My Thoughts on Alibaba and XIRR Update

 

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Many have compared Elon Musk with Jack Ma. Of course they have completely different backgrounds, one is an entrepreneur/scientist another is an eloquent businessman. Lets look at the companies they control.

Musk is worth $158 billion, Jack Ma $59 billion, only one-third of Musk. Musk controls eight companies namely Tesla, SpaceX, PayPal, Boring company and Neuralink, etc which covers payment platforms, ev car, interstellar exploration, underground high-speed rail, brain-computers, solar power and other fields. 

Ma founded Alibaba which owns 12 companies, including Alipay, Taobao, Tmall, Ali Cloud, Koubei, etc. In view of the world, Musk's eyes are on interstellar exploration, colonizing Mars and modifying the human brain, majority of his visions are out of this world and likely unprofitable for a long long time. Jack Ma however is not interested in these, what he cares about is the sustainable development of mankind on earth and a scalability track for all his companies. We saw this first hand during the interview they had with each other. Who is better?

Alibaba's group of businesses are very service oriented. Highly demand dependent, hence all its companies have a track to EBITA profitability over time. Core business accounts for 86% of revenue. It is the company’s main cash flow. It is also the only business in the company's four major business sectors that has achieved EBITA profitability. Core business includes Taobao,Tmall,1688, platform e-commerce business such as Lazada platform, Hema Fresh, New retail business such as Intime Department Store etc.

The company invests capital in other sectors through core business profits. Thereby increasing the company's penetration in the commercial field, expand the company's service dimension, currently cloud computing and Internet infrastructure businesses account for 9% of revenue, digital media and entertainment business accounted for 5%. Alibaba's capital investments are quite aggressive, but not as aggressive and incubative as Tencent. 

The company's core commercial business maintains rapid development, new retail business continues to develop rapidly, an increase of 43.50% over the same period last year, accounted for 27.37% of China's retail business, has become an important part of Alibaba's core business.


Cloud computing business revenue continues to grow, mainly from the internet, driven by growth in customer revenue in the financial and retail industries, Alibaba Cloud's current scale has reached the scale of Amazon AWS cloud business revenue 3Q2015, at this stage, AWS's operating margin is in a rapid improvement phase. According to information released by Alibaba at its annual investor conference, Alibaba Cloud expects to achieve profitability in FY2021. 

Digital media and entertainment business are Alibaba's ecological collaborative business, their revenue are increasing gradually. The main reason is the increase in revenue from online games. But still at a loss.

Alibaba's sales and management expenses to gross profit ratio continue to be less than 40% in the past four seasons. Latest value 39.4%, average 38.2% in the past four quarters. This shows that the company has a decent ability to generate profit.  

Alibaba's valuation is still cheap. 8 years FCF CAGR of 30% with a topline CAGR of 33.3% and at only a Price to FCF of 21x. Very cash generative with an accumulation of HK$15 net cash per share(329bil hkd net cash). 

Official press releases and state media portrayed the public rebuke as necessary for the healthy development of the e-commerce and fintech industries. This means it is for the health and continued development of Chinese fintech and not due to Jack Ma's speech on the government. The increased cash buffer for Ant and bank regulation requirement is necessary to avoid a financial crisis, even though valuation of Ant might be affected. Will China crush Alibaba and destroy their own interest? Highly unlikely, but anti monopoly rules might benefit Tencent more as they are more incubative with their start up. See how it goes.

Full disclosure, I have vested interest in Alibaba and it is currently up 10.67%(updated 14th Jan 2020).

Snap shot of my portfolio performance as of today: Total profit for 2021: S$8,141.22. Due to the rapid rise of Weimob and CCnewlife today.


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