BABA - Alibaba

[concerto]

Interesting - how would sales be double-counted between Taobao and Tmall? I thought each merchant operated separate storefronts on each platform?

[peridotcapital]

People seem to be assuming that every user BABA counts is a consumer and every dollar spent would be considered "retail sales." Does anyone buy stuff to resell as a business over there? Could one person have 2 accounts (one for their personal purchases and one for their business)? I know plenty of U.S. folks who buy stuff wholesale on BABA and resell it at full retail in the U.S. so it seems likely people do that in China too. All in all, I'm not sure assuming every user is a retail consumer and every transaction is for a household is going to provide the full picture. 

[MattR]

24 minutes ago, LearningMachine said:

Thanks @MattR, really appreciate your data from the ground!

Does he or anyone he knows ever order from anyone other than TaoBao, Tmall, JD, Suning, Guangzhou, VIP, or PDD? For example, does anyone he know ever buy directly from any brand's website, e.g. https://www.apple.com.cn/, https://www.huawei.com/cn/, https://www.vmall.com/, https://www.lenovo.com.cn/, https://www.hpstore.cn/, https://www.dell.com/zh-cn/shop, https://www.microsoft.com/zh-cn or https://www.samsung.com/cn/, for example to avoid risk of getting counterfeits?

When he says to not trust all the numbers, does he mean only number of annual active consumers are double-counted, or does he mean GMV and average spend per customer are also double-counted?

annual active users are double counted, so people who bought from both are counted as two users instead of just one. I know he only orders brands on Tmall websites since most of the companies have a store there anyway and shipping and returns are must faster.

Edited May 13, 2021 by MattR

[LearningMachine]

2 hours ago, Fitz said:

LM - It's a valid point, the share seems insanely high in relation to its competition in China. You should send this info over to some of a analysts on the last call, would be really awesome if Alibaba clarified this.

Thanks @Fitz.  Does anyone have email addresses or an easy way to get the email addresses for the following analysts that were mentioned on the call today?

• Alex Yao of JPMorgan
• Thomas Chong of Jefferies
• Jerry Liu of UBS
• Han Joon Kim of Macquarie

Edited May 13, 2021 by LearningMachine

[concerto]

39 minutes ago, LearningMachine said:

Thanks @Fitz.  Does anyone have email addresses or an easy way to get the email addresses for the following analysts that were mentioned on the call today?

• Alex Yao of JPMorgan
• Thomas Chong of Jefferies
• Jerry Liu of UBS
• Han Joon Kim of Macquarie

DM'd you

[Fitz]

@LearningMachine Would be awesome to see you able to get that question in front of management. Maybe it could be something as simple as some of the costs JD.com and other have are shipping and logistics and not counted in the online shopping spend, or some other explanation we haven't thought of yet? Or maybe it will be a difficult one to answer for them...

[adhital]

Does anyone know where the NBS gets its data from? I couldn't find this info from their website. Also note that Alibaba's number is from March to March and NBS is from Jan to Dec. China's e-com retail is growing like 15 to 20% month to month so may need to take this into account. Also, JD notes that "The calculation of GMV includes shipping charges paid by buyers to sellers" and NBS may not be accounting this.  But regardless, GMV's doesn't add up or very very close. 

Edited May 13, 2021 by adhital

[Spekulatius]

So observations:

Alibaba’s take rate is small relative to Amazons. their revenues from marketplaces are 0.47T revenue with GMV 7.3T is ~6.4%. Amazon ‘s take rate for 3rd party on their website runs around 20%.

 

Now Alibaba does various things including Marketplaces (Tao Bao, Tmall), logistic services, payments (now de-consolidated), websites , advertisements and even B&M retail sales as well as delivery. I think that one order/ vendor may use several services and they are all added up (in terms of GMV) rather than counted as one.

 

This would explain the lower take rate of the market places and the relatively high total GMV because the services are counted independently while for Amazon they stack resulting in a lower GMV but a higher margin. This does make sense because I don’t think all vendors in Tao Bao mall use Alibaba’s logistic service for example (they just use the storefront etc).

 

Otherwise it is hard to explain why Amazon has more than 3 times the 3rd party sellers take rate compared to Alibaba.

 

Anyways, the concern with Alibaba’s earnings was the lower profitability for the current quarter as well as going forward. The news about a foreign Ali cloud customer jumping ship and impacting revenue growth didn’t sound great either.

[LearningMachine]

28 minutes ago, Spekulatius said:

Otherwise it is hard to explain why Amazon has more than 3 times the 3rd party sellers take rate compared to Alibaba.

I don't think CCP will let Alibaba raise their take rate any more.

U.S. antitrust is asleep at wheel and ok with companies leveraging their monopsony power to benefit shareholders. 

