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I have written quite extensively about how cheap Alibaba is in terms of its sum of parts. Buying it equates to getting their China core commerce free. Assuming we give a 10x ebita valuation to its core commerce that is around 300bil usd. This means in a kind and generous market, Alibaba should theoretically be worth 500bil usd.
The recently announced restructuring seems to be trying to address this problem. Splitting into 6 business each with a board and CEO. I would assume this would translate to a few perks.
1) No more blood transfusion from its core commerce segment, ie money is freed up to invest into technology that would benefit the core business. I read an article guessing that Alibaba might invest more into chips and large model AI going forward.
2) Ease of spinning off. Why is the chance of separate IPO higher now? Because these companies will be standalone i.e. the staff working there will be receiving stock option not from Alibaba but from its own business segment. This incentivize the standalone segment to IPO so that the stock option that they get can be en-cashed. If they are really not getting money from Alibaba, then IPO financing is crucial, i.e. the companies have to find ways to raise money by themselves.
3) More diverse business prospects. For example, if Cainiao is a standalone company, it would want to do business not only with Alibaba but with everyone. The goal becomes different because it will no longer be a native family member seeking attention from the parent, but rather a business that wants to grow itself. So I wouldn't be surprise to see Cainiao servicing JD, Pdd or Bytedance in the future. These might mean more business which equates to higher topline growth and valuation.
4) Removal of holding co discount. Maybe a maturing fcf machine like Tmall/Taobao might not impune a high valuation, but that does not mean its other business like Ali cloud, Cainiao, AI and International commerce should be bogged down together with it. Spinning off is a way to unlock the true value of its underlying assets. Dont forget, Alibaba is aggressively buying back shares too. So this two way value optimization can help to unlock its true value overtime if done correctly.
5) I would assume that in China context now, six companies worth 50bil usd are better than one company worth 300bil. More under the radar and looks less monopolistic. Spinning off also means more cash for the parent which may fuels more share buy back.
All these however will only materialize if management actually does something about it. If after this announcement, everything remains status quo, nothing will change. But from the way Zhang Yong the ceo talks about this, it seems like he is quite serious about it. See how it goes.
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