Source: Beast Finance Author: Beast Finance
In this article, Boldbeast Finance will focus on: the significance of Jack Ma’s return to China at this time, the splitting of Alibaba into six major business groups, why Zhang Yong’s splitting of Alibaba into six major groups is beneficial to investors, and the various groups of Alibaba after the split Conduct a comprehensive analysis of Alibaba in terms of business valuation analysis, Alibaba's financial performance, profitability analysis, asset allocation analysis, reasons why Alibaba is worth investing in, and the risks Alibaba currently faces.
Ma Yun's return to boost investor sentiment
On March 26, there were media reports that Ma Yun, the founder of Alibaba Group, who had appeared in Japan, Thailand and other places, made an appearance in Hangzhou. A netizen photographed a suspected Jack Ma appearing in a Toyota Coaster driving in the tunnel of Wenyi Road in Hangzhou, and rumors of Jack Ma's return to China began to spread on the Internet.
Later, some media confirmed to relevant persons that the man in the photo was Jack Ma, and Zhang Yong, chairman and CEO of Alibaba, and Shao Xiaofeng, senior vice president of Alibaba Group, appeared in the car with him.
On March 27, the news of Ma Yun's return to China was further confirmed, and the topic "Ma Yun has returned to China" also rushed into the hot search on Weibo. In a photo released by Yungu Education, Jack Ma is wearing a white casual sweater, sitting with several other people at a long table next to a building, and they chat happily. According to the official article released by Yungu Education, Jack Ma visited the classrooms of the first-year students and the pottery classroom, and held a meeting with the principals.
As soon as Ma Yun opened his mouth, he was a golden sentence. Technologies such as ChatGPT have brought challenges to education, but technologies such as ChatGPT are only the beginning of the AI era. We need to use artificial intelligence to solve problems instead of being controlled by artificial intelligence. Although human physical and mental strength are inferior to machines, machines only have a "core", while humans have a "heart".
Beast Finance believes that Jack Ma's return to China during this time period is a positive signal, which will help improve the business sentiment of Chinese private enterprises after experiencing unprecedented supervision.
Because Chinese private companies are still scarred by the regulation of the past two years, and by the collapse of consumer confidence and the real estate market during the new crown epidemic lockdown.
However, Ma's return is largely symbolic and is not expected to help boost Alibaba's (BABA) revenue and profitability in the near term. Still, its return does help paint a more positive picture for investors, with the government eager to restore confidence and a faster recovery in private business.
For example, the special action of "Qinglang, Optimizing the Business Network Environment and Protecting the Legal Rights and Interests of Enterprises" launched by the Cyberspace Administration of China on March 28 is an example. .
On the other hand, after the epidemic restrictions are fully lifted, the recovery of domestic enterprises is uneven. From January to February this year, China's industrial profits fell 22.9 percent year-on-year, according to Bloomberg.
Therefore, the just-started recovery of the domestic market is still facing the challenge of a "higher-than-expected unemployment rate", while the real estate market is still weak, and exports are still tepid.
The government has emphasized that consumption is expected to be a key cornerstone of China's economic growth in 2023. The national planning department has set a GDP growth target of 5%, despite economists' consensus forecast of 5.3%.
Therefore, Alibaba's role as China's largest e-commerce platform will help drive the recovery of the domestic market (as recent consumer spending data shows that domestic consumer brands have seen a surge in demand, and Wall Street forecasts also show that Alibaba in Revenue in fiscal year 2023 will grow by 2.6%. Revenue growth in fiscal year 2024 will reach 10.7%.), so Jack Ma's return at this time will also help boost the confidence of investors and private companies.
Split the company into six major business groups
On March 28, Zhang Yong, chairman and CEO of Alibaba Group, issued a letter to all employees, announcing the launch of the "1+6+N" organizational reform and splitting the company into six major businesses Group and several business branches.
Under the Alibaba Group, six business groups and multiple business companies will be established, including Alibaba Cloud Intelligence, Taobao Tmall Business, Local Life, Cainiao, International Digital Commerce, and Dawen Entertainment. Business groups and business companies set up boards of directors respectively, and implement the CEO responsibility system under the leadership of the boards of directors of each business group and business company. Alibaba Group fully implements holding company management. In the open letter, Zhang Yong stated that in the future, qualified business groups and companies will have the possibility of independent financing and listing.”
Beast Finance believes that this move may further release the value of Alibaba, and it is also a very beneficial move for shareholders. On top of that, doing so could also reduce Alibaba's future regulatory risks.