Edited May 14, 2021 by LearningMachine

[LearningMachine]

3 hours ago, concerto said:

DM'd you

Thanks @concerto and @Fitz.   I've reached out to the analysts and Alibaba investor relations.

[LearningMachine]

54 minutes ago, Spekulatius said:

their revenues from marketplaces are 0.47T revenue with GMV 7.3T is ~6.4%. Amazon ‘s take rate for 3rd party on their website runs around 20%.

 

Now Alibaba does various things including Marketplaces (Tao Bao, Tmall), logistic services, payments (now de-consolidated), websites , advertisements and even B&M retail sales as well as delivery. I think that one order/ vendor may use several services and they are all added up (in terms of GMV) rather than counted as one.

I think Alibaba knows what they are saying here.  There is a reason why they calculate GMV as a percentage of NBS-reported-Retail Sales in China, instead of calculating GMV as a percentage of NBS-reported-eCommerce-Sales, i.e. 76.9%, which will draw more attention to their GMV claims. 

Source: https://www.alibabagroup.com/en/ir/presentations/Investor_Day_2020_FinancialInvestmentPerspectives.pdf.

 

Also, they calculate their ~4% take rate based on Customer Management revenue (0.306070 T) as a percentage of GMV claim (RMB 7.5 Trillion).  They are not including "Others" revenue and "Cainiao" revenue in this calculation.  In the 2020 Investor Deck, they did add Cainiao revenue to come up with Overall take rate of 4.5% above 4.0% take rate for Customer management revenue and commission.  However, when Maggie mentioned take rate in today's call, she just said ~4%, which doesn't include Cainiao and others revenue.

Source: https://www.alibabagroup.com/en/ir/presentations/pre210513.pdf

Edited May 14, 2021 by LearningMachine

[PJM]

Let me give you some perspective on how Baba and the Chinese ecommerce market is bit different than US, and so any comparison to Amazon is incorrect. For the numbers like GMV, it may be inflated but the question is the margin by which it is inflated. Also the numbers may not give the real picture as a lot of buying is done differently in China and Asia. I'm based in Hong Kong and have quite a few friends based in China as well other parts of Asia, so my opinions are cumulation of what these observations:

1. A lot of people out side China from places such as HK, Taiwan, Singapore etc buy goods from Taobao/Tmall, and the purchase value is much higher than local consumers. Since most merchants don't ship outside China, people aggregate purchases from various merchants on Taobao and use freight forwarding. So the order value is quite high.

2. So why do people buy on Tabao rather than local ecommerce? The prime reason is massive selection and prices which can be cheaper by as much as 50% than buying locally in their respective countries. Another huge USP is that consumers can chat with merchants and do customisation. A simple example is home furnishing - If I see some really interesting dining table and chairs at an expensive local furniture shop or online, I can just send that design to the merchant on Taobao who will be able to build exactly the same item at a fraction of a price. This is very common in Hong Kong. Now you can imagine that the value of these goods will be very high. 

3. I think the ability for consumers to speak to merchants online and then customise the products, even bargain on the prices is a huge differentiator, especially in Asia where people like this way of buying and bargaining.

4. So how do people buy when they don't speak the language of the merchants, payment system is different etc. There are people in China who are essentially broker/buyers for overseas non-chinese speaking customers. These people do the purchasing from Taobao, payment and shipping for a commission of around 2-5% depending on the value on top of the shipping charges. You can understand the average annual purchase value for such "brokers/buyers" will be quite high. They may laso made a small spread by bargaining the price from merchantsIt's all very common for these buyers to create multiple accounts.

5. I know couple of people that work with large branded products such as apparels, cosmetics, watches etc, and they said that unlike other countries, for all brands bulk of the business happens through Tmall/JD. Most brands are unable to get traffic directly and the ecosystem of Taobao/Tmall/JD is very very strong.

6. There will always be a massive GMV difference between JD and Baba, because JD owns the merchandise and they claim to have authentic product. JD can only own that much inventory. Second JD is very strong in electronics which is a local business meaning concentrated within China and probably not a high frequency purchase. Baba's USP is that the merchants on its platform selling everything that you can imagine. People who have lived or experienced Taobao in China even as early as 2011 are amazed of what they can buy on Taobao and that has only grown bigger and stronger. What PDD does is slightly different but I think Baba will catch up as their ecosystem is very strong.

So going back to GMV, my guess the numbers may not be inflated by a huge margin. There may be some double counting or aggregate counting, E.g. lot of overseas sales is coming through a local user account that maybe shown as local china spend. Also the average spending of RMB9000 may look high but not out of bound. I personally know people who buy around 10K dollar worth of goods on Taobao/Tmall.

