What’s going on?
Market value is seriously undervalued
The most realistic consideration is that the current market value of Alibaba (ticker: BABA ) has been underestimated by the capital market for more than three years, and it is difficult to improve in the short term. A spin-off is the most effective way to increase Alibaba’s corporate value. From the perspective of performance, on the eve of the reform, the market value has shrunk by more than 70% from a high of nearly 900 billion U.S. dollars. Its core e-commerce business is facing new challenges such as JD.com (ticker: JD), Pinduoduo (ticker: PDD), and Douyin. In the face of competition and challenges from old rivals, Alibaba Cloud has also dropped from triple-digit growth to 3%.
In the past three years, the valuations of Chinese concept stock companies have not been determined solely by financial report performance or business fundamentals, but have fluctuated with external situations—they include the risk of decoupling between China and the United States, and global geopolitical tensions, the geopolitics impact is keep rising, changes in China’s macroeconomic situation, and the impact of policy regulation.
As a leading business, financial services, and cloud computing company, Alibaba’s current price-to-earnings ratio is only 11 times, and macro factors have been overly reflected in the stock price. Alibaba has roughly 240,000 employees, twice as many as Tencent (ticker: TCEHY ), but has half the market capitalization.
China’s regulation ends
Jack Ma, the founder of Alibaba, who has been hidden for many years, announced his return to the mainland at the end of March 2023. Then Alibaba announced this major organizational adjustment; it is a new stage to cooperate with the Chinese government’s regulatory policies and the development of private enterprises.
At the same time, it is in line with the situation that mainland regulators previously believed that private companies such as Alibaba are too large, their businesses are too connected, and their ecosystems may monopolize the market.
Adopted Alphabet practice
In 2015, Google created a parent company Alphabet (tickers: GOOGL and GOOG) for itself. The parent company operates as a holding company, like an open umbrella, covering many of its subsidiaries. Among them, the largest subsidiary, new Google, still maintains the most profitable core business such as search.
And those businesses that are far away from the Internet, or seem to be more futuristic, such as Google X, the core research and development department, Ventures and Capital, the venture capital business, and Calico, a subsidiary that studies how to extend human life, are included in the parent company Alphabet separately.
How to split?
Split into 6 business groups
On March 28, 2023, Alibaba announced a major adjustment to the group organization, announcing the establishment of 6 major business groups and multiple business companies to respond to the market more agilely and flexibly, and said to promote their independent listing and financing. Chief Financial Officer Toby Xu mentioned that buying back treasury shares is only one of the ways to increase shareholder value. After the group organization changes, the six major business groups and business companies may all be listed independently, and there will be more ways and means to increase shareholder value.
Alibaba will become a holding company
Alibaba stated that in all business segments and business companies, except for the commercial group of Taobao and Tmall, all other business groups and companies can independently raise funds, spin off and go public if they meet the conditions in the future. And Alibaba Group, as the controlling shareholder, will continue to play a role, initially controlling each company’s board of directors. “But our business relationship will shift from business operations to asset operations and capital operations.”
Specifically, Alibaba Group will be more like a relatively detached holding group, with the focus of operations removed from specific businesses and more energy devoted to investment, innovation, and incubation. The independent “children” will set up their own boards of directors and implement the CEO responsibility system under the leadership of the board of directors. The independent business decision-making power will be greatly strengthened. The annual business planning, market response, budget, salary and benefits will be determined by themselves. Facing the market alone.
Future relationships among 6 groups
The chief financial officer of Alibaba said: After the business group is listed, it will evaluate whether to give up control. Alibaba Group ontology may also relinquish control of other businesses. However, Daniel Zhang, chairman of Alibaba’s board of directors, stated on March 30, 2023 that the stable cooperative relationship between Alibaba’s businesses will change due to organizational adjustments.
Any impact on ADR?
As for whether relevant adjustments will affect Alibaba’s primary listing status in Hong Kong, Alibaba only responded that it will continue to evaluate the market and external environment. Previously, Alibaba originally expected to complete the primary listing in Hong Kong before the end of 2022, forming a dual primary listing on the Hong Kong Stock Exchange and the New York Stock Exchange, but it was not completed as scheduled.
Sub-groups in Alibaba’s business empire?
Relevent contents in my book
In section 5-1 of the book “The Rules of Super Growth Stocks Investing“, on pages 346-348, I discussed and analyzed, as well as a table listing the composition of Alibaba’s various subgroups and competing manufacturers.
Introducing 6 business groups
Alibaba will build a “1+6+N” organizational structure, 1 Alibaba Group + 6 business groups (Alibaba Cloud, Taobao and Tmall Business, Local Life, Cainiao, International Digital Commerce, Dawen Entertainment) + N Business companies (Ali Health, Sun Art Retail, Intime Commercial, Hema, Quark, etc.). The 6 business groups and N business companies will all become separate start-up companies.
The specific leader plan of each subgroup is as follows:
- Established a new Cloud Intelligence Group, with Daniel Zhang concurrently serving as CEO.
- Established Taobao and Tmall Business Group, Dai Shan served as CEO.
- The Local Life group was established with Yu Yongfu as the CEO.
- Cainiao Group continues to have Wan Lin as the CEO.
