To The Moon

In 2019, Jack Ma, the "chief founder" of Alibaba Group Holding Limited (ticker: $Alibaba(BABA)$), Jack Ma, stepped down as chairman and gave way to co-founder Daniel Zhang Yong who rapidly went on to be enter the roster of Time Magazine's 100 most influential people in 2020. Alibaba's sprawling business empire was long considered to be driven by those in the chairman's seat. This, however, changed in April 2023 when the company announced that it will split into 6 units - each of which will managed by its own CEO and board of directors. These units will be free to pursue independent fundraising and a public listing.

Taiwanese-Canadian lawyer and long-time Hong Kong resident Joseph Chung-Hsin Tsai – who left a $700,000-a-year job with Sweden's Wallenberg family wherein he handled their Asian private equity investments to join Alibaba in 1999 after meeting Mr. Ma – took over as the group’s Chairman six months later. At the same time, Eddie Yongming Wu – another 1999 alumnus who started out as technology director for the group – became the group's CEO. Reporting segments changed to reflect the “6-unit” change as well:

In order, the six major units are:

• Taobao and Tmall Group, a China-centered commerce business that comprises of two dominant parts. The first is its retail e-commerce platform which the company contends is the world's largest retail commerce business in terms of Gross Merchandise Value in the Fiscal Year (FY) that ended March 31, 2024 (or “FY 2024”). The second is the wholesale commerce platform which is China's largest. 

• Cloud Intelligence Group, which the company contends is the world’s fourth largest and Asia-Pacific’s largest cloud services provider by revenue in 2023.

• International Digital Commerce Group, an internationally-focused commerce business which comprises of two parts. The first are retail e-commerce businesses such as Türkiye-based Trendyol, Singapore-based Lazada, Pakistan- and Bangladesh-serving Daraz, Spain-based Miravia as well as world-spanning AliExpress. The second is its wholesale international commerce business operating as Alibaba.com which the company contends is China’s largest integrated international online wholesale marketplace as of FY 2024.

• Cainiao Smart Logistics Network, which operates a global logistics network that aims to fulfill consumer orders within 24 hours in China and within 72 hours anywhere else in the world.

• Local Services Group, which includes food and grocery delivery services as well as mobile digital map, navigation and real-time traffic information services.

• Digital Media and Entertainment Group, which produces content and operates online long-form video platform Youku.

Three months after the "split" announcement, Mr. Wu took over as CEO of Taobao and Tmall Group as well, which the company clarified four months afterwards will remain wholly owned by Alibaba Group. 

Trend Analysis

The company's earnings release which, as per the company's FY reporting  standard would be the first quarter of FY 2025, was stated to have missed analysts' expectations. However, there are grounds for re-examining such an assertion.

While revenue is currently trending as running slightly above par for FY 2025, Earnings Per Share (EPS) is trending to close out FY 2025 at a solid 24% higher than the previous year. However, it bears noting that despite two full FYs of solid Year-on-Year (YoY) growth, the deep losses sustained in FY 2022 haven't been fully recovered yet. 

With the announcement of new business units also come dedicated financial line items, which were utilized for the first time in the annual report for FY 2024. When considering these new metrics, however, additional depth is available.

In terms of revenue, the China-focused commerce, logistics and cloud businesses remain fairly consistent in Q1 2025 relative to FY 2024. However, international e-commerce is beginning to contribute more and more while trending to close FY 2025 12% higher than the previous FY. In a similar vein is "Local Services".

Trends in earnings before interest, taxes, and amortization (EBITA), however, is a much more interesting story. While "Taobao and Tmall" shows stable trends with a modest trend in revenues and EBITA at par, three businesses – cloud, international commerce and logistics – show an explosive improvement in EBITA over the past FY.

Local services and content businesses, at first glance, might seem to be underperformers. But, since local services are currently showing a substantial improvement in terms of losses in the most recent quarter, it's quite likely that it will break into positive earnings in Q2 2025, i.e. the next earnings release. 

The content business has long been an overall underperformer in terms of earnings contribution. While the most recent quarter shows substantially lower losses relative to the past FY, it could be expected that a breakout into positive earnings might be possible, albeit a few quarters down the road. 

IPO Outlook and Market Action

If "Taobao and Tmall" is the anchor of the group, then the progressive improvement in metrics will be the signal for the other five units' respective IPOs. Going by the metrics, the most promising candidates for a spin-off and IPO would be Cloud Intelligence and Cainiao Smart Logistics. Given that it's deeply enmeshed in "Big Tech" with its own AI platform, a "Cloud Intelligence" IPO would be keenly anticipated and likely well received by the investing public, both retail and institutional. 