Hope this helps 

 

[gudvangen]

BABA is 20% of net worth and I recently piggybacked Munger into it. Its a tough company to analyze just as Amazon was/is. Main reason is that unlike capex flowing through cash flow statement predominant investments by BABA are made via income statement i.e. supporting negative earning new ventures. Some of these are actual investments like Lazada etc. but most are investments to keep its moat intact. They want the taobao/tmall and whatever other apps they can conjure to be ubiquitous ecosystem for purchasing and for this to happen sustainably they have to always be the best service provider.....in terms of time to delivery, number of product offerings, price, etc. Unfortunately capital is cheap and competition intense....so BABA is forced to do whatever stupid thing the competitor does however uneconomical it is.....hence the step towards low margin retail and logistic/supply chain businesses where it loses huge amount of cash.

I heard somewhere that you should identify and ditch a growth company as soon as it slows growing because that is when the multiple collapses. I believe BABA appears to be in that stage.

For example. people tout the stock because earnings have been growing at +30% clip while PE multiple is close to 20. First of all you need to look under the hood and subtract off investment gains which was 71B in 2020 and 66B in 2021. Also run rate of share based compensation is ~32B/year. After you remove these items the true income is close to 130B for 2021 and 100B for 2020. 

The golden egg  i.e. core advertising/customer management revenue(CMR) grew 24% from 246 to 306 while non CMR commerce revenue increased 65% from 190 to 315B. Most if not all of this non-CMR revenue is loss making which resulted in much smaller change in net income.

So till now these growth initiatives have been eating into CMR earnings and hence reducing margins and suppressing earnings growth but that was ok since earnings were still growing at healthy pace because of operating leverage. But in 2022 management is expecting zero earnings growth which means the chase for unprofitable revenue this year is going to totally wipe out the growth from core CMR. Some of this is permanent in terms of eliminating merchant fees.

So how much would you pay for a company which is probably going to g row income  0% and is trading at 3600/130 = 28x core earnings ?

Yes you can try to do a sum of parts valuation but its almost impossible to do this accurately without any segment level data and when these segments are all deep in red. Price to Sales could be one tool but its a awful....what P/S multiple should one put on logistics CAINOW vs high margin Cloud business ? I have no idea

Long story short, competition is killing baba and its forced to give handouts to gain/keep market share.....hardly a sign of pricing power. Or maybe "have blind faith #neversell" type of investing is just not my cup of tea.

[MattR]

13 minutes ago, gudvangen said:

BABA is 20% of net worth and I recently piggybacked Munger into it. Its a tough company to analyze just as Amazon was/is. Main reason is that unlike capex flowing through cash flow statement predominant investments by BABA are made via income statement i.e. supporting negative earning new ventures. Some of these are actual investments like Lazada etc. but most are investments to keep its moat intact. They want the taobao/tmall and whatever other apps they can conjure to be ubiquitous ecosystem for purchasing and for this to happen sustainably they have to always be the best service provider.....in terms of time to delivery, number of product offerings, price, etc. Unfortunately capital is cheap and competition intense....so BABA is forced to do whatever stupid thing the competitor does however uneconomical it is.....hence the step towards low margin retail and logistic/supply chain businesses where it loses huge amount of cash.

I heard somewhere that you should identify and ditch a growth company as soon as it slows growing because that is when the multiple collapses. I believe BABA appears to be in that stage.

For example. people tout the stock because earnings have been growing at +30% clip while PE multiple is close to 20. First of all you need to look under the hood and subtract off investment gains which was 71B in 2020 and 66B in 2021. Also run rate of share based compensation is ~32B/year. After you remove these items the true income is close to 130B for 2021 and 100B for 2020. 

The golden egg  i.e. core advertising/customer management revenue(CMR) grew 24% from 246 to 306 while non CMR commerce revenue increased 65% from 190 to 315B. Most if not all of this non-CMR revenue is loss making which resulted in much smaller change in net income.

So till now these growth initiatives have been eating into CMR earnings and hence reducing margins and suppressing earnings growth but that was ok since earnings were still growing at healthy pace because of operating leverage. But in 2022 management is expecting zero earnings growth which means the chase for unprofitable revenue this year is going to totally wipe out the growth from core CMR. Some of this is permanent in terms of eliminating merchant fees.

So how much would you pay for a company which is probably going to g row income  0% and is trading at 3600/130 = 28x core earnings ?

Yes you can try to do a sum of parts valuation but its almost impossible to do this accurately without any segment level data and when these segments are all deep in red. Price to Sales could be one tool but its a awful....what P/S multiple should one put on logistics CAINOW vs high margin Cloud business ? I have no idea

Long story short, competition is killing baba and its forced to give handouts to gain/keep market share.....hardly a sign of pricing power. Or maybe "have blind faith #neversell" type of investing is just not my cup of tea.

