BABA - Alibaba

[DooDiligence]

A blast from the past.

www.reddit.com/r/brkb/comments/mnyvm0/oct_2010_byd_factories_to_be_confiscated_after/?utm_source=share&utm_medium=web2x&context=3

 

Edited April 10, 2021 by DooDiligence

[LearningMachine]

2 hours ago, Poor Charlie said:

It's clear that Beijing wants the financial sector to be a source of soft power going forward.  Given this objective, are they really going to kneecap Alibaba?  Are they going to allow wholesale theft of Alibaba's assets?  I'm willing to bet they won't.

CCP doesn't have to do something as extreme as explicitly allowing wholesale theft of Alibaba's assets for shareholders to not do great.  CCP can achieve the goals you mention better by having multiple players, not just Alibaba, be a source of soft power.

Looks like CCP has already asked Alibaba to "[share] fruits of growth" with customers, merchants & competitors more and to "introduce measures to lower entry barriers and business costs of operating on our platforms." See https://www.alizila.com/a-letter-to-our-customers-and-to-the-community/.

They are of course also asking that Alibaba not push merchants to list only on their platform.  If merchants now listed on multiple platforms, what do you think it does to Alibaba's pricing power with merchants? 

What if CCP explicitly asked Alibaba now or in the future to lower the commission revenue to below certain percentage in order to reduce "business costs of operating on" Alibaba?

Regarding the VIE structure, a future Chinese court ruling that the variable interest contracts are meant to evade CCP rules and thus invalid doesn't kneecap Alibaba at all.  It would only kneecap the shareholders holding ADS or H shares.  Alibaba can continue to add value to consumers and merchants. 

Edited April 11, 2021 by LearningMachine

[Poor Charlie]

1 hour ago, LearningMachine said:

CCP doesn't have to do something as extreme as explicitly allowing wholesale theft of Alibaba's assets for shareholders to not do great.  CCP can achieve the goals you mention better by having multiple players, not just Alibaba, be a source of soft power.

Looks like CCP has already asked Alibaba to "[share] fruits of growth" with customers, merchants & competitors more and to "introduce measures to lower entry barriers and business costs of operating on our platforms." See https://www.alizila.com/a-letter-to-our-customers-and-to-the-community/.

They are of course also asking that Alibaba not push merchants to list only on their platform.  If merchants now listed on multiple platforms, what do you think it does to Alibaba's pricing power with merchants? 

What if CCP explicitly asked Alibaba now or in the future to lower the commission revenue to below certain percentage in order to reduce "business costs of operating on" Alibaba?

Regarding the VIE structure, a future Chinese court ruling that the variable interest contracts are meant to evade CCP rules and are invalid doesn't kneecap Alibaba at all.  It would only kneecap the shareholders holding ADS or H shares.  Alibaba can continue to add value to consumers and merchants. 

The concerns you raise are issues all dominant tech companies face.  And some of them are even more acute in the West.  For instance, out of Apple, Amazon and Alibaba, who faces the least pricing pressure on takerates?  I would argue Alibaba.

My post related more to the existential threats that appear to be vivid in investors' minds: seizure and theft.  I'm not saying these aren't risks.  In fact, I believe they're risks you face investing anywhere, including the US.  I'm just saying that investors may be overweighing them.  That's all.

[LearningMachine]

1 hour ago, Poor Charlie said:

The concerns you raise are issues all dominant tech companies face.  And some of them are even more acute in the West.  For instance, out of Apple, Amazon and Alibaba, who faces the least pricing pressure on takerates?  I would argue Alibaba.

My post related more to the existential threats that appear to be vivid in investors' minds: seizure and theft.  I'm not saying these aren't risks.  In fact, I believe they're risks you face investing anywhere, including the US.  I'm just saying that investors may be overweighing them.  That's all.

I agree there are some risks in the West with regulatory bodies, but not to the same extent.  Rulings in the West are still based on rule of law, where courts will follow the law and precedence. 

Regulatory agencies here can't just "tell" Apple/Google how much to charge on their App Store even when they are charging as high as 30%, but CCP can "tell" Alibaba to lower their Commission+Customer Management Revenue to 2% even when Alibaba is taking as low as 4%.

With CCP, you will get bits and pieces of the ruling released in the newspaper, and it doesn't even have to be logically tight. 

In the West, you will get a meticulously written ruling articulating precisely which law is violated, and what is the precise remedy based on precedence that has to then pass the scrutiny of thousands of lawyers in the public domain for logical tightness and something you can then take to courts to argue on whether it violates the law, whether remedy is appropriate, whether precedence is followed, and precedence is then created for future rulings. 

 

Also, if a Chinese court does rule again in the future that a variable interest contract that is written to get around CCP rules is invalid as they have done in the past, it is an issue of shareholders losing everything.  The Law Review article I shared above goes in more detail on this.  

