BABA - Alibaba

[LearningMachine]

2 hours ago, concerto said:

Asset stripping is probably not the way I'd characterize it though. The Chinese government isn't stealing Ant, they're just regulating it to death in order to destroy Jack Ma. They lack the incentive to do the same to the commerce businesses or the cloud business, which is where the majority of BABA's value comes from.

They're regulating commerce business as well by creating a freer marketplace where competitors can thrive, where Alibaba can't use its market power to grow, i.e. to tell merchants to pick them exclusively.  They are also regulating by influencing Alibaba to lower its take rate.  Joe Tsai also admitted they are now starting to look into all M&A.  This will be great for Chinese economy, but not for shareholders. 

Imagine a world where U.S. government was telling Apple and Google they can't take more than 2% on their AppStore, and that Amazon cannot charge 3rd party sellers more than 2% on its store.  Imagine a world where Apple was forced to allow competitors to also host iOS app stores.  Imagine a world where Amazon couldn't enter effectively exclusive contracts where they are not allowed to ask suppliers for a lower price than other sellers can sell for, and suppliers are encouraged to also sell on another platform.   I can go on and on with regulations that can create a freer marketplace, more competition, less power over consumers, and much less profitable Amazon, Google and Apple, and much lower valuations.   This is what CCP wants.  It will be great for China's economy, but not for shareholders.  

[Xerxes]

What if what is great for Chinese economy grows the overall economic pie so much so that the shareholders also benefit as well with the growing pie. I believe the intent of CCP is to ensure that the wealth doesn't accumulate and get "stuck" into the vaults of one or two companies (ala $200 billion of Apple). 

[cubsfan]

^ And we seems to be ignoring the fact that all these small sellers (private businesses) NEED BABA. They depend on BABA to sell - and the transaction costs are plenty low. So if the CCP corrected the BABA's behavior on abuses - it's a potential speed bump that gets overwhelmed by the growth of the Chinese economy - and that is in the best interest of the CCP.  

[Spekulatius]

I think BABA next earnings will be crushing it - consumer spending in China is even stronger than in the US and look at what FB and  GOOGL did.

 

I know that FB and GOOG are ads vs BABA is a marketplace, but I think those two are correlated, if the economy is booming, both are going to do very well.

Edited April 29, 2021 by Spekulatius

[cubsfan]

^ Alibaba makes the majority of it's money from ad placement. It's closer to Google than anything else.

[LearningMachine]

2 hours ago, cubsfan said:

^ Alibaba makes the majority of it's money from ad placement. It's closer to Google than anything else.

Actually, if you listen to their CFO, Maggie Wu, in the Investor Day videos, she says that take rate has gone up 80% since 2014 (from 2.5% to 4.5%) not because they have increased "fees" [implying non-ad revenue] but because "we provide broader value to our merchants" [further implying non-ad revenue].

Source: Maggie Wu's video at https://www.alibabagroup.com/en/ir/investorday, starting around 14:23 minutes

Earlier and later, she talks about some of the value that is source of their revenue. 

Edited April 29, 2021 by LearningMachine

[LearningMachine]

4 hours ago, Spekulatius said:

I think BABA next earnings will be crushing it - consumer spending in China is even stronger than in the US and look at what FB and  GOOGL did.

To keep it balanced, and give you benefit of devil's advocate, if Chinese consumer spending goes up by only 10% on Alibaba, with PDD claiming to now have more active customers than Alibaba, if take rate goes down as they have publicly promised, say by 10% from 4.5% to 4.05%, it will be a wash.   

That's what Maggie Wu means by there will be impact to "top line".  She says this will involve giving some of the mature services for free. 

When she says there will be impact to "bottom line" as well, she means earnings will be impacted because of the additional spend on tools and training on merchants to show them how to lower their expense on Alibaba platform.

Source: Webcast from April 12, 2021 at top of page of https://www.alibabagroup.com/en/ir/home

 

At P/E of 26-27, what growth rate is market expecting?  Will Alibaba earnings beat that growth rate expectation?  Shouldn't there be also some discount for risks due to VIE structure, future regulatory actions that are favorable to consumers/merchants/competitors, future potential stripping of assets like AliPay? 

Edited April 29, 2021 by LearningMachine

[Ulverski]

@LearningMachine

You are really good in devil's advocate role. Thanks!

 

I have three valuations of that company - different scenarios base on growth changes. Very good, normal and terrible scenario. Recent BABA financial results are in my very good scenario range, but of course it will change because of new rules. Company is about 10% undervalued according to my normal scenario. What will happen? Who knows?

What we know for sure is that BABA has the biggest sail to cath e-commrce and digitalization tailwinds in China economy and regulator will not allow to build monopoly (Amazon size in US). So, probably all three major players in China  - BABA, JD, PDD will grow, but non of them will be allowed to be dominate the others. What do you think about "hedging" BABA positon by buying one of the competitors?

