Alibaba: Let's Clear Up Some Misconceptions

seekingalpha04-25

Many forget that they are not directly invested in Alibaba, but only have a contractual interest in the profits through the VIE structure.Moreover, I do not see much room for multiple expansions ...

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RAJAH88
04-25
RAJAH88
Well. I think PDD rise have moderate impact at most to Baba. PDD product are mainly low end dollar shop stuff. If you are buying say a premium sports shoes, you will still buy in TMall They just capture different segment of the population. Similarly Douyin live streaming sales might work for young Chinese but if you observe any moderate or high income earner won't have the time to watch live streaming sales. If they want to buy something, they will just buy it rather than watching live streaming which is a waste of time for higher income earner. So my view is still that PDD or Douyin capture only the lower end of the segment. JD is still a competitor and focus on electronic stuff. All in all, Alibaba moat is still strong.
- winky9:
  Wow, your analysis is spot on!

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markets. Pinduoduo and MercadoLibre in particular are showing incredible growth rates.Robert WayThe Alibaba Group Investment ThesisI see a lot of social media posts right now comparing the valuations of Chinese stocks to oil stocks in 2020. And many are hoping that when sentiment turns positive again, there will be a chance to make good returns through multiple expansions. As for mainland China's A-shares, I agree. However, Alibaba Group Holding Limited is fairly valued in my opinion, as I will explain below.In my opinion, Alibaba does not have much room for significant multiple expansion given the risks and performance over the past few years.The First Misconception About Alibaba - No Direct Stake In AlibabaAnyone interested in investing in Alibaba has probably heard of an American Depositary Listing, or ADR for short. But the fact that most of them are variable interest entities, or VIEs for short, is not clear to everyone, judging from discussions on social media and elsewhere.This constellation exists because it is partly prohibited for foreigners to acquire shares in Chinese companies. So this type of situation is used to obtain outside capital. Typically, a Cayman Islands holding company is established for this purpose, which participates in the profits of the private company through contracts. It is important to note, however, that the holding company does not own any equity in the Chinese company, but is only contractually entitled to a share of the profits.This means, and this is not clear to most people: You do not own equity in the Chinese company but only in the company that is contractually entitled to a share of the profits.The Second Misconception - Participating In China's Growth With Cayman ADRsOf course, you get some of that if you invest in Alibaba, Tencent Holdings Limited (OTCPK:TCEHY) or other Cayman-listed companies, but the CSI 300 is probably a better reflection. This index, which includes 300 stocks traded on the Shanghai and Shenzhen exchanges, is more of a Chinese counterpart to the S&P 500. And in this index, for example, Alibaba, Tencent, or even JD.com, Inc. (JD) are not represented. This means that the investors of these companies are almost exclusively foreigners and not mainland Chinese.The best-known company in the CSI 300 outside of China is probably BYD Company Limited (OTCPK:BYDDF), which many may know from Berkshire Hathaway Inc. (BRK.A) and its investment. But even though the CSI300 hit a 5-year low in 2024, so many on social media are right that sentiment towards Chinese equities is currently very negative.However, since only mainland Chinese citizens or certain foreign investors can invest in the A-shares that make up the index, retail investors have little opportunity to invest in these stocks. Therefore, many are hoping that an investment in Cayman Island Holdings will benefit when the CSI300 rises again and sentiment turns positive.So the easiest way to invest in China is through B shares, which are priced in dollars and can be bought by foreigners. However, only a few companies are currently issuing B shares, so the selection is very small. Unless of course you meet the requirements for the QFII, RQFII or Stock Connect program, which allows you to invest in A shares.The Third Misconception - If You Get A Share Of The Profits, Everything's Fine, Right?Yes, but many forget what happened in 2009 - 2011 when Alibaba spun off AliPay into a company controlled by Jack Ma, and the shareholders of the VIE structure initially lost out. Later an agreement was reached to settle the dispute, but this again shows that you only have one contract, that of profit sharing, and that something like