Edited April 11, 2021 by LearningMachine

[Pistachio_Lawyer]

If you look at BABA absent its current regulatory woes, you'll notice account receivables declined from 31% of cash holdings in 2018 to 30% in 2019 and later to 25% in 2020. Strangely, their financial statements don't explain how much of BABA's total assets are in inventory. Still, given the slower pace of total asset growth than cash holdings and assuming BABA isn't lying on their balance sheet, they're likely to post a gain in earnings. I guess when you look at it this way, it all comes down to whether you have the stomach to hold on to this stock for its intrinsic value when all other external factors are telling you to put it in the "too hard" pile.

Edited April 11, 2021 by Pistachio_Lawyer

[Xerxes]

I think now that the sandbox is clear in terms of penalty, etc. the stock after an initial drop should probably head higher. Just my guess. There is a conference call on Monday morning.

As far as Munger, i dont think it is fair to compare his sizing of Alibaba to all of his personal assets. It should be sized vs the rest of the equity portfolio within the Daily Journal and judged at that level. The reality is that of all things he could bought he chose Alibaba as a not so insignificant position in a concentrated portfolio.

On comments about Xi, i would caution that in China, despite Xi climbing the ladder of power, the true power is always in the collective mind (i.e. CCP). In the West, we have a bias, that whenever a person extends his/her presidency it is seen as that person being the new dictator for life (ala Putin etc.). In China, you need to separate the organs of State and those of the Party. Extending the term of presidency has to do with the government and state. Call me when Xi becomes Secretary General of the Communist Party for life. Than maybe i will call him dictator for life. I think people in the West overestimate the individualism in China. Just like the Party was ready to crush Jack Ma for his individualism, it will have no problem to crush on of his own if it needs to. Simple fact that the Party chose Xi to do things that he is doing in his new assertive chapter of China, moving from "hide your strength"-phase of 1990s and 2000s as China gathered soft and hard power under Zemin and Hu.

Looks at Deng Xiaoping, who held no formal position in China in the 1980s, yet he reigned supreme as the de facto paramount leader. And he certainly did not need to make himself president for life, because that is meaningless. Tomorrow China can have a new president, but power will remain with Xi as the current Secretary General of the Communist Party.

Let's not forget that the PLA swears allegiance to the Party and NOT the State. In the U.S. of course it is different, with the military swearing allegiance to the State (i.e. president) and not to any one Party. A president for life in the Western world has a different meaning than a president for life in China.

 

Edited April 11, 2021 by Xerxes

[Krapdivad]

Barrons got a comment from Munger about his BABA purchase. It looks like he sees the purchase as a store of value. This hints that he sees lower risk of owning an ADR/VIE than buying treasury bills. Albeit he says allocated a "tiny amount Alibaba common stock" at $37 million. 

How do you guys explain this $37 million being a “tiny amount” of the $270M DJCO has in cash and marketable securities?

 

https://www.barrons.com/articles/berkshire-hathaway-charlie-munger-prefers-alibaba-stock-to-treasury-bills-51617813729

In response to a request for comment on the investment, Munger, who is also the vice chairman of Berkshire Hathaway (BRKb), provided a statement to Barron’s:

“Daily Journal Corporation has and needs securities held as cash equivalents. These cash equivalents would normally be U.S. Treasury Bills. But, with returns on Treasury Bills now so low, the Company instead, invests in common stock. And, unless its long term prospects seem good, a common stock is not considered to be a good cash equivalent.

“A minor part of Daily Journal Corporation’s cash equivalents now consists of a tiny amount of Alibaba common stock.”

That “tiny amount” was valued at $37.5 million as of March 31

Edited April 11, 2021 by Krapdivad

[Spekulatius]

The VIE structure is not ideal for sure from an investor perspective, but it neither a new risk nor is it specific to Alibaba. The  VIE structure is clearly sanction by the powers so it isn’t really a separate risk from the CCP calling the shots, imo.

I am more comfortable than I was a few years ago with the VIE structure because China actually has done a good job in making the Chinese stock market more investable, Imo.

Ironically, the increased scrutiny of the regulators may have played a large a large role in getting Alipay into crossfire since the regulators put any business that applies for a stock market listing I to the X-ray machine and find out who it operates. They did t like that Alipay’s essentially runs an unregulated bank/ consumer lending and asset management business with a lot of intransparent ties to regular banks as well as with Alibaba. I am guess this has to be restructured  in a way that is more appealing to the. Regulators.

It will be interesting how this plays out for Alibaba and even more so Tencent. Tencent in many respects is even less transparent than Alibaba and has more platform power through Wechat as it has become the quasi operating system for e-commerce in China.