[LearningMachine]

Thanks @Ulverski :-).

@Spekulatius might be right on 2021 Q1 results because impact of take rate and spending on merchants won't start showing until 2021 Q2 results, and Mr. Market might get swayed by positive 2021 Q1 results, and then get swayed the other way by 2021 Q2 results.  Also, with Q2 results, Mr. Market might ignore impacted earnings results from profitable marketplace businesses, and instead focus on revenue growth from other almost non-profitable businesses.  So, we can't predict what will happen in the market with certainty. 

Regarding @Ulverski's questions, I don't have a clear answer.  We all want to ride the Chinese economic growth story.  This reminds me of how everyone wanted to ride the solar cell growth story in 2007 but growth doesn't necessarily mean the value created sticks to shareholders.  So, we have to approach this cautiously. With three retailers competing with each other, it can be hard to build market power to extract from merchants or consumers, especially with regulator watching, and I'd worry that one of three newspapers in town can be worth orders of magnitude less than one newspaper in town.  I haven't looked deeper into PDD and JD.   BABA has more diverse businesses with some potential.  So, I like BABA the most among the three currently. 

That said three newspapers in town doesn't necessarily mean none can build market power.  For example, in the U.S., government hopefully won't do anything to stop Verizon from extracting exclusive contracts with streaming providers, or extract lower prices for streaming content than what streaming providers can sell to others for.  In China, government won't let any of the three retailers extract like that, but each of the three retailers might be able to carve out their own parts of the market, where they don't compete too much with each other - hard to tell.

 

Edited April 29, 2021 by LearningMachine

[Pistachio_Lawyer]

On 4/28/2021 at 11:07 AM, wabuffo said:

Asset stripping is probably not the way I'd characterize it though. The Chinese government isn't stealing Ant, they're just regulating it to death in order to destroy Jack Ma.

My reference to asset stripping is a reference to Jack Ma.  How do you think he got to own most of Alipay (now Ant Financial) in the first place.  He transferred the AliPay asset to a company he controlled. Yahoo tried to sue Jack Ma in Chinese Courts and got nowhere.  That's because Chinese Courts don't even recognize the contracts that govern the Cayman Islands VIE that owns financial and other commercial contracts with the operating business in China.   Yahoo thought they owned 43% of AliBaba and therefore 43% of AliPay and found out they own bupkis.

My worry is that all the good assets get transferred to Chinese owners while the bad assets that need constant capital infusions stay connected to the Cayman Islands VIE so that foreign holders continue to supply it.  It's fraught with "heads we win, tails you lose" incentives which is probably why the foreign VIE corporate structure is tolerated. 

It would be great if the Chinese government formally endorsed this structure instead of leaving it in a gray area.

wabuffo

I had no idea about this, thank you for sharing 

[DooDiligence]

50 minutes ago, Pistachio_Lawyer said:

I had no idea about this, thank you for sharing 

I think @John Hjorth has one of the best plays on China with LVMH.

Berkshire is in a good position with Apple & anyone interested in a cup of coffee or a slice of pizza might be well served by Starbucks or Dominos without the potential of getting stiffed.

Then again, Charlie.

Edited April 30, 2021 by DooDiligence

[Ice77]

If you want a current horror story around VIE, read up on what's been happening with Arm China (NVDA is trying to buy Arm and Arm China issues are one of the bigger stumbling blocks). It's as crazy as they get, worthy of a thriller.  

[LearningMachine]

At the April 12 call, Maggi Wu had mentioned that they have "reserved Billions of RMB" for helping merchants [webcast no longer available on Alibaba investor site]. 

Is anyone else bothered by the opacity of "Billions", or is it just me?  Whenever companies are opaque about some figures, it gives them opportunity to be able to claim different figures in the future.  The bigger the range created by opacity, the bigger the opportunity for coming up with numbers. 

Also, by "reserved", did she mean reserved backwards looking, e.g. in 2021 Q1 before the ruling, or forward looking starting 2021 Q2?  In other words, will it show up in May 13 earnings call or not? 

My guess is no, and so, Mr. Market might pop-up BABA stock big time after earnings growth claims on May 13, allowing Mr. Tsai and Mr. Ma to unload, only to then fizzle out in August or much later after Mr. Tsai and Mr. Ma have finished unloading.

Edited May 6, 2021 by LearningMachine

[LearningMachine]

At the April 12 call, Daniel Zhang got incorrect the amount in RMBs that average Chinese consumer spends on Alibaba to the extent that someone else corrected him later in the call.  The call is no longer available on the Alibaba site - if anyone remembers the number and the correction, it will be great if they could share. 