this can happen.And I am not saying it will happen again. But it shows what the risks are.Alibaba's Balance SheetData by YChartsAlibaba's balance sheet is very healthy, as the company has more cash than debt, but there is an increase in long-term debt that should be watched. At present, however, liquidity is available and debt should be easily serviceable.Alibaba's Capital AllocationData by YChartsUnfortunately, Alibaba ranks near the bottom of the peer group in one of the most important indicators of long-term success. Their ROIC is below average and their ROIC-WACC spread is only slightly positive with a WACC of ~6%-7%. This means that Alibaba currently has a spread of only about 1%, while Amazon and MercadoLibre have spreads closer to 5% to 7%. This means that they create significantly more value with their investments and use their capital more efficiently.Data by YChartsOn the positive side, Alibaba has not diluted its shareholders and has announced further share buybacks. This should have a positive impact on EPS. And I think the buyback announcement, along with the strong balance sheet, is one of the biggest arguments for Alibaba right now.Peer GroupData by YChartsThe peer group comparison shows that Alibaba is not growing as fast as its strong competitors PDD Holdings Inc. (PDD), MercadoLibre or even Amazon. Alibaba remains a high-quality company, but the growth opportunities seem to be exhausted, and with them the opportunities for strong multiple expansion. But MercadoLibre and PDD deserve to be highlighted as they continue to grow rapidly and justify their premium status.MercadoLibre has the advantage of serving and knowing the South American market best. This market is characterized by high inflation and special political conditions that make it difficult for companies from outside the region. This knowledge alone, which foreigners do not have, is a major barrier to entry and protects against too much competition.PDD, on the other hand, captured the spirit of the times with Temu and the slogan \"Shop like a Billionaire\" and quickly gained market share with cheap products, fast delivery and aggressive social media campaigns. It almost seems as if Temu has taken the dollar store, bargain hunter concept and applied it to the Internet age, which they are doing very well at the moment. And of course, Temu's success puts pressure on Amazon and Alibaba.Especially since PDD focuses on the Western market and often offers free shipping to Europe and the USA, which is an advantage over AliExpress. This gives PDD a clear advantage over Alibaba in the fast-growing international e-commerce segment.Therefore, I believe that the key to Alibaba's success should be to beat PDD in international e-commerce, which is a huge market with a future. Western customers who are suffering from inflation have a huge demand for cheap but good quality products. Especially since many brands sell the same products that Temu sells, just with their personal branding at a higher price.But right now, when I look at social media, I see that Temu's presence dwarfs that of Alibaba and its companies in terms of brand visibility.Data by YChartsIn this chart, you can clearly see that Alibaba, JD, and Tencent have much lower multiples, which I think is justified when you look at the revenue growth rates. In addition, PDD has a higher multiple, although it also bears the China risk. However, the growth justifies the higher valuation compared to other Chinese companies. Therefore, I do not believe that Alibaba is undervalued, but rather that the stock is fairly valued when we look at all parameters such as growth rates and risks. The multiple looks low at first glance, but it is justified.Of course, I could see multiples going back to 15x, but I think the 20x days are a thing of the past. For that to happen, there would have to be a significant upturn in growth, which, I think, is unlikely right now because of the competition.BABA's Reverse DCFAuthorIf we want to know what the market is currently pricing in, a reverse DCF is always a good choice, and here we have a TTM diluted EPS of $5.46 as a base, suggesting that the market is currently pricing in an EPS CAGR of 12%.However, Alibaba has only achieved an EPS CAGR of 7.96% over the last 5 years, which would imply that the market is pricing in more than has been generated in the past. But as I expect EPS CAGR to be slightly higher going forward due to the large new buyback program, I think the stock is fairly valued.The $25 billion share repurchase program could result in Alibaba buying back about one-fifth of its outstanding shares if it completes the repurchases and does not issue new shares. This would be a significant boost to EPS, as the earnings would be spread over fewer shares. However, it remains to be seen how many shares will actually be