Alibaba

[donmihaihai]

Thought experiment: What is Alibaba worth, if topline growth slows <10%, net margin compressed due to increased cost from regulations and competition (benefitting from regulations); and most of the profits can't be returned to shareholders, due to "common prosperity" initiatives?

(ex-investor)

If most/ all profits cannot be return to shareholders in the future. Alibaba is worth zero or close to zero. Simple!

hi donmihaihai,

Let's don on the lens of value investing. I think it should be worth at least "liquidation value" or "replacement cost". To be conservative, let's put it as "liquidation value".

I believe a social enterprise that is not profit driven, is still "worth something". For example, Philanthropist A is a new billionaire and wants to leave his name in history. But he is in a rush as he is really old. Rather than do a greenfield startup which takes time, he could purchase an existing social enterprise from Philanthropist B (replacement cost). And when Philanthropist A passes on and his heir decide to cash out, they could break up the social enterprise into parts and sell (liquidation value).

An investment that doesn't produce return worth zero. If this investment depend on the next fool willingness to pay for it, then it worth as such. If alibaba really return zero profit for shareholders but remain as a great or decent company, then it worth alot as public goods( like a public transport co.) but still zero to shareholder.

Return to shareholder doesn't mean dividend only. It also mean Liquidation, spin off and any ways shareholders are able to get the money.

[dreamybear]

Thought experiment: What is Alibaba worth, if topline growth slows <10%, net margin compressed due to increased cost from regulations and competition (benefitting from regulations); and most of the profits can't be returned to shareholders, due to "common prosperity" initiatives?

(ex-investor)

While reading your post and thinking about your question, I can't help but notice your signature about CM's quote. There must be some reasons why CM view Alibaba as a good investment despite some of the views shared here.

For me, I have been cracking my head and still couldn't figure out. 

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https://finance.yahoo.com/news/charlie-m...%20million.

[CY09]

A share buyback is a form of return of capital to investors. The policy is there and if you are the only one selling in the market, Alibaba will buy your shares back

On why Alibaba is such an attractive company, its due to its earnings and cashflow ability. Its forward P/E is now 14 and has the ability to generate close to US$10 billion in free cash per annum. It has the prospects of growing another AWS and if it does follow AWS footsteps will mean a triple in earnings for Alibaba from present situation. No doubt Alibaba should be priced at 25-30 times P/E given this (USD$192-$231)

However, it has a severe downside which is the communist party. The party leader is scared of how big Alibaba has grown and how its retired founder's words has such influence over the Chinese common man. Hence China is finding ways to restrict its growth which has been affecting Ant and there is speculation now on how the govt is hampering Alibaba Cloud's growth and trying to promote Huawei cloud who is many steps behind.

[Wildreamz]

Hi Dreamybear, you can hear from the man himself:

[Scg8866t]

Is this a fair assessment of Alibaba's sum of parts?

Alibaba currently has a market cap of 290bil usd

Its China Commerce(Taobao, Tmall, Taodeal, Taocaicai) latest 9months ended Dec31 Ebita is 27.85 bil usd(174bil rmb), if we annualized that will be around 37bil usd. Do note this year is a very bad year for China ecommerce according to their consumption index so the numbers are likely conservative.

Give this business a conservative 8x ebita multiple that would already be 296bil usd more than its current market cap

This means that according to its latest balance sheet it has assets that market is not pricing in at all:

53.178bil usd of net cash

77.3bil usd of equity investments

33% stake in Ant Group as a associate(The latest most bearish valuation I get was from fidelity which value Ant Group now at 67bil usd) https://www.businesstimes.com.sg/garage/...ntensifies

Alicloud that is doing an annualized 11.6bil usd in top line revenue. If we give it a conservative 5x revenue, it will be worth ard 58bil usd currently. According to China Cloud Computing Development White Paper 2021, China cloud will 5x to 1trillion rmb by 2025 and Alicloud is the clear leader in China cloud space.

63% stake in Cainao at a valuation of 28bil usd in 2020 https://www.reuters.com/article/us-fosun...SKBN23U10I

53.178 + 77.3 + 22.11 + 58 + 17.64 = 228bil usd of prominent assets not accounted for by Mr market.

To be conservative I can write off their International commerce(lazada, trendylol, aliexpress) and Digital media and innovation sector because those are still not ebitda profitable yet. Although their international commerce is growing quite rapidly with news of alibaba wanted to IPO lazada https://www.businesstimes.com.sg/consume...lazada-ipo. So that segment will ultimately be worth a subtantial amount.

