Alibaba (BABA) is often referred to as the "Amazon (AMZN) of China," but I believe that does not do justice to this technology giant. I suspect that many investors have clearly steered due to political uncertainties and simply do not know what BABA is doing. That makes sense – because BABA operates mainly in China, it is almost impossible for the typical American to really understand what he is doing. After reading this article you will know exactly what BABA is doing, why it should be a core stake and why it is my last conviction.
Tale of the Band
Since its IPO in 2014, BABA has been an absolute horse:
For many investors who are less familiar with their business model, they can quickly scream "bubble". But even after the run I have
Why it can come to wrong ratings
First, China has experienced a broad market sale in the past year, probably due to the increased trade tensions with the US, which have also led to BABA, his Shares in sympathy:
This makes large Chinese technology companies attractive. With the same logic that companies like Facebook (FB) and Alphabet (GOOGL) seem to have little impact from potential trade wars because they have no direct exposure to China, Chinese technology companies like BABA may also be left untouched by their low presence in China the USA (they operate mainly only in China).
Second, there was a great deal of discussion about the possibility of Chinese technology companies officially listing shares in Chinese stock exchanges. Because BABA is listed on the New York Stock Exchange, it means Chinese citizens can not buy stocks! It's as if US citizens are unable to buy AMZN shares. As part of its recent earnings conference call, management discussed the listing of China Stock Exchanges with Chinese Depository Receipts (CDRs) later this year. I assume that the increased liquidity will help propel stocks, as a new wave of buying comes from the Chinese investor base, which actually works with BABA on a daily basis.
Divisions – Take Care
BABA has three core businesses that I want to convey to readers. For each one, I will give the US counterpart company that best represents their respective business models.
BABA is best known for its e-commerce platform, which consists of two components: Taobao and Tmall. I should first point out that this is not the same. Taobao is a consumer-to-consumer platform that basically allows the average citizen to sell and buy things from the average Joe. Taobao is very similar to eBay (EBAY) and Craigslist. In the past quarter, they had 617 million mobile monthly active users.
(Investor Day 2017)
On the other hand, brand dealers sell their products. One should think about how an online mall, very much like AMZN. Companies pay BABA a service fee to operate an online store on their platform that gives them access to the broad Chinese consumer market. As of March 31, 2018, Tmall had more than 150,000 brands. Some of the major brands can be seen below:
(Investor Day 2017)
Both Taobao and Tmall have experienced explosive growth in gross trade volume:
(Annual Report 2017)
Fellow author Jae Jun has written an excellent article detailing the stickiness of her ecommerce platform.
BABA also has a cloud department that offers its customers cloud computing capabilities. For those who do not know what "cloud" means, these services include data storage, relational databases, big data processing, anti-DDoS protection, and content delivery networks (CDNs). BABA notes that they lead the Infrastructure-as-a-Service (IaaS) market in China, with a 47.6% share in 2017, according to IDC, compared to 42.4% in 2016. They continue to gain Global Customers (19659025) Cloud Computing revenue increased 101% year-over-year in fiscal 2018 to RMB13,390 million (US $ 2,135 million) driven by robust growth in paying customers and increased revenues. Customers who reflect higher value-added products. They recently added large clients to China National Petroleum Corporation, Malaysia Digital Economy Corporation and Cathay Pacific.
Digital Media and Entertainment (YouTube)
Youku is an online streaming platform that is very similar to Youtube. Users can watch and upload their own videos and stream TV dramas. I should note that China differs from the US in that there are many competitors in the room, including iQiyi (IQ) and Tencent Video (OTCPK: TCEHY). Youku is part of their Digital Media and Entertainment division, which grew 34% last year and 160% daily average subscribers.
Summary so far
We have seen that BABA has the eBay marketplace platform, Amazon e-commerce and cloud services, and an online streaming presence like Youtube. There are actually more.
In addition to its core businesses, BABA also has interests in many companies. This includes a 33% interest in Ant Financial, which they acquired in the financial year 18 and which Alipay owns. Alipay is very similar to Paypal (PYPL) and has 870 million active users worldwide per year. While it is unbelievable for Americans to believe this, China is more advanced in accepting mobile payments, with so many businesses accepting mobile payments that CNBC recently declared that cash in mainland China is almost dead:
Alipay is currently the leader in mobile payment, closely followed by TCEHY's WeChat Pay.