repurchased, over what period, and how earnings will develop.However, if Alibaba buys back less and growth continues to slow, one could argue that the market is pricing in more than is possible. Execution will be key here.RisksI see the biggest risks in the VIE structure, the current slow growth and the strong competition. I also think that the fear of fraud in China is exaggerated because one of the biggest scandals in recent years, involving Wirecard, happened in Germany, a country that is often accused of being very accurate.ConclusionI think PDD Holding is a good example of how higher multiples can be achieved if Chinese companies continue to grow strongly. Of course, the multiple is lower than its Western peers, but that is the discount for the VIE risk, which is likely to continue.But even US companies with below-average ROIC, single-digit EPS growth and low revenue growth would not get a 20x multiple. If we also consider the VIE risk, Alibaba's P/E Ratio of 12.5 is fair. A US company with the same characteristics would probably get a 15x multiple, simply because of the better risk profile.And it will be difficult for Alibaba to enter new markets because MercadoLibre already has a strong presence in South America and Amazon has a strong presence in the Western world. And in addition, PDD Holdings is a strong Chinese competitor in the market.Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":298938795339816,"gmtCreate":1714014944475,"gmtModify":1714016526151,"author":{"id":"4120633236244832","authorId":"4120633236244832","name":"RAJAH88","avatar":"https://community-static.tradeup.com/news/f9f98a9b70f209ef66c12efd3447c840","vip":1,"crmLevel":3,"crmLevelSwitch":0,"idStr":"4120633236244832","authorIdStr":"4120633236244832"},"htmlText":"Well. I think PDD rise have moderate impact at most to Baba. PDD product are mainly low end dollar shop stuff. If you are buying say a premium sports shoes, you will still buy in TMall They just capture different segment of the population. Similarly Douyin live streaming sales might work for young Chinese but if you observe any moderate or high income earner won't have the time to watch live streaming sales. If they want to buy something, they will just buy it rather than watching live streaming which is a waste of time for higher income earner. So my view is still that PDD or Douyin capture only the lower end of the segment. JD is still a competitor and focus on electronic stuff. All in all, Alibaba moat is still strong.","listText":"Well. I think PDD rise have moderate impact at most to Baba. PDD product are mainly low end dollar shop stuff. If you are buying say a premium sports shoes, you will still buy in TMall They just capture different segment of the population. Similarly Douyin live streaming sales might work for young Chinese but if you observe any moderate or high income earner won't have the time to watch live streaming sales. If they want to buy something, they will just buy it rather than watching live streaming which is a waste of time for higher income earner. So my view is still that PDD or Douyin capture only the lower end of the segment. JD is still a competitor and focus on electronic stuff. All in all, Alibaba moat is still strong.","text":"Well. I think PDD rise have moderate impact at most to Baba. PDD product are mainly low end dollar shop stuff. If you are buying say a premium sports shoes, you will still buy in TMall They just capture different segment of the population. Similarly Douyin live streaming sales might work for young Chinese but if you observe any moderate or high income earner won't have the time to watch live streaming sales. If they want to buy something, they will just buy it rather than watching live streaming which is a waste of time for higher income earner. So my view is still that PDD or Douyin capture only the lower end of the segment. JD is still a competitor and focus on electronic stuff. All in all, Alibaba moat is still strong.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":83,"commentSize":1,"repostSize":4,"link":"https://ttm.financial/post/298938795339816","repostId":2430497582,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":299041851351312,"gmtCreate":1714016831336,"gmtModify":1714037874469,"authorId":3479274820474232,"author":{"id":3479274820474232,"idStr":"3479274820474232","authorId":3479274820474232,"name":"winky9","avatar":"https://static.tigerbbs.com/9a2c539bd7eff494d3755975b44673ef","vip":8,"crmLevel":1,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":298938795339816,"type":1,"supId":0,"prevId":0,"content":"Wow, your analysis is spot on!","text":"Wow, your analysis is spot on!","html":"Wow, your analysis is spot on!"}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":8,"commentSize":1,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430497582"}