Edited April 11, 2021 by Spekulatius

[LearningMachine]

1 hour ago, Spekulatius said:

The VIE structure is not ideal for sure from an investor perspective, but it neither a new risk nor is it specific to Alibaba. The  VIE structure is clearly sanction by the powers so it isn’t really a separate risk from the CCP calling the shots, imo.

I haven't looked into this deeper yet, but looks like A shares, B shares and some H shares do not have VIE structure. 

Looks like BABA's H-shares have VIE structure though. 

[K2SO]

The numbers are compelling. But if you've decided to buy BABA because Munger is in, it's probably a mistake. 

Munger is 98 this year. The next time BABA faces issues with the CCP, he may not be around to assuage your concerns. 

You have to do the work to gain your own conviction.

I have decided that it's too much work for me and beyond my ability to understand in detail, and so I pass.

 

[LearningMachine]

Just listened to Alibaba's call. 

They confirmed they will be lowering the costs to the merchants and will do more to reduce merchants' operating costs on Alibaba's platform, e.g. give mature services for free, and also invest in providing tools and training to merchants to lower costs on Alibaba's platform.

The question with broken-up voice in the beginning also asked about how much commission revenue will go down, but when Daniel was paraphrasing the question, he skipped that part of the question. 

Looks like regulators are on their case to lower the commission and customer relationship management revenue from 4%, but Alibaba didn't answer what percentage will make regulators happy this time.  Regardless of what the percentage is that will make regulators happy now, regulators can always come up with a new percentage in the future as well. 

Edited April 12, 2021 by LearningMachine

[Munger_Disciple]

I love Munger but I don't understand how could he say BABA stock or for that matter any common stock holding can be considered cash equivalent? Initially I thought Barron's might have misinterpreted Munger's comments but the article says that Munger provided a statement to the publication. 

[wabuffo]

I love Munger but I don't understand how could he say BABA stock or for that matter any common stock holding can be considered cash equivalent?

He doesn't want the SEC to rule DJCO is an Investment Company per the SEC's 1940 Act by virtue of its holding of over 40% of its assets in marketable securities.   He is reinforcing the fact that the investment portfolio is a cash alternative/working capital for the operating businesses.  If it were classified as an Investment Company, it would add a lot of regulatory and reporting complexity to its mgmt.

Here is the SEC poking DJCO about the issue in 2013:

https://www.sec.gov/Archives/edgar/data/0000783412/000000000013010354/filename1.pdf

Here's DJCO's response:

https://www.sec.gov/Archives/edgar/data/0000783412/000143774913003140/filename1.htm

wabuffo

Edited April 12, 2021 by wabuffo

[Gregmal]

Well, market seems to view this as a positive. Settlements/fines=alpha. 

[Xerxes]

34 minutes ago, wabuffo said:

I love Munger but I don't understand how could he say BABA stock or for that matter any common stock holding can be considered cash equivalent?

He doesn't want the SEC to rule DJCO is an Investment Company per the SEC's 1940 Act by virtue of its holding of over 40% of its assets in marketable securities.   He is reinforcing the fact that the investment portfolio is a cash alternative/working capital for the operating businesses.  If it were classified as an Investment Company, it would add a lot of regulatory and reporting complexity to its mgmt.

Here is the SEC poking DJCO about the issue in 2013:

https://www.sec.gov/Archives/edgar/data/0000783412/000000000013010354/filename1.pdf

Here's DJCO's response:

https://www.sec.gov/Archives/edgar/data/0000783412/000143774913003140/filename1.htm

wabuffo

Very interesting. I think that is also what Michael Saylor has been saying for his Bitcoin hoarding, in fact when I read that Barron's article, my thought went straight to Saylor' exact wording for his investment (putting aside the merit of doing so). 

 

[Xerxes]

26 minutes ago, Gregmal said:

Well, market seems to view this as a positive. Settlements/fines=alpha. 

Made my day !

Thanks 

[Munger_Disciple]

39 minutes ago, wabuffo said:

He is reinforcing the fact that the investment portfolio is a cash alternative/working capital for the operating businesses.  If it were classified as an Investment Company, it would add a lot of regulatory and reporting complexity to its mgmt.

Got it; so Munger is saying common stocks are really just cash alternatives to pacify the SEC. Makes sense. At 98, Munger still got the Mojo. 

Thanks wabuffo!

[LearningMachine]

At the Monday call, Maggie Wu, Alibaba’s CFO, announced that there will be impact to both “top line” and “bottom line”.  
 

She said “top line” will be impacted because of lowering of fees for merchants, e.g. giving mature services for free. She said “bottom line” will be impacted because of more spending on tools and training to merchants to help them lower their costs on Alibaba’s platform.

Given that CCP will be watching and given that Alibaba has made a public commitment to customers that they will be lowering business costs, what do folks think Alibaba’s earnings will be in the next fiscal year?   Higher, flat or lower? If higher, how much higher? If the stock price stayed around the same, what will be the PE?

