and shrinking ebita losses. If we use the same multiple as their 2020 cash injection valuation of 3.8x topline. Base on the 2.4bil usd topline for this quarter, the valuation is around 22.982 billion for Alibaba's 63% stake. This is despite the fact that Cainiao is growing their topline at 27% year on year.

Alicloud + Dingtalk: 58bil usd

Annualized its revenue this quarter and give it a conservative 5x multiple. 1/3 of what Liliani's article is valuing it at. Almost half of Goldman Sachs' valuation in 2020(article here).

Alicloud is ebita profitable, close to being operationally profitable. The 5x multiple I feel is warranted because its 9 months topline can still grow at 5% yoy, despite the draconian restrictions on the Chinese economy in 2022 under the zero covid policy, compared to Tencent which is currently trading more than 5x topline with almost no revenue growth yoy.

Alicloud has the largest market share in China at 36% and ranked third in the world. Cloud works on scale, so the larger market share you have, the higher gradual margin increment you will inherit.

Do note that in terms of Iaas global market share, Alicloud is bigger than Google Cloud and Google Cloud is estimated to be conservatively valued at 200bil usd. I feel 58bil usd for Alicloud is reasonable.

International Commerce(Lazada, Aliexpress, Trendyol): 22.576 usd

From the latest financing round in 2021, during the peak of covid, Trendyol is already valued at 16.5bil usd, article here. Annualize this segment's revenue for this quarter and give it a conservative 2x multiple.

Reason I give a 2x multiple is because Alibaba already has the experience paving a path to profitability for their domestic ecommerce. So despite the competition and difficulty in adapting to different cultures and languages, the potential to profitability is still there.

I feel that 22.576 billion is conservative because Trendyol latest cash raise valued it at 16.5bil already and I don't think Aliexpress and especially Lazada are only worth 6billion usd.

Ele.me, Amap, Fliggy, Digital media, Innovation: 12.513 bil usd

These businesses have unsubstantial revenue and unlikely to turn profitable anytime soon. I group their revenues together(Local consumer service + Innovation + Digital entertainment) for this quarter, annualize it and give it a 1x multiple.

Total sum of parts ex China core commerce: US$235.465 billion

This means Alibaba's most profitable segment, its China core commerce which helped the company churn out close to 12bil usd of fcf for this quarter alone is not only free, but valued at negative 5 billion usd in terms of its total sum of parts.

Even though I try to be conservative as much as I can, there might still be errors due to over valuation from previous cash raise or unknown headwinds for their businesses going forward. But assuming their 12bil free cash flow per quarter continues every quarter at a realistic range, I feel their net cash will keep increasing and hence the potential error will be corrected over time.

Alibaba repurchased 45.4 million ADSs for approximately US$3.3 billion under their share repurchase program. This amount is close to doubled from last quarter.

From mid 2021 onwards, Baba's total issued shares have been decreasing every quarter even after share based compensation. This gives me an impression that the management knows the company is cheap and hence wants to actively close the gap through share buy back.

To give you a gist of how low Chinese tech companies are valued now. Nvidia churns out 4-5bil usd of fcf in a year, Alibaba churns out 12bil usd fcf in a quarter(3 months) yet Nvidia's market cap is 2.5x that of Alibaba. The reason is likely due to geo politics, domestic governance risk and macro outlook, hence it depends on you whether you want to consider these factors into your investing strategy. Own view.

Seems like the cogs of the gears are in action. One of the parts you mentioned is preparing for IPO! At around the valuation you have indicated above!

https://finance.yahoo.com/news/alibabas-...56759.html

(29-03-2023, 06:29 PM)Scg8866t Wrote: All these however will only materialize if management actually does something about it. If after this announcement, everything remains status quo, nothing will change. But from the way Zhang Yong the ceo talks about this, it seems like he is quite serious about it. See how it goes.

This ain't child's play and so there is no way "nothing will change". 

China, been a relatively closed pseudo-capitalist market gave rise to the inevitable monopolies. Now with its unique "common prosperity" drift, is dismantling them (ditto Tencent). It reminds of me of the break-up of John Rockefeller's Standard Oil more than a 100 years ago, which itself didn't turn out too bad. I think these restructurings are healthy and plays according to the CCP's playbook.

You probably seem to be psyching yourself up to have lower expectations, so as to have a better psychological uplift later on?

I have low expectations, as I feel that thanks to their anti-trust drive, has deteriorated most of Alibaba's growth vectors (Cloud, E-commerce, Fintech etc.).

This might alleviate regulatory pressures a bit, but also means that they have given up building empires. Not sure if their business divisions are attractive on their own, other than E-Commerce, and Cloud Computing (which both have been under regulatory and competitive pressures).

Nothing to shout out much about the results. However, what is important is that Alibaba Cloud, Hema and Cainiao will be spun out within the next 18 months

How much will the valuation be? Feel free to comment on the value that Alibaba Cloud or Hema or Cainiao should be when it IPOs/Spin out

https://data.alibabagroup.com/ecms-files...esults.pdf

Higher MOS required ?

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Jack Ma’s clash with Beijing has cost Alibaba and Ant over $1.14 trillion
https://www.straitstimes.com/business/ja...4-trillion
"....Mr Xi recalibrated the country’s economy to emphasise “common prosperity” and support for the middle class...

While China’s latest measures may signal an easing of the crackdown, the policy priorities of ensuring social stability and national security remain unchanged.

“You have to take care of employees and society, and then you can take care of your investors,” said Ms Schaefer. “That’s really the message now.”..."

"Common prosperity", "doesn't prioritize shareholders" etc.

Many buddies have been voicing similar concerns since 2021. Right?