Alibaba is a core position in my portfoilo forming a 56% weightage. Given this, I thought it would be good to explain why I continue to invest in Alibaba for the year of 2023 and my expectations for it.
Positive Core Earnings Growth Year on Year
Alibaba's core operations profitability grew by 10% from RMB 45 billion to RMB 50 billion using comparison of 1HFY2023 vs 1HFy2022 (Source: see Page 9, Line item 'Income from Operations'); thanks to the improved profitability from the international commerce business, local consumer services and cloud computing segments. Extrapolating from Alibaba's previous FY2022 core profits of RMB 69.6 billion, it is definitely possible that this year's profits will be RMB 77 billion or USD$11 billion.
Beyond this FY, it is likely Alibaba will continue to see earnings growth of 10% annually, a decrease from its annual 40-50% growth before COVID/Clamp down by China's government. At current P/E of 21.1, Alibaba is cheap.
China Reopening Theme
Unlike Pinduoduo which is an e commerce platform mainly for consumer staples and groceries, Alibaba positions itself as an e commerce that caters to all types of goods. Hence, it has a higher income senstiviety than Pinduoduo. With China reopening, I expect an improvement in economic conditions and in turn the affluence of the chinese consumer. Hence, Alibaba will be a beneficary.
Target Price for 2023
In my view, a P/E of 40 times for Alibaba based on this year's profits is definitely reasonable. Margins across its business segments are going to improve with an expectation of 10% annual growth in profits.
Hence, I expect to see Alibaba at around US$166 this year. However, should Alibaba outperform and clock in a larger than 10% profit growth in May 2023, a re-rating should happen (also applicable if the eventual "Income from operations" growth is less than 10%).
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