$BABA: +40 sell-side brokers covering it; here are some points worth considering

This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below. The author may hold positions in any of the securities mentioned.

Foreword

There are currently +40 sell-side analysts covering Alibaba with far more resources than me. The goal of the attached paper is to provide a different lens on the company as follows:

1. Instead of a “Price Target”, back-solve what today’s (let’s say $137) price implies in terms of future growth expectations

2. Demonstrate how AliCloud is only an upside for long-term holders

3. Touch on specific components of China’s plan (14th 5-year plan) and see how it impacts Alibaba

4. Explore the management team (without firsthand exposure to them)

*** See paper attached. Otherwise conclusion below***

Conclusion

Although "cheap", Alibaba will continue to provide lowish ROE weighed down by donations, early stage startups & share-based payments to staff. Forgetting the share price movement, ultimately this is a long-term bet on China's middle-class, Alicloud's 1st mover advantage & HKSE/US shares not being shut down by CCP.

Valuation: There are a huge number of components to Alibaba. Personally, I only ascribe value to Core marketplace + AliCloud.

• Core Commerce – I think non-GAAP EBITA will grow at high single-digit growth (e.g. 7-8%). This could be either through big top-line growth (e.g. overseas/logistics partnerships at low margins) or slower growth with +30% TMall margins

  • The biggest risk to this is that Alibaba is sandwiched between low tier cities (dominated by Pinduoduo) and top tier cities (led by JD.com)

• Cloud Computing – I think an investor hoping to capitalise on the growth in cloud computing needs to hold for the long term

• Other – I think the company will continue to have low ROE due to loss-making ventures and an inability to maximise the value of Ant Financial

Regulatory risk: The economies of scale & future tax revenue that Alibaba offers the CCP is appealing & does offset some regulatory risk. Unsurprisingly the more obvious risk that Alibaba shareholders face is the requirement to reinvest more in poor returning start-ups and/or donate more as seen in their currently suppressed ROE.

• A delisting would be bad for the price of NYSE shares but ultimately allow you to convert to HKSE shares

• Per my research on H-Shares and A-shares, even when these are traded on the HKSE… there remains regulatory risk because it is NOT mainland

Capital allocation: The business has great working capital benefits however, unfortunately, I do not envisage Alibaba generating >mid teen ROE due to a large amount of employee stock, start-up ventures and weakening core commerce margins

Management: There are no major red flags. Their low ROE (see below) does suggest poor capital allocation to start-ups (albeit partially forced by the government) and large share-based payments. The long tenure of the leadership team is a positive however it is worth noting the real cost of these share-based payments.

BABA Note

.pdf

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