Alibaba latest quarterly results revealed how its largest 2 performing segment- local E commerce and cloud, have evolved into a mature state business. Revenue is growing in single digits which shows the difficulty of the company growing further.
Cainaio is the only positive with a large growing in revenue and further steps to profitability.
Alibaba China e commerce have cloud are still churning through with margin improvements being made. This has helped the company to report flattish profits. However, what is terrible was its digital commerce group, in particular South East Asia.
South East Asia is turning to be a financial black hole because Tiktokshop and Shopee are present and desperately fighting for market share. In my view, South East Asia is too small a market of 3 e commerce players to be earning billions. Previously Tokopedia, Shopee and Lazada were fighting. Only Shopee was profitable churning at an estimated profit level of US$1.2 billion per year (based on the 2 quarters it was profitable), while Lazada and Tokopedia were loss making and slowly making themselves to go to breakeven.
However, the surrender of Go-to and entry of Tiktokshop makes it worse. All are now engaged in a cut throat pricing war with Tiktok being supplemented by the tens of billions it earns from douyin and the brainwashing advertisement empire it has built. Douyin is immensely profitable and rivals Alibaba's e commerce profitability. Alibaba's Lazada has sought to efficienise by closing its highest loss making market of Vietnam. However, I feel this is too small. Lazada should layoff its entire Malaysia and Singapore staff to reap cost savings. As evident by the latest quarter, the losses are widening. Lazada is a black hole which seems to never break even; pherhaps Alibaba should learn to cut losses and close down more unprofitable operations or sell off to either Shopee or Tiktok. In my view, it will be a more accretivie move.
A full closure of Lazada could help Alibaba as a group improve its margins by 8%.This to me could be a good move for Alibaba investors. I am supportive of Lazada closing down more markets for the benefit of the parent company.
Management Talk- Too Slow a Buyback Pace
The transcript during Alibaba's analyst call was interesting. While Alibaba had announced a larger share buyback program, the US stock analyst were quick to pick up that the increase in buyback amount corresponded to a longer duration. Doing simple maths, Alibaba was not increasing the intensity of its buyback per quarter; there was no change. An analyst voiced this as a question.
CFO Toby Xu's reply shed a few insights. I quote verbatim:
"And we can use it if we need it. You know, we can increase the leverage, you know, also to sort of get sufficient cash for us to do the share buyback. So, as I said in my script, you know, we're targeting to reduce -- to have a net reduction of share count at least 3% every year in the next three fiscal years." &
"And if -- so combined with the buyback, accretion, and the dividend yield, you're looking at, you know, about 4.4%, 4.5%, which is actually quite close to the 10-year Treasury yield. So, if you buy Alibaba stock, it's like you've bought a 10-year Treasury bond "
What I intrepret is we can expect earnings of the company to grow by about 5.3% due to declining no of shares (3.3%) and Alibaba's ability to improve its margins (2%). We should not expect much in revenue growth because most of Alibaba's key business has plateaued. In addition the company will continue to give about US$1 to US$2 in dividends, the company is not going to give more dividends. Alibaba will only continue to reduce the amount of shares by 3.3% per year.
The End of Alibaba as A Growth Stock
With a maturing state of itself and the cloud business being unable to grow further because the communist party favours Huawei as its cloud vendor and flag bearer and not Alibaba, it is very hard to peg Alibaba as a growth stock.
It is now a matured value play. However, on an operations front, Alibaba is improving and the share buybacks increases earnings organically. Moving forth, I anticipate Alibaba to improve earnings by 5% per year. It is not that impressive but good enough.
I expect this year Alibaba will clock full year earnings of S$7 per ADR. This translates to a P/E of 10.5 times. However, with given knowledge that Alibaba will be improving its earnings albeit gradually by 5%, Alibaba is a hold for now; however, I truly do not think bulls who are shouting for Alibaba US$300 will see it be a reality. Because a 40+ price earnings with 5% earnings growth does not justify valuations. If i were to value, a company who can grow its earnings by 5% deserves to be awarded a 20 times price earnings max, this means a fair price for Alibaba is US$140.
However, the closure of Lazada could be a positive move which adds US$20 to share prices and a one-off earnings boost of 8% (equivalent to 4 years of cost cutting)
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