So, I tried to make sense of the following slide 12 from Investor Day at https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_FinancialInvestmentPerspectives.pdf.

 

Alibaba claims average spending of ~RMB9000 by 742 million Annual Active consumers.  This multiples to RMB6.678Trillion.  So far, this is consistent with their claim of total GMV of RMB7.3 Trillion, which includes international marketplaces also.

Now, they claim 550 Million of those 742 million consumers spend less than RMB7,000.  They divide them into two buckets: (1) Those who spend less than RMB2,000, and (2) Those who spend between RMB2,000 and RMB7,000.  I know this is probably incorrect, but because of opacity, let's say for now that those two buckets are about equal, that is 275 Million consumers each.  Let's assume for Bucket 1, the average spend is right in the middle, that is, RMB1,000.  Let's further assume for Bucket 2, the average spend is RMB6,000.  Then GMV from Bucket 1 is RMB0.275 Trillion, and GMV from Bucket 2 is RMB1.65 Trillion.  Adding Bucket 1 and Bucket 2 gives GMV of RMB1.925 Trillion.

Now, things get interesting for the remaining High-Spending 190 Million Consumers who spend more than RMB7,000.  Let's call it Bucket 3.  Subtracting RMB1.925 Trillion from RMB6.678 Trillion provides that this bucket is RMB4.753 Trillion.

This means that these 190 million consumers spend on average RMB25,016 yearly on Alibaba.  Alibaba claims on the slide that these consumers have disposable income of above RMB36,000.  If the average income of these 190 Million middle-class consumers is RMB36,000, they are spending 69.4% of their income on Alibaba.  You might say that the income of these 190 Million consumers is lot higher.  How much higher would you say it would be for the percentage to be reasonable? 

Let's look at these figures in U.S. dollars.  RMB 25,016 yearly is $3,889 US per year. For context, in the U.S., where average consumer income is much much much higher, without too much digging, looks like Amazon claims average non-Prime customer spends $600 per year and prime customer spends $1,400 per year. 

Are Alibaba's numbers of $3,889 USD per year expenditure by 190 million Chinese middle class customers believable compared to what much much much richer consumers in the U.S. spend on Amazon?

Now, I know folks might come back and say have you seen how much Taobao has integrated into the Chinese consumer's life.  If someone is going to make that argument, it will be great if they can back it up with some believable numbers based on average income of those customers, how much they spend on housing, utilities, travel, healthcare, education, cars, etc. and what percentage of leftover income is then spent on Taobao.

Edited May 7, 2021 by LearningMachine

[Fitz]

I would look at the GMV and Cloud growth as the most important variable to watch over time, what happens next quarter with the revenues or profits that reach Alibaba will be less important over the life of this investment than satisfied customers spending and driving more traffic through the Alibaba universe. 

 

The lowered take rate or more free services could in fact accelerate the growth and help keep competitors at bay. 

[LearningMachine]

Thanks @Fitz.  I hear you. 

My question above is different.  I'm not talking about next quarter.  I'm asking how credible are Alibaba's GMV numbers.  Do you believe the numbers above regarding how much 190 million Chinese consumers spend on Alibaba as a percentage of their income, and a figure that even when converted to USD is many multiples of what a much much much richer Amazon customer spends in U.S.?

The reason it is such an important question is that if Alibaba's numbers are not credible, what numbers can you trust coming out of Alibaba?

In the Luckin Coffee thread, we discussed that making false statements to U.S. investors is not illegal in China, and almost all shareholder fraud goes unpunished in China.  Given BABA is listed in Hong Kong also, maybe things are different from Luckin' Coffe, but Maggie Wu and Jack Ma are not based in Hong Kong - they are in mainland, where you can escape being punished for making false statements to shareholders. 

Edited May 7, 2021 by LearningMachine

[adhital]

1 hour ago, LearningMachine said:

This means that these 190 million consumers spend on average RMB25,016 yearly on Alibaba.  Alibaba claims on the slide that these consumers have disposable income of above RMB36,000.  If the average income of these 190 Million middle-class consumers is RMB36,000, they are spending 69.4% of their income on Alibaba.  You might say that the income of these 190 Million consumers is lot higher.  How much higher would you say it would be for the percentage to be reasonable? 

Let's look at these figures in U.S. dollars.  RMB 25,016 yearly is $3,889 US per year. For context, in the U.S., where average consumer income is much much much higher, without too much digging, looks like Amazon claims average non-Prime customer spends $600 per year and prime customer spends $1,400 per year. 

Are Alibaba's numbers of $3,889 USD per year expenditure by 190 million Chinese middle class customers believable compared to what much much much richer consumers in the U.S. spend on Amazon?

