Tuesday, 3 May 2022

Alibaba's Value is now clearer as Regulations has Eased

Last week, the Chinese Government has again affirmed that the many rounds of regulation on the likes of Alibaba, Tencent etc. is nearing its end via a speech that the future economic growth of China will be supported with the rise of its own Internet platforms. 

While it is merely verbal affirmation with no real policy shown yet, the continuous regulations has resulted in Chinese economy slowing and China Internet companies have been firing their own locals in order to cut cost. 

What's Next for Alibaba?

Just by a single speech, Alibaba moved up 10%. However, to me what is important is that are we now able to value the worth of Alibaba as a sum of parts. To me, it might now be safe to evaluate Alibaba's value as the waves of regulations has cleared.

Base Case Scenario

Based on Alibaba's latest quarter (page 8), its e commerce business margins have dropped, international e commerce's competition has intensified and local consumer services has not been doing well. At the end state, it is likely the first 3 sectors will be making RMB$40 billion per quarter, while the Cloud division and Cainiao will only break even, earning RMB$1 billion each. Personally, it is difficult for Alibaba Cloud to be a successful as Amazon's Web Services which generates as much profit as its e commerce. This is because Alibaba Cloud's main market is China and the Chinese Government is still wary of Alibaba Cloud and has been asking government entities to shift to Huawei Cloud which is technologically inferior to both Tencent's and Alibaba's cloud offering. 

Excluding the RMB $28 billion impairment which is one time, I expect Alibaba, as a group, to be reporting profits of RMB $37 billion per quarter (USD$5.6 billion per quarter). Extrapolating to a full year, Alibaba might be a US$22 billion profit generating machine. Applying a 20 times P/E (which is 50% of Amazon's valuation), we are looking at a US$440 billion market cap, implying a 58% upside.

Bull Case Scenario

To me, the bull case is that its cloud services becomes as profitable as its e commerce division as China allows it to prosper- something that Amazon Web Services has achieved for Amazon. This means the doubling of profits and will put Alibaba at US$880 billion market cap at 20 times P/E. This is a 215% upside.

My evaluation

To me, the bull case is a little hard to believe because i don't forsee China ever allowing Alibaba and Tencent Cloud to rule over China's Internet and Payment Services like what Amazon, Microsoft, Alphabet have done to the Western World. 

The offerings and Technological innovation by these 2 China Tech giant are definitely as good as the latter 3 US companies. But because the Chinese Communist Government is wary of them in growing to be larger than the communist party itself. I personally don't think either of the 2 will become trillion market cap giants.

Hence my view is that Alibaba can grow to be a US$420-US$500 billion market cap. Alibaba's business offering is more diverse than Amazon's (on an apple to apple comparison) because it has a 'Google Maps" division, a payment service, a digital banking arm and a youtube equivalent in China. This means Alibaba is in fact an Amazon + part of Alphabet. However to even grow to even Amazon's value of US$1.2 trillion is never going to happen.

My estimate is at a price of US$186 (share price) or US$500 billion market cap, it is the upper limit of Alibaba's fair value.

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