Social Media Presence
As described in their annual report, they also have a 31% stake in Sina Weibo (WB). While many have given the title "Facebook (FB) China" Tencent WeChat, WeChat is in reality more like Facebook Messenger. The actual application that gives you the famous "Facebook feed" and profile page is the Internet giant Weibo:
In her latest quarterly report, Weibo reported that the growth of MAUs increased by 20.5% to 411 million MAUs.
(presentation for the March quarter of 2018)
For fiscal year 19, they expect sales growth of more than 60% compared to the previous year. With a market capitalization of $ 484 billion, BABA trades 47.5 times. In addition, they have a strong balance sheet typical of large technology stocks. By the last quarter, BABA had cash and cash equivalents of $ 32.7 billion, liabilities of $ 18.9 billion, and equity investments of $ 22.3 billion. This is a company that fires on all cylinders with slightly more than 42 times futures.
Everything is checked, given the number of attractive companies, very strong growth and equally attractive valuation. This is a company that benefits from a growing economy, growing market and pricing power. Now is the time to discuss the risks.
Are there accounting problems?
In 2016, the famous short seller Jim Chanos publicly published a short position in the BABA for "accounting irregularities". A proof (at least public) of his hypothesis, this brings an important point about non-US companies in relation insist that they do not go through the same rigorous testing that US companies are doing. There can always be a bias towards such companies. And I'll be honest, as I went through their balance sheets, I thought too, I would look at a financial fraud.
With regard to their cash flow statement, something struck me: ]
(Chart by Author, Data from Annual Reports)
While producing very significant sums of money from operations, they effectively bring this money into the "acquisition of equity" investee each year Is it possible that they will send money to these "subsidiaries" who in turn "pay back" the same money to BABA, which gives the appearance of growth in the profit and loss account? Chanos wondered if BABA used such methods to falsify the numbers.
However, after some digging, it seems that their payments to these "affiliates" are the same as acquiring companies or equity. its 28.7 billion dollar takeover of Youkou by the RMB in 2016. A full breakdown of all of its equity investments into a list format would be i give more clarity to their positions.
"Available-for-sale and held-to-maturity securities" sound like safe bonds I can live with, but I am confident that they will break these investments specifically in their balance sheet, much like large technology companies in the US. I, and I believe other shareholders too, want to know very well which investments they own.
The fact that they retain so much profit for acquisitions harbors the risk that these acquisitions will lose value in the future, great confidence in the assessment of the acquisitions by the management. A great share buyback program and dividends would do much to clarify management's commitment to giving back to shareholders. This is something that I believe even technology companies in the US need to improve on (I'm not a big fan of cash hoards), but more so because of the added "Chinese bias" of BABA.
They have "only" China
For the time being, one of BABA's main problems is that their platform is mainly used only in the home. Therefore, a typical bear reaction is: how much more can the Chinese economy grow?
China's GDP has seen accelerated growth over the past decade:
With these numbers I have no qualms about the Chinese market.
Like AMZN, BABA benefits from the strong business trend of e-commerce. Combine this trend with a growing economy and you have the stuff to very strong tailwind. While I believe that BABA can eventually expand globally, the point here is that "only China" is more than OK.
What about the government?
I can not cope without the potential risk of the Chinese government. With President Xi Jin Ping, who recently raised the term Maxi (he will be President for life), it is reasonable to be skeptical of this government. In addition, BABA operates on a complex Variable Interest Entity (VIE) structure in the Cayman Islands to circumvent the more stringent regulations for China-based companies. This means that the shareholders of BABA own a shell holding company that has contracts that give them "ownership" of Alibaba's profits. Will the Chinese government allow this in the future? It is true that the Chinese government could decide at any time to invalidate the VIE at the expense of the shareholders. However, I do not think that would happen. The consequences would be long-lasting and would effectively block the access of American (or foreign) capital in the future. Nevertheless, readers must keep an eye on this very serious risk.
BABA is a fast-growing technology juggernaut that unites the businesses of AMZN, EBAY, PYPL, YouTube and FB in one home. Investors may have stayed away due to political risks, opaque bookkeeping and simple knowledge of what BABA is doing. I believe that this is one of the largest growth companies of our time, which happens to be in a distant world. This recent pullback has made his rating very attractive, and I therefore rate the stock as a conviction.
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Disclosure: I am / we are long GOOG, FB, TCEHY, BABA, AMZN.
I wrote this article myself, expressing my own opinions. I do not receive any compensation for it (except from Alpha search). I have no business relationship with a company whose shares are mentioned in this article.
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