The market reaction to the news has also been very positive, with Alibaba shares up 15% as of this writing.
Still, Alibaba's shares are trading well below their January highs, as they had been falling sharply over the past two-plus months before news of the split broke.
Wall Street analysts are also very bullish on Alibaba's split, lauding the move as being shareholder-friendly as it could unlock hidden value in Alibaba while potentially mitigating risks.
Why are splits good for investors?
Like some of the other big tech companies in China, Alibaba is a company active in different industries. However, not all of Alibaba's businesses are at the same stage, with some profitable but slow-growing businesses and others fast-growing but not yet profitable. When all these businesses are lumped together into one entity, some see the company as a jack-of-all-trades master of none. Investors who prefer growth investing may avoid Alibaba because some of its businesses are growing slowly, and value investors may also avoid Alibaba because some of its businesses are not yet profitable, so this situation increases investment Investors are uncertain about Alibaba's future earnings prospects.
Likewise, some investors may want to invest in companies related to Chinese consumer spending, such as Alibaba's e-commerce business, but those same investors may view Alibaba's other businesses, such as cloud computing, as a drag on the company's performance. burden. Meanwhile, other investors may be more interested in investing in China's cloud computing business than in digital media and entertainment.
By splitting the company into different business groups, Alibaba has created a new option for investors, who can more easily invest in their favorite businesses. Growth investors will be able to choose to invest in Alibaba's fastest-growing businesses, while value investors can choose to invest in slower-growing but more profitable businesses in the company's current form.
Among the six major business groups (Alibaba Cloud Intelligence, Taobao Tmall Business, Local Life, Cainiao, International Digital Commerce, and Big Entertainment) investors are also very clear about which companies will be listed in the future. Once split, the core e-commerce business including Taobao and Tmall will be one of the most important and valuable businesses.
After all, the core e-commerce business is where most of Alibaba's profits come from. The overall growth prospects for Alibaba's e-commerce business will continue to grow steadily, driven by the steady expansion of China's middle class and rising consumer spending.
Other businesses, such as the future Alibaba Cloud Intelligence Group, have more obvious growth prospects because China's cloud computing market is still small but growing rapidly. Therefore, the cloud computing business should have a faster growth rate, but on the other hand, it may not generate profits in the short term. According to Alibaba's latest financial report, the cloud computing business lost 1.5 billion yuan in the latest quarter, with an operating profit margin of -7%. In comparison, the e-commerce business’s operating profit for the same period was 53 billion yuan, about $8 billion at current exchange rates, and an annualized profit of more than $30 billion.
Although we would not invest in some fast-growing but unprofitable companies, some investors still like to do this because China's cloud computing market is experiencing rapid growth. According to McKinsey's forecast, China's cloud computing market will expand from US$32 billion in 2021 to US$90 billion in 2025, which means that the industry has grown by 180% in just four years.
Growth-focused investors may be interested in this growth story. With Alibaba Cloud generating about $3 billion in revenue in the most recent quarter, or about $12 billion on an annualized basis, we think this business alone could be worth around $100 billion, given peers like Microsoft (MSFT) The sales multiple is only 10 times, and the sales multiple of 8 times does not seem excessive for Alibaba's cloud computing business. Of course, Microsoft is profitable, but on the other hand, Microsoft is not a pure cloud computing company. Even if the market decides that Alibaba's cloud computing business only trades at a multiple of 5 times sales, that would give it a valuation of $60 billion, or a quarter of the current market cap of Alibaba's entire company.
Valuations for the smaller Alibaba unit are likely to be lower, as demand for the future logistics business may not be as apparent relative to the more promising cloud computing business. Still, there is still some value in digital media and entertainment, smart logistics, and service-centric businesses, including mapping company AutoNavi and food delivery service Ele.me.
If we assume that Alibaba's cloud computing business is valued at $80 billion with a sales multiple of 6.7 times, and the other four businesses not focused on cloud computing or e-commerce have a combined valuation of $20 billion, then the e-commerce business The current implied value of $155 billion, which is why its shares rose 15% on Tuesday, seems like too much for a company that generates operating profits of around $30 billion even assuming no growth. low.
Therefore, we believe that the split of Alibaba will release huge value, and the total value of the six major group companies in the future will far exceed Alibaba's current market value of US$255 billion in US stocks.
Breaking up the company has another benefit for investors, some of whom have been avoiding Alibaba, for example, because they see it as a regulatory risk. But Beast Finance believes those risks should be reduced when the company is split into six different companies. After all, when Alibaba's different businesses are separated, it will be harder for regulators to prove that Alibaba is a dominant conglomerate with too much market power. For example, investors who like to invest in Alibaba's cloud computing business also don't have to worry about potential regulatory issues in the digital entertainment field, and so on. In short, once Alibaba is done breaking up, it won't be that big, and it won't be a target for regulators.