 

I think the "average" may not be the right way to quantify this but "median”.  china has more billionaires then here in US so the top percentile might be spending much more then the overall Chinese. Just an example, say out of 190Mn Chinese consumer, top 20% may be spending  >$20,000/yr and then the remaining can spend less to come up with average $3889 as you calculated. Just a thought..

[LearningMachine]

23 minutes ago, adhital said:

I think the "average" may not be the right way to quantify this but "median”.  china has more billionaires then here in US so the top percentile might be spending much more then the overall Chinese. Just an example, say out of 190Mn Chinese consumer, top 20% may be spending  >$20,000/yr and then the remaining can spend less to come up with average $3889 as you calculated. Just a thought..

Wouldn't the same thing apply in the U.S. with Amazon?   Why is Alibaba's number in USD per customer for 190 million Chinese consumers is many multiples of Amazon's number for much richer customers? 

Are you saying top 20% of those 190 million middle-class consumers, i.e. 38 million Chinese consumers are much much much richer than top 20% of middle-class consumers in the U.S.?

Edited May 7, 2021 by LearningMachine

[adhital]

It’s all my guess, and without knowing the exact spending distribution, it’s very hard to quantify. For example, GMV & average spend  can change in either directions if you change the average spend on any of the buckets. But, it’s a valid skepticism to compare the numbers with Amazon.

If you ignore the bucket, average BABA consumer spending is  $1300, almost compared to the prime. So yes, it looks like they’re spending much more on BABA platform that US consumers on Amazon. Chinese consumers spend considerable % of their disposable income in goods compared to services. The top percentile of Chinese consumers may be spending much more than the top prime spenders. All guess of course. I don't have a data to back this up. 

BABA can skew the consumer numbers but I don’t think they can manipulate the actual cash balance audit by PricewaterhouseCopper, a reputable auditor.

[LearningMachine]

1 hour ago, adhital said:

BABA can skew the consumer numbers but I don’t think they can manipulate the actual cash balance audit by PricewaterhouseCopper, a reputable auditor.

Thanks @adhital.  China Hustle talks about the same impression that many investors have that a reputable auditor brand is auditing the books.

What was a learning for me from China Hustle was that it is actually not accurate to think that a reputable Western auditor is auditing the books.  The reason is that each location of the reputable auditor brand is almost like an independently operated franchise.   When a Chinese branch of Western auditor brand is auditing the books, they are operating under different laws, laws where it is not illegal to make false cash balance statements to U.S. investors, laws where punishment can be escaped for defrauding shareholders. 

Did you know that Ernst and Young brand was the auditor for Luckin Coffee?  False statements still got made, fraud still happened, and no-one got punished, unlike Enron, where fraudsters did get punished. 

Edited May 7, 2021 by LearningMachine

[LearningMachine]

Alibaba's supposedly USD $3,889 expenditure by 190 million middle class consumers is 6.48 times $600 expenditure by Amazon non-prime customers and 2.78 times $1400 expenditure by Amazon prime customers.

If Alibaba's claimed consumer GMV numbers are a multiple of actual numbers, e.g. double or quadruple of actual numbers, for revenue numbers to be correct, take rate percentage has to be a multiple of 4.5%, i.e double or quadruple of 4.5%, which wouldn't fly well with the regulators.   So, if GMV numbers are wrong, revenue numbers are likely wrong as well. 

 

Edited May 7, 2021 by LearningMachine

[Spekulatius]

E-Commerce spending in China actually exceeds B&M spending now and sits at ~52%. Somit makes sense that Chinese consumer spent proportionally more of their income at BABA and other online vendors. In the US, , e-commerce is roughly 14% of total retail.

https://www.scmp.com/economy/global-economy/article/3122234/china-set-be-first-country-where-e-commerce-sales-outstrip

 

[concerto]

I think higher ecommerce penetration in China is likely a good explanation. Also, the commentary on the slide notes that those 190mn users have a disposable income (not total income) above 36k RMB, which I realize is a pretty minor semantic difference but accounts for some of the discrepancy you note vs. Amazon.

I also think Alibaba doesn't really need to exaggerate its numbers. We all know that Taobao and Tmall are very real, very large businesses - inflating GMV numbers at this point seems like unnecessary overkill fraught with massive legal risk.

[adhital]

2 hours ago, LearningMachine said:

Did you know that Ernst and Young brand was the auditor for Luckin Coffee?  False statements still got made, fraud still happened, and no-one got punished, unlike Enron, where fraudsters did get punished. 

@LearningMachineI think the fraud  was with the pre-ipo sales data and not the quarter since  Ernst and Young started audit. That’s why auditor was not fined. 

[Spekulatius]

FWIW, the CC that LM was referring to can be found on tikr.com:

https://app.tikr.com/stock/transcript?cid=42083601&tid=263579308&ts=2249661&e=710924151&refCode=o94y6y#