- Established an international digital business group, Jiang Fan served as CEO.
- Established a Dawen Entertainment group, with Fan Luyuan as the CEO.
How much is it worth?
Taobao and Tmall group
Let’s first look at the more mature Taobao and Tmall business group. Goldman Sachs believes that the current market value of Alibaba only reflects the Taobao and Tmall business group. According to the research report of Sinolink Securities, the core commercial transaction business including Taobao Tmall plus domestic wholesale is Alibaba’s cash cow, with an overall valuation of US$581.7 billion.
Alibaba cloud group
Alibaba Cloud’s long-term stable and profitable cloud business is also highly expected. Moreover, in terms of market share, Alibaba Cloud ranks among the top three in the global cloud service market and No. 1 in the Asia Pacific.
Goldman Sachs values Alibaba Cloud at $41.2 billion. Sinolink Securities, referring to the valuation level of the cloud computing industry, estimated that Alibaba Cloud is worth US$42.54 billion.
Cainiao group
Goldman Sachs values Cainiao Logistics at $28.5 billion. Sinolink Securities pointed out that Cainiao, one of Alibaba’s fastest-growing sectors, is valued at nearly US$18.345 billion.
Local Life group
Goldman Sachs puts local living at $17.6 billion. Sinolink Securities pointed out that Local Life group, including Ele.me and Koubei, is valued at nearly 15.165 billion US dollars.
International Digital group
Goldman Sachs puts the international digital business at $33.5 billion. Sinolink Securities pointed out that the International Digital business group is valued at US$5.666 billion.
Dawen Entertainment group
Goldman Sachs values Dawen Entertainment at $4.8 billion. Sinolink Securities pointed out that the valuation of the Dawen Entertainment group is 1.77 billion US dollars.
N Business companies
This portion includes Ali Health, Sun Art Retail, Intime Commercial, Hema, Quark, etc. According to the research report of Sinolink Securities, the new retail business of Hema and Intime is in the incubation period, with a valuation of approximately US$12.65 billion.
Overall value
Alibaba’s financial report shows that as of the first nine months of this fiscal year, the adjusted EBITDA of these major businesses only represents that Taobao and Tmall’s domestic business and Alibaba Cloud are positive, and the rest are losses.
Although it is too simple and direct, it can be regarded as a reference-the valuation of the existing sub-businesses is added, and the “new Alibaba” will be worth 677.82 billion US dollars, which is about three times the current market value of Alibaba (the current market value of Alibaba is only 254.4 billion US dollars).
IPO
Listed subgroups
At present, Sun Art Retail, Ali Health, and Ali Pictures under Alibaba have all been listed independently.
Taobao and Tmall group
The status of Alibaba’s China commerce segment also looks similar to Google’s most profitable search business — they are both group cash cows, contributing about 60% of the group’s revenue. Alibaba’s China commerce unit and its retail businesses, especially Taobao, are unlikely to be listed independently.
Cainiao group
Cainiao has the opportunity to be the first to spin off and go public in the future. because:
- First, because of its impressive development speed, Alibaba’s financial report for the third quarter of fiscal year 2022 (2022 Q4) shows that Cainiao’s revenue increased by 27% year-on-year, ranking first in the group.
- Second, Cainiao’s business logic is relatively simple.
- Third, Jingdong Logistics, which was listed on the Hong Kong Stock Exchange on May 28, 2021, is also a precedent-it is the second subsidiary of Jingdong Group (ticker: JD) after the spin-off and independence of its subsidiary Jingdong Health. Split up listed companies.
Alibaba’s financial report shows that as of the first nine months of this fiscal year, Cainiao Logistics’ revenue was RMB 42.062 billion (the same below), but it suffered a small loss of RMB 72 million.
Alibaba has hired CICC (China International Capital Corporation) and Citigroup to participate in the spin-off of the business, which will be listed on the Hong Kong Stock Exchange. According to Bloomberg, citing unnamed people familiar with the matter, the listing could be as early as possible.
Alibaba cloud group
Alibaba Cloud is also a business highly anticipated by the capital market. Considering the current trend of increasingly loose listing regulations in Hong Kong, Alibaba Cloud Services may first be listed independently at the end of 2023.
Local Life group
It is worth noting that currently Alibaba is gradually increasing its Amap resource and management business. Just like most people rely on Google Maps, users can directly order food delivery, call a car, book a room and buy tickets on Amap (aka GaoDe Map), which may become an Alibaba’s most important carrier of local life.
According to Alibaba’s financial report, as of the first nine months of this fiscal year, the largest loss among the six major groups was local life services of 9.868 billion yuan and revenue of 37.563 billion yuan. Daiwa Securities is most optimistic about the rookie with the least loss and the most local life, and will take the lead in listing other business subgroups.
Ant Group
But don’t forget, Alibaba still holds 33.3% of Ant Group’s shares!
The impact to Alibaba share price
On the day of the announcement on March 28, 2023, Alibaba’s US stocks rose by 14.3%! As of March 30, 2023, in just three days, a total increase of 20.04%! It shows that ordinary investors and Wall Street are unanimously optimistic about the prospects of this arrangement. This split will help the market imagine Alibaba’s prospects and help boost Alibaba’s stock price.
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