Fundamental Analysis of Alibaba
Alibaba recently released its December 2022 quarterly earnings report. Its 2022 quarter results are pretty solid in our view, especially given the challenges. As Zhang Yong, Chairman and CEO of Alibaba, said: "Despite the impact of the new crown pneumonia epidemic, weak demand, supply chain and logistics disruption, we still achieved a solid quarterly performance." Even under the new crown pneumonia epidemic
, Profitability remains strong
although Alibaba has experienced severe margin pressure over the past few years due to a number of factors including tightening regulations, rising operating costs and weak consumer demand due to COVID-19, as shown in the two charts below .
The first graph shows its return on capital employed in recent years, with a focus on 2022. As we can see, the company's profitability has been severely damaged, and its return on capital employed has fallen back to 64% from nearly 97% in the first quarter of 2022, according to its 2022 earnings report. The second graph, taken from the company's financial report last December, shows that by the end of 2021, the company's operating profit margin has dropped to 3%.
Source: Alibaba
Source: Alibaba
Still, despite these strong headwinds, Alibaba's profitability remains strong, and there are already signs of a turnaround. As the chart below shows, its current return on capital employed is 64%, which is on par with FAAMG. In addition, the company's profit margins have improved significantly over the past year. As the chart above shows, its operating margin has improved from 3% in the December 2021 quarter to 14% in the most recent reporting period. Meanwhile, adjusted EBITDA margins also widened from 21% in December 2021 to 24% in the most recent reporting period.
Source: Beast Finance
Capital allocation remains highly flexible
Historically, Alibaba has maintained a strong financial position. However, its finances have been somewhat weakened by its contributions to Wealthy Together, high tax rates, fines and regulatory changes. Still, Alibaba's operating cash flow of $24.4 billion for the nine months ended December 31, 2022 provides a better case for the above commitments (and cash obligations for investment and financing obligations). background.
At the same time, the company maintains a large cash position on its books. Total cash and cash equivalents currently stand at around $75.3 billion. It also has relatively low levels of debt ($27.7 billion in total), resulting in a sizable net cash position. All told, those numbers translate to a cash position of about $10.9 per share, or about 13.1% of its current stock.
Reasons why Alibaba is worth investing in
(1) The relationship between regulators and big tech companies has eased. Regulators have launched multiple antitrust reviews of big tech companies in recent years, but there are already signs that regulators are now more focused on getting companies back to growth, given the struggling domestic economy and the fallout from the COVID-19 pandemic. Ant Group, for example, recently received regulatory approval to raise $1.5 billion to further expand its consumer business.
(2) Headwinds related to the COVID-19 pandemic have begun to abate. Zhang Yong, Alibaba's chief financial officer, said that even under the challenge of the new crown epidemic, the company's profit growth has been strong due to past efforts to improve operational efficiency and optimize costs. At the same time, Alibaba's net cash position remains healthy, and Beast Finance believes that once the macroeconomic environment improves, Alibaba's cash flow will continue to achieve strong growth.
(3) Alibaba's current share price is very cheap. For instance, it trades at 11.5 times adjusted earnings, 1.5 times book value, and 9.5 times operating cash flow. By technology stock standards, those price-to-earnings ratios are very low.
(4) Growth should resume in the future. One of the reasons for Alibaba's stock price drop last year was that the previously high-growth company lost growth. This tested the patience of shareholders, but now we have every reason to believe that Alibaba's growth will accelerate again. Because in the fourth quarter, China has fully lifted the restrictions on the new crown epidemic. These restrictions have suppressed corporate profits, so Chinese e-commerce companies have been hurt along with companies in other fields, and shareholders holding Alibaba shares have also been hurt. It's been a rough patch, but as the economy reopens, Alibaba's growth potential will resurface.
Risks
Beast Finance believes that the risks currently facing Alibaba include competition risks, operational risks and geopolitical risks. Alibaba operates in highly competitive markets, including e-commerce, cloud computing and digital payments. Existing and potential competitors could disrupt its business model or compete on price, putting pressure on its profit margins.
While China has fully lifted restrictions on the outbreak, it remains uncertain how quickly customer demand will recover. Finally, Alibaba operates in multiple countries and may face risks related to geopolitical tensions, particularly trade tensions between the US and China and political instability in the Russia/Ukraine region.
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