Alibaba Break Up: How much is the Broken Entity Worth?

 As the first steps of breaking up the empire, Alibaba has announced the spin off of (i) Alicloud, (ii) Hema (Freshippo), (iii) Cainiao (which it holds a 67% stake)

In this post, I will try to evaluate the worth of these 3 entities so as to guage the fair value of what they are. This will help to decide the fair value of them when they list

Alicloud

This is the second largest segment of Alibaba and touted the fastest growth. While the company is growing faster, it is now cutting prices to keep up with the compeition. Due to its relapse into loss making, a P/E value is not effective, instead a price/sales (P/S) ratio is a good measure. 

At about US$11 billion in revenue, a 5 times P/S will be where it stands; I know there are loss making cloud companies that are valued in the region of 10 times, but given that Alicloud can only compete in China, a 5 times P/S is valid.

A US$55 billion valuation

Cainiao (48% stake)

The close listed comparable is Coupang (which is valued at about 140 times P/E and 1.4 times P/S) and Kerry Logistics (5 times P/E and 0.3 times P/S)

Cainiao is still loss making so using P/S as the guage and with continued growth, it may mean Cainiao is worth about 2 times its current P/S, Cainiao reported RMB55 billion in revenue (US$7.8 billion). Hence alibaba's stake is worth US$7.5 billion

Hema

Hema is a supermarket chain which uses technology to efficiense itself and provide consumer insights.

In July 2022, it was reported that Freshhippo was raising funds valuing it at US$6 billion. So let's take it.

Overall value of the three spun out entity

The three entities value to existing shareholders is about US$66.3 billion

Alibaba holds 33% in ANT's stake (the whole of ANT is valued at US$100 billion) and $36 billion worth of shares in other companies.  Netting everything out, this means its China Commerce (the largest revenue generator) is valued only at US$96 billion.

Alibaba's china commerce segment generated RMB$172 billion in profits (US$24 billion) in its latest financial year. At its estimated valuation of US$96 billion, it is priced at 4 times P/E, which i find is relatively undervalued

Potential Upside

Personally, a 10 times P/E for its china commerce segment is fair and this place it at US$240 billion. 

My views is the fair value for Alibaba on a whole is about US$390 billion. At current valuation, a doubling of market value can be easily achieved but I feel modelling and assumptions are no longer valid in the stock market environment we live in