[MattR]

8 minutes ago, LearningMachine said:

At the Monday call, Maggie Wu, Alibaba’s CFO, announced that there will be impact to both “top line” and “bottom line”.  
 

She said “top line” will be impacted because of lowering of fees for merchants, e.g. giving mature services for free. She said “bottom line” will be impacted because of more spending on tools and training to merchants to help them lower their costs on Alibaba’s platform.

Given that CCP will be watching and given that Alibaba has made a public commitment to customers that they will be lowering business costs, what do folks think Alibaba’s earnings will be in the next fiscal year?   Higher, flat or lower? If higher, how much higher? If the stock price stayed around the same, what will be the PE?

I still think it is going to be higher. Not the 35% that they had historical revenue growth, but I would say that it should still be around 30%.

[LearningMachine]

Since 2014, they have increased their take rate by 80% from 2.5% to 4.5%, resulting in 80% growth in their revenue. 

Do you think they will be able to announce a further increase in that take rate after publicly announcing that that they will be lowering business costs on their platform for merchants, they will be giving mature services for free, their top line and bottom line will be impacted, all the while merchants and CCP are watching? 

Do you think there is a possibility that CCP and merchants are expecting them to announce a lower take rate, and they will follow through on their promise to lower business costs for merchants on their platform by having a lower take rate? 

 

 

Edited April 13, 2021 by LearningMachine

[LearningMachine]

If they decrease their total take rate by 12% from 4.5% to 4.0%, it will result in 12% reduction in revenue, with some of it offset by other sources of revenue and increase in GMV to the extent PingDuoDuo and other competitors allow.

Interesting how small changes in take rate percentage can have such a huge impact on revenue on the way up and on the way down. 

Because it is such an important question with a huge impact on revenue, what do folks think they will be able to announce on take rate percentage in the next fiscal year? 

Edited April 13, 2021 by LearningMachine

[concerto]

Wouldn't any changes to take rate primarily affect the transaction commissions and not advertising? I think it'd be difficult to force lower customer management revenue as ad placement is based on customer bids. Given most of BABA's commerce revenue comes from ads and not commissions, I think the actual impact might be less than people think (although, obviously, still quite material). I hope the company stops burning so much cash on the adjacent businesses (outside of commerce and cloud) so they can extract some more profitability.

Edited April 13, 2021 by concerto

[LearningMachine]

18 minutes ago, concerto said:

Wouldn't any changes to take rate primarily affect the transaction commissions and not advertising? I think it'd be difficult to force lower customer management revenue as ad placement is based on customer bids. Given most of BABA's commerce revenue comes from ads and not commissions, I think the actual impact might be less than people think (although, obviously, still quite material). I hope the company stops burning so much cash on the adjacent businesses (outside of commerce and cloud) so they can extract some more profitability.

 

At the Sep 30, 2020 Investor Day, Maggie Wu mentioned that the [80%] increase in take rate [which in turn grew revenues by 80%] from 2014 to 2020 was from additional services they provide to the merchants, not from ads.  Please see https://www.alibabagroup.com/en/ir/investorday.

 

At the April 12, 2021 Group Conference Call, Maggie Wu mentioned that top line [revenues] will be impacted because they will be giving mature services for free.  Please see https://www.alibabagroup.com/en/ir/home.

 

So, I think on April 12, 2021, when she is talking about giving some of the services for free, she is talking about some of the same services that she mentioned on Sep 30, 2020 that led the take rate to go up. 

Edited April 13, 2021 by LearningMachine

[DooDiligence]

I think they'll do just like eBay did when they cut PayPal out and made us all go to managed payments. They said we'd see savings, but we haven't. Effective competing platform choices are available, but managing multi channel, or switching altogether, is difficult. The big online platforms can pretty much do whatever they want to piss off customers and we bitch but we don't switch.

Edited April 13, 2021 by DooDiligence

[LearningMachine]

1 hour ago, DooDiligence said:

I think they'll do just like eBay did when they cut PayPal out and made us all go to managed payments. They said we'd see savings, but we haven't. Effective competing platform choices are available, but managing multi channel, or switching altogether, is difficult. The big online platforms can pretty much do whatever they want to piss off customers and we bitch but we don't switch.

The difference here is that CCP is watching.  Alibaba said on the call that they will be in constant touch with regulators going forward to make sure they are abiding by their guidance going forward.

Also, are you agreeing that they won't increase the total take rate anymore from 4.5%, in order to meet their public promise of reducing cost to merchants of operating on their platform, making some mature services free, which they admitted will impact top line?

In the past, they were able to increase the take rate by 80%, resulting in 80% revenue growth.

If you still think they will be able to increase the take rate, how much do you think they will be able to increase it?

Edited April 13, 2021 by LearningMachine