My Thoughts on Alibaba Sep Quarter 2022

 

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Some points that you might have missed out on:

Alicloud revenue after inter-segment elimination grew 4% year-over-year only. But if we look at their top line on a sequential basis, it has been dropping for four quarters straight prior. This quarter however, showed a 17% increase sequentially, breaking the quarterly downtrend and hitting an all time high for the quarter.

Non-Internet industries continued to improve, growing 28% year-over-year and contributing 58% of overall Cloud revenue. This means they are at the forefront of digitizing traditional industries, the demand for this will likely accelerate due to government cloudification push. 

Alibaba's Cloud businesses is the world’s third largest and Asia Pacific’s largest Infrastructure-as-a-service provider by revenue. 

Alibaba's Cloud businesses primarily generate revenue from the provision of public cloud services and hybrid cloud services to domestic and international enterprise customers. They have more than 4 million paying customers, which include more than 60% of the A-share listed companies in China

By 2025, the size of China’s cloud computing market is expected to reach RMB1 trillion, which is 3x the size of the current market. Therefore the growth potential continues to exist for cloud computing.

The ongoing geopolitics also means decoupling which means, Chinese private and state owned companies would not dare to use American cloud for fear of government intervention. Vice versa for American companies. 

As of September 30, excluding stores that have been open for less than 12 months, the vast majority of Hema stores are cash flow positive. This is a good sign as initially, my thesis on Hema is that its capex intensive with very low margin. But money ploughed in this new retail concept does create a moat for the company. Ultra high tech robots and scanning systems means reduced manpower cost. All the over 200 Hema supermarkets also serve as fulfilment centers. 

With covid zero policies gradually being removed, more people will start to do their groceries offline, because its harder to buy weekly fresh produce online and maybe more demand for offline experiential shopping.

Alibaba had repurchased approximately US$18 billion of shares under their existing US$25 billion share repurchase program. In addition, the board of directors has approved to increase its existing share repurchase program by another US$15 billion and extend the program through the end of March 2025. This means a total of US$40 billion shares will be bought back which is 20% of their total enterprise value. This should be the largest buy back in terms of quantum and percentage of enterprise in Chinese stock market history.

If we give a bear case fcf of 10bil usd for Alibaba a normalized conservative estimate for its avg fcf should be in the range of 15-20bil. The latest quarter shows a 5bil usd fcf, this will likely increase next quarter due to their cost cutting measures. There are less than 10 companies in this world that can generate 15bil usd of fcf. 

For Local service, the highlight here is not Ele.me, but Gaode(Amap). The financial report mentioned that AutoNavi's orders have grown strongly. This may mean that AutoNavi has the potential to be a new growth engine in the next stage, just like the cloud. In the quarter ended September 30, 2022, order volume of "To-Destination" business grew rapidly yearover-year, driven by Amap business. During the week-long National Day holiday in October, Amap achieved a record high of over 220 million daily active users in China.

Amap is currently the leading GPS super app in China. The catalyst will likely continue due to the opening up next year, ie more cars on roads. You can watch this video to know more about it: here.

Risk embedded in this stock:

1) China's top down governance is problematic for investors. Admittedly the events in the last few years have put a question mark to whether profit, cash generative businesses like Alibaba can flourish with current policies.  

This is the biggest risk to the thesis as without growth in revenue or profits, earning IRR is capped. 

2) Geopolitical risk between US and China. Both sides can ban and black list companies even though they have not done anything wrong. Both sides can use national security risk as a blanket excuse to destroy competition. 

3) Covid zero and lockdown and how long it will last. Current mood seems to be that CCP is pivoting and that they will gradually open up. But what if the virus spreads extensively and China's death rate starts to spike? Another risk to consider.

4) VIE structure. Munger: "When you buy Alibaba, you do get sort of a derivative. But assuming theres a reasonable honor among civilized nations, that risk doesn't seem all that big to me." 

The securities regulators in China have recognized VIE, they have allowed Chinese companies to list anywhere in the world. 

Stock Connect has also brought VIE stocks into China for eg Tencent. This means currently, alot of Chinese in China are already owning VIE stocks. Alibaba, if their HK primary listing is approved next year will also likely join the Stock Connect. Employees and directors of these vie tech companies are also getting the same VIE stock. So even though the risk exist, its not as bad as it seems for me personally.

5) Domestic risk and competition. CCP can continue to find fault in Alibaba and demand hefty fine from them. Total fine currently is around half of their quarterly fcf so in terms of quantum, its still superficial. 

For my sum of parts valuation of Alibaba can click here