The latest conference call Daniel talked about wanting to unlock value for long term shareholders, ie spin off Alicloud, Ant Group, Cainao, Lazada, Trendylol etc). He mentioned that these companys are no more under the umbrella of alibaba but they are independently self runned entities that can be spun off. Their current share buyback is indirectly paying a 5% yield back to shareholders and that would likely continue. Mgtment also mentioned that current market price does not reflect the true value of its business.

[CY09]

I recall somewhere i saw the valuation of China Unlisted Unicorns as of end 2021

Ant was valued at USD $150 billion, Alibaba cloud at US $120 billion, Cainiao is at US $50 billion.

Taking Alibaba's stakes and its cash/equity, it gives a value of 53+77+50+120+30= USD$330 billion.

The above main stakes total value is higher than its current market cap. This excludes its entire commerce division. Again valuation is subjective and should China tighten its rein on its tech companies, ANT and alibaba cloud valuations will head south

Alibaba has other valuable names as well such as Dingtalk which is the China equivalent of Slack (Slack is valued at about US$27 billion). The china commerce arm earns about RMB$180 billion per year (or about USD$28 billion). No doubt profits are falling, so lets keep it at 10x P/E. That's is $280 billion.

Eventual fair value of Alibaba is US$630 billion.

[weijian]

Alibaba has a VIE; hence, shareholders are only entitled to the profits, "control" but not "ownership" of the assets:

Real Tencent then creates a complex web of legal agreements that serve to give Fake Tencent a claim on the profits and control of the assets that belong to Real Tencent.

(Note that there is no recognition of any actual ownership, just a claim on the profits and indication of an element of control)

Source: https://gci-investors.com/chinese-vie-st...the-risks/

Not sure if "liquidation value" has any barring to the VIE shareholders. Please correct me if I'm wrong.

The man says that Daily Journal is investing in a "derivative assuming there is a reasonable amount of honor between civilized nations".

Rules set up in China are made intentionally vague to allow flexible interpretation according to "requirements". So it is reasonable to assume liquidation doesn't make sense although it might be used as a guideline for some base valuation. And as 2008 showed us, derivatives have counterparty risks and so it is also reasonable to assign some probability to a scenario of zero liquidation value.

[Scg8866t]

Alibaba has a VIE; hence, shareholders are only entitled to the profits, "control" but not "ownership" of the assets:

Real Tencent then creates a complex web of legal agreements that serve to give Fake Tencent a claim on the profits and control of the assets that belong to Real Tencent.

(Note that there is no recognition of any actual ownership, just a claim on the profits and indication of an element of control)

Source: https://gci-investors.com/chinese-vie-st...the-risks/

Not sure if "liquidation value" has any barring to the VIE shareholders. Please correct me if I'm wrong.

The man says that Daily Journal is investing in a "derivative assuming there is a reasonable amount of honor between civilized nations".

Rules set up in China are made intentionally vague to allow flexible interpretation according to "requirements". So it is reasonable to assume liquidation doesn't make sense although it might be used as a guideline for some base valuation. And as 2008 showed us, derivatives have counterparty risks and so it is also reasonable to assign some probability to a scenario of zero liquidation value.

I am not too worried about VIE. After the Hong Kong Connect, many domestic chinese are owning VIE structure shares like Tencent etc. Even in its own domestic Shanghai Exchange, there is a recently listed VIE called ninebot. So vie shares are now circulated not only overseas but domestically too. 

It seems the chinese security watch dog has also recognised VIE listing overseas. https://amp.scmp.com/business/china-busi...rseas-ipos

Banning VIE is actually counter intuitive to CCP as that means returning all the wealth to a single person like Jackma and Pony Ma.

[Wildreamz]

Hi Scg8866t, 

My issue with VIE is not with the risk of authorities "banning" VIEs; but the assumptions behind the view that "liquidation" has any baring to the intrinsic value of the VIE shares.

[Scg8866t]

Hi Scg8866t, 

My issue with VIE is not with the risk of authorities "banning" VIEs; but the assumptions behind the view that "liquidation" has any baring to the intrinsic value of the VIE shares.

Hi Wildreamz, think about it, the tech founders and all their employee share option schemes(ESOP) are all received in vie. Its deeply and widely circulated in China now. 

There are numerous vie stocks in nyse being privatised. Like Sina, Bitauto etc. They are treated similarly in my view and will be more recongised after the official recognition by the ccp. China is actually trying to open up by allowing 100% foreign ownership of certain chinese segments. With the oening of beijing stock exchange, i suspect more liberation will happen. Own view.

Tencent is another example that has been paying a proportionally accurate div yield every year and has been distributing inspecies shares of TME, China Literature and the recent JD in proportion of the amt given out against the number of shares to shareholders.