Source: Beast Finance Author: Beast Finance
Why did Alibaba split the company into six 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 the splitting of the company. It is composed of six major business groups 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.”
According to data from S&P Capital IQ, Alibaba held a meeting with sell-side analysts on March 30, 2023. An investor meeting was held. At this investor meeting, Alibaba emphasized that the company will "have more options to increase the value of shareholders after the split". Bold Beast Finance believes that this is why Alibaba will split the company The reasons for the six business groups.
In this article, we will analyze in detail what investment value and impact Alibaba will bring to investors after the company is split.
What impact will the split have on investors?
Bold Beast Finance It is believed that the split of Alibaba can have a positive impact on investors and the company in at least two aspects.
First, Alibaba mentioned at the investor meeting with analysts on March 30, 2023 that after the split, the company will " Provide incentive plans for the management teams and employees of the six major business groups" to "promote corporate innovation".
Alibaba's current revenue has slowed down from 41% in fiscal year 2021 to 19% in fiscal year 2022 and 20% in fiscal year 2023. and 2%. In addition to regulatory headwinds (antitrust investigations) and the impact of the epidemic, Alibaba's financial performance has also been affected by competitive pressure.
Specifically, Alibaba's core business has been surpassed or overwhelmed by competitors. For example, Alibaba's Taobao Tmall business, local service business (such as food delivery company Ele.me), global digital business (such as Southeast Asian e-commerce company Lazada) and other businesses are facing challenges from Pinduoduo (PDD), Meituan (03690) Intense competition with companies such as Sea Limited (SE). Alibaba's individual businesses could have done better if it wasn't for the fact that the company is too busy, with centralized decision-making and cumbersome processes, and employees not properly incentivized for the success of their business units.
But after the split is completed, Alibaba's various business groups will become more independent, and the company's core business departments will also be given more autonomy and become more motivated, and can compete more effectively with their respective competitors. Rivals competed. It will also allow Alibaba to achieve faster growth in the future and improve profitability.
Secondly, Alibaba emphasized at the investor meeting with analysts at the end of March that as part of organizational governance reform, all business groups and companies that meet the conditions in the future, except Taobao Tmall, will have the possibility of independent financing and listing According to Bloomberg ,
Alibaba has planned to list its Cainiao smart logistics business (one of the six business groups after the split) in Hong Kong by the end of 2023. So,
this shows that Alibaba will follow in the footsteps of its Chinese Internet counterparts , it is realistic for more of its business groups to be listed separately. For example, Tencent Music (TME), the entertainment business of Tencent Holdings (00700), has already been listed on the New York Stock Exchange through splitting, and JD Health, a subsidiary of JD. (06618) and JD Logistics (02618) were also listed on the Hong Kong Stock Exchange after separate splits.
Alibaba’s valuation has been substantially lowered by the market many times in the past because its business scope is too broad , and these businesses are not listed, so they cannot obtain a higher valuation. If all of its business groups are listed one after another, it will greatly increase Alibaba's valuation and investment value.
Key Indicators for Alibaba Stock
Beast Finance believes that Alibaba's key indicators are related to the diversification discount that the market assigns to Alibaba and its peers, (diversification discount, that is, the market tends to value a diversified enterprise and Qiqi at a price below the sum of its parts. asset valuation).
Alibaba's diversification discount is estimated at 40% or higher, according to research notes from UBS and Goldman Sachs.
A research report by UBS on April 11, 2023 shows Alibaba's share price at $177 at a diversification discount, compared to a stock price of $101.54 on April 10, 2023, A discount of 41%.
In addition, according to a research report released by Goldman Sachs on March 31, 2023, assuming that the diversification discount rate is zero, then Alibaba’s stock price will reach $182. In other words, according to Goldman Sachs’ calculations, Alibaba’s current diversification The discount rate is about 44%. Goldman Sachs also highlighted that JD's average diversification discount over the past 22 months was about 30%. Compared with Alibaba, JD.com's diversification discount is smaller because Alibaba has spun off some core businesses as a separate listed entity.
If we assume that Alibaba's current diversification discount rate is 42.5% (taking the average of Goldman Sachs and UBS), and expect that the diversification discount rate will shrink to 30% in the future (after the split is completed), then Alibaba's Shares are headed for a 22% upside, making it a great buy.
What is the long-term investment prospect of Alibaba?
Alibaba emphasized at an investor conference with analysts on March 30 that it will gradually become "an asset and capital operator, rather than a commercial operator", which will mark a key shift, that is, "Alibaba The boards" will "control the boards of these new companies, particularly during the initial stages of the spin-off." Beast Finance believes that this is one of the most important reasons for Alibaba's split, and it will also have a major impact on its long-term prospects.
In the past, key members of Alibaba's management, such as CEO Zhang Yong, would have had to spend a significant portion of their time overseeing the day-to-day operations of the company's core business. After the split, as each business group will operate independently and assume greater responsibility for operational matters, Alibaba's management should be able to spend more time and energy on the most important capital allocation matters.
Alibaba also specifically mentioned in the investor meeting with analysts that "the future will monetize certain non-strategic businesses in the investment portfolio to improve our capital structure" and reiterated that "the return on existing stocks Commitment to the repurchase program (the repurchase amount is US$40 billion and will continue until the first quarter of 2025)”. In the long run, these remarks can give us a deeper understanding of Alibaba's future prospects and how this will create value for the company and shareholders.
In terms of investment portfolio optimization, Boldbeast Finance believes that as Alibaba splits the company into six business groups and multiple business branches, it means that Alibaba has determined which businesses or assets are non-core. A leaner corporate structure should narrow Alibaba's diversification discount by divesting non-core assets. In addition, as the proportion of non-core businesses in the company's overall business portfolio decreases, Alibaba will also be able to prioritize the allocation of capital to new or existing businesses with stronger growth potential and higher profitability.
in return on capital. Beast Finance believes that Alibaba can now return capital more actively to shareholders. First, Alibaba's main business units can raise their own funds as separate entities without relying on a parent company, which frees up excess capital. Second, the monetization of non-core assets and investments can also allow Alibaba to have more funds for dividends and larger share repurchases in the future.
in conclusion
After Alibaba split the company into six, in our view, this should increase the value of Alibaba's investment.
Because the market should be willing to give Alibaba a smaller diversification discount as it monetizes its value by splitting and promoting separate listings of each business.
In the long run, a spin-off can also free up management to focus on creating value for shareholders by optimizing capital allocation.