Cainiao is a much more prosaic story. The group has expended considerable resources to build out the infrastructure over the past couple of years in a bid to attain its goal. Infrastructure is a costly business: the fact that relative EBITA contribution turned positive in the previous FY and remains so in the current year might be grounds for the business to secure additional financing via an IPO. 

While the International Commerce business has shown a strong uptick in revenues, the fact that it has to burn capital to contend with the Amazons and Shopifys of the world indicate that it has some ways to go. Nonetheless, in the order of precedence, an IPO will likely be a keenly-anticipated development in the course of a year. 

Local Services is an interesting business. FY 2025 might be a transformative year in that it might eventually prevail against its myriad competitors in China by producing a positive EBITA by the end. The fact that it offers a "Google Maps" equivalent as a service will likely make it one to watch in the future.

Content is a tough business to sell to investors. There's a glut in the market and there is likely an upper limit on market penetration that is highly dependent on subscription price. Of all of the group's businesses, this one will have the longest and hardest road ahead. 

Whether an IPO would translate to payoffs to the parent group remains very much in play. However, the solid development in business line items hasn't been missed by the investing public, both retail and institutional. Considering the fact that the group has been in operation for over a quarter-century and an ostensible pioneer in many ways in its homeland China, traded volumes in its Hong Kong-listed shares ($Alibaba(09988)$) has averaged at 3.5 times that of its U.S.-listed American Depositary Shares (one of which equals eight shares) over the past year. 

Unlike many other "dual-listed" Chinese companies, volumes and price trends in the Hong Kong-listed shares and U.S.-listed ADS's have been strongly consistent over the past one year, with a slight edge imputed in valuations for the ADS.  

Image Design: Leverage Shares

Despite the recent earnings ostensibly missed analyst expectations, both the shares and ADS's rose by 5% on the day after the earnings release and another 2% on the 19th of August. The 19th was an interesting day in terms of volumes: traded volumes in the Hong Kong-listed shares were 14 times that of the ADS. As of 19th of August, the ADS is at 99.1% of the value as of the 21st of August 2023. The share is at 95.3% and the gap seems to be closing.

For a group of this vintage, hype narratives tend to be dated for Chinese investors. However, traded volumes and price trajectories indicate that Chinese investors seem to be in unison with their American counterparts in terms of anticipation. 

In Conclusion

It bears noting that an American Depositary Share (ADS), unlike a share, simply accords the investor a portion of profits without signifying ownership; the Chinese government has long held that foreign investors can only hold shares in China-based companies in specific contexts that exclude most of the investing public outside its shores. 

Nonetheless, given its quarter-century of operations and expansive global ambitions, the likelihood of the group reneging on its "overseas" investors is likely being deemed low. In the event of an IPO and spin-off wherein a business ostensibly pays the group for its freedom, the cashflows would likely be used by the group to further strengthen "Taobao and Tmall" in its long and cut-throat running battles with the likes of JD.com ($JD.com(JD)$), Pinduoduo ($PDD Holdings Inc(PDD)$) and Meituan ($MEITUAN-W(03690)$) (among others) for dominance in China. 

While global investors have been divesting from the breadth of investments made in Chinese companies given economic headwinds, the group's vintage does give it a certain amount of brand equity among sellers, buyers, clients, and investors. While the breadth of China investments might be narrowing for global investors, this group likely stands out as an exception. Any prospective IPO timeline would only be a boost for the stock's (and ADS') valuation. But until then, the stock is going to have a bumpy ride as conviction waxes and wanes.

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Note: Investors with access to European exchanges can consider Exchange-Traded Products to boost gains on short-term stock trajectories. The “+3x Long Alibaba ETP” (LSE ticker: BAB3) gives a 3X daily-rebalanced exposure to the upside of the stock while the “-3x Short Alibaba ETP” (LSE ticker: BA3S) does the same to the downside of the stock.

PS: The 3x ETP has just started rising on account of the stock’s recent rising:

The volatility (highlighted via the orange box), however, makes it a prime instrument for short-term plays.

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For broader articles that deep-dives into business and culture in Asia, visit asianomics.substack.com. The latest article discusses the spate of Mercedes Benz BEVs spontaneously combusting across Asia and trends in Benz’ EV sales. Also recently published is the rationale behind my commentary featured in Bloomberg, Fortune Magazine and CoinTelegraph.