Since we previously covered Alibaba Group Holding Limited $Alibaba(BABA)$ , its share price had collapsed since its peak by 67%. In our previous analysis on Alibaba, we examined its cloud segment as it became profitable for the first time and we expect its margins to continue rising to attain profitability levels of AWS and Azure in the next 2 to 3 years. Moreover, we looked into the regulatory risks of Ant Group regarding its lending business segment which represents over a third of its revenues. Furthermore, we examined the regulatory crackdown on its e-commerce but believe it not to solely target the company but expect it to lose out the most with its significant market power as the dominant market leader. Additionally, we did not account for proceeds for Ant Group IPO which was reported to be suspended indefinitely.
In this analysis on Alibaba, we examined its e-commerce business in China where it faces regulatory crackdown risks and intensifying competition. We projected the China e-commerce market growth based on the penetration rate and consumption growth forecasts and determined Alibaba's share of growth.
Moreover, we examined its international e-commerce business operations including Lazada and AliExpress as it increasingly focuses on expansion overseas with logistics expansions. We analyzed the growth rates and penetration rates of each geographic region as well as market share to project Alibaba's international business.
Lastly, we examined the Asian cloud market as Alibaba leads in terms of market share. We analyzed the growth forecast by each region and projected Alibaba's cloud revenues in the Asian region based on its data center footprint and expansion in the region.
We concluded with a revised valuation of Alibaba based on DCF analysis but note that its share price had collapsed since its peak and would have to increase by 186% to reach its previous peak.
Facing Regulatory Crackdown and Tough Competition
Alibaba still dominates the Chinese e-commerce market with Taobao, the country's largest C2C platform and Tmall. Notwithstanding, the competition faced by the company continued to increase with its market share eroding in 2021.
Company Data, eMarketer, China Internet Watch, Khaveen Investments
In the past 10 years, the penetration rate of online shopping in China from CNNIC more than doubled to 81.6% in 2021 but shows its growth plateauing from 2018 onwards. The middle-class population is expected to double to 800 mln by 2035 according to Huang Qifan of the IFF Academic Committee. In our analysis on JD.com, we projected the growth of China's e-commerce market sales based on the 5-year average China retail growth and increase in e-commerce penetration rate as well as an adjustment of -2% per year. Overall, we maintain our forecast of China's e-commerce market to grow at a 5-year forward rate of 13.6%, slowing down sharply from its past 5-year growth of 21.6%.
On the regulatory front, we see several threats to Alibaba. In 2021, the State Administration for Market Regulation (SAMR) concluded that the company prevented merchants from using other platforms in a blow to its exclusive dealing practices which we believe could result in a negative impact on the company. The company was also faced with a record fine of $2.75 bln (4% of revenue). According to Global Times, the company and Pinduoduo were called by regulators to deal with fake goods. In a Bloomberg article, Alibaba suffered a massive data leak for its Taobao platform since 2019 involving an employee as ruled by a Chinese court.
In our previous analysis, we assigned an adjustment factor for each company based on the net number of negative impacts with the formula 0.8^n, where n is the number of net negatives. We projected the 5-year revenue growth of each company based on their average revenue growth with the adjustment factor derived for each company.
Company Data, eMarketer, China Internet Watch, Khaveen Investments
Overall, we projected its China commerce segment revenue to grow at a 5-year forward average rate of 10.7%, a significant slowdown of 34.2% in the past 5 years taking into account the uncertainties.
Overall, while Alibaba had experienced tremendous growth in its China e-commerce segment, we see it continuing to face mounting regulatory risks based on our analysis of the company with a net negative impact. As we forecasted the China e-commerce growth to slow and adjusted for regulatory risks, we see Alibaba's core e-commerce revenues in China slowing down at a 5-year forward rate of 9.7% as it loses market share to fierce competitors.
Expansion In Overseas E-Commerce Markets
The company's revenue streams are highly concentrated in the China commerce segment which accounts for 68% of total revenues compared to just 7% for its International Commerce segment. Its international commerce segment grew at a slower pace of 32.8% compared to its China commerce segment which grew at 34.2%.
Alibaba had announced its expansion overseas with Lazada and AliExpress. The former caters to the Southeast Asian market while the latter mainly to European markets with expansions across Southern Europe. The company also announced the expansion of its Cainiao logistics network in Europe.
We compiled its share of traffic from iPrice in Q3 2021 as a base for our estimate of the sales volumes in each country and obtained the e-commerce sales volume to derive an estimate of Lazada's GMV by country.
As Alibaba expands overseas, we analyzed its growth opportunities based on the market CAGR of its top markets for Lazada and AliExpress. For Lazada, it mainly caters to the Southeast Asian region with growth driven by the fastest growing countries such as Malaysia, the Philippines and Vietnam. Whereas Europe is a significant region for AliExpress with half of its top 10 countries representing European countries. We projected its growth by countries with growth driven by the fastest growing countries including Brazil, Russia and Italy. Based on our forecast, we derived an average growth rate of 15.5% through 2026 for Alibaba's International Commerce segment where Lazada's growth is slightly higher than AliExpress due to its focus on the fast-growing Southeast Asian region.
Cloud Market Growth Expansion Overseas
According to Synergy Research, AWS (AMZN), Alibaba and Microsoft (MSFT) were the top players in the Asia Pacific cloud market.
In the China cloud market, Alibaba had faced increasing competition as its market share declined. Huawei Cloud gained market share in the past 8 quarters.
Alibaba Cloud had expanded and continues to expand overseas in Singapore, the Philippines and Indonesia. It also announced its expansion overseas with its first data centers in South Korea and Thailand in 2022.
In our analysis of Oracle, we looked into the number of data center availability zones of each company and estimated planned expansions. Then, we forecasted the cloud growth based on the % difference of the total number of data centers of each company from the average total.
Risk:Declining Margins
In the past 9 years, Alibaba's gross margins declined from 72% in 2013 to 41.5% in 2021. As seen in the chart above, the company's COGS had increased over the period accounting for 57% of revenues. In terms of its segment's profitability, its Core Commerce segment is its only segment with positive EBITDA margins. Whereas its Cloud Computing segment had negative margins and higher revenue growth than the Commerce segment.
We believe the company's margins could continue to remain compressed with the outpacing growth of its lower margin Cloud segment and forecasted its COGS to decline based on the 10-year average growth of its COGS as a % of revenues of 9.9%.
Valuation
We projected the company's FY2022 revenues based on prorated Q1 to Q3 results. Moreover, we forecasted its China Commerce, International Commerce and Cloud Computing segment revenue in the points as discussed above. For the remaining segments, we projected it based on the market forecast CAGR but tapered down by 1% per year as a conservative estimate.
Notwithstanding, we expect a significant deceleration to its growth compared to its historical 5-year growth at a huge difference of 35.2%. This also represents a significant decrease compared to our 5-year growth forecast of 22.5% in our previous analysis. We derived a price target that has been reduced following the expected growth decline factored in our revenue projections but still obtaining a higher upside as the company's share price collapsed by around 67% since its peak last year. Compared to our previous price target, the difference between our upside is a whopping 193%.
Verdict
Since our previous analysis, we examined the regulatory developments of China's e-commerce market and projected Alibaba's e-commerce sales growth based on our market analysis of where we believe it faces a negative impact from the regulatory developments and forecasted a 5-year growth rate of 10.7%.
Moreover, as the company expands overseas, we estimated its GMV for Lazada and AliExpress broken by its top largest markets and forecasted its growth based on market CAGR for a total average growth of 15.5% through 2026 with Southeast Asian countries such as Malaysia, Philippines and Vietnam expected to drive Lazada's growth and Brazil, Russia and Italy to drive AliExpress growth. Lastly, we believe its cloud computing segment could continue driving its growth, based on our analysis of the cloud infrastructure market as it expands its data center footprint globally for an average growth rate of 45.6% in the next 5 years. Overall, we rate the company as a Buy with a target price of $120.83 as its share price collapsed by around 67% since its peak last year but is a significant downgrade from our previous price target of $329.72 with the expected slowdown in growth.
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Source:seekingalpha
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