But they still grow at a ridicoulous rate. Even the cloud sector where a lot found it to be disappointed grew 50% YoY.

[LearningMachine]

6 hours ago, gudvangen said:

BABA is 20% of net worth and I recently piggybacked Munger into it. Its a tough company to analyze just as Amazon was/is. Main reason is that unlike capex flowing through cash flow statement predominant investments by BABA are made via income statement i.e. supporting negative earning new ventures. Some of these are actual investments like Lazada etc. but most are investments to keep its moat intact. They want the taobao/tmall and whatever other apps they can conjure to be ubiquitous ecosystem for purchasing and for this to happen sustainably they have to always be the best service provider.....in terms of time to delivery, number of product offerings, price, etc. Unfortunately capital is cheap and competition intense....so BABA is forced to do whatever stupid thing the competitor does however uneconomical it is.....hence the step towards low margin retail and logistic/supply chain businesses where it loses huge amount of cash.

I heard somewhere that you should identify and ditch a growth company as soon as it slows growing because that is when the multiple collapses. I believe BABA appears to be in that stage.

For example. people tout the stock because earnings have been growing at +30% clip while PE multiple is close to 20. First of all you need to look under the hood and subtract off investment gains which was 71B in 2020 and 66B in 2021. Also run rate of share based compensation is ~32B/year. After you remove these items the true income is close to 130B for 2021 and 100B for 2020. 

The golden egg  i.e. core advertising/customer management revenue(CMR) grew 24% from 246 to 306 while non CMR commerce revenue increased 65% from 190 to 315B. Most if not all of this non-CMR revenue is loss making which resulted in much smaller change in net income.

So till now these growth initiatives have been eating into CMR earnings and hence reducing margins and suppressing earnings growth but that was ok since earnings were still growing at healthy pace because of operating leverage. But in 2022 management is expecting zero earnings growth which means the chase for unprofitable revenue this year is going to totally wipe out the growth from core CMR. Some of this is permanent in terms of eliminating merchant fees.

So how much would you pay for a company which is probably going to g row income  0% and is trading at 3600/130 = 28x core earnings ?

Yes you can try to do a sum of parts valuation but its almost impossible to do this accurately without any segment level data and when these segments are all deep in red. Price to Sales could be one tool but its a awful....what P/S multiple should one put on logistics CAINOW vs high margin Cloud business ? I have no idea

Long story short, competition is killing baba and its forced to give handouts to gain/keep market share.....hardly a sign of pricing power. Or maybe "have blind faith #neversell" type of investing is just not my cup of tea.

@gudvangen, thank you for sharing your thoughts.  Really like how you critically think about a business even if you happened to follow Munger to invest 20% of your net worth in it.  Are you waiting for exit opportunity to exit completely or reduce your percentage invested in it? 

Really like how you also noticed the share-based compensation was high.  Agreed this needs to be subtracted.

Regarding subtracting RMB 66,305MM investment gains, that is fine eye for detail.  It is so easy to gloss over that.  They subtract that when going from GAAP to Non-GAAP on slide 16 presumably because GAAP requires those to be included in the income, but they didn't want to include that for Non-GAAP? How did you figure out they are including the RMB 66B investment gains in the Marketplace-based Core Commerce EBITA RMB 229B figure on slide 9?  Because, there is no other place to put it?  How do you know for sure that they are doing that?  Where do you think those investment gains are coming from?  Their self-made appraisals of investments?  They can book any figure for that then, can't they? 

Also, kudos to you for noticing in yesterday's earnings call "0 profit growth" for 2022 to "invest all of our incremental profits in this coming year into core strategic areas such as technology innovation, support programs for merchants to lower their operating costs, user acquisition and experience enhancements, merchandising and supply chain capabilities, infrastructure development and new business initiatives."  

I didn't find the "0 profit growth" part surprising because they had already made a public promise to CCP & merchants at the April 11 call "to both reduce fees and charges to help merchants and brands, at the same time also invest and spend more for them. So the impact going to be both reflected in both top line and bottom line. So overall, we have reserved billions of RMB in additional annual spending to support initiatives in the future year."

Edited May 14, 2021 by LearningMachine

[gudvangen]

6 hours ago, MattR said:

But they still grow at a ridicoulous rate. Even the cloud sector where a lot found it to be disappointed grew 50% YoY.

Economics 101....a business that earns less than it's cost of capital destroys value when it grows. These investments are producing negative returns(atleast for now) so you have to be able to believe/trust that eventually they become profitable and the net present value of these future positive cash flows is worth the investment. Very hard question to answer. 

Basically you need to believe Alibaba can make money above cost of capital in these low margin investments once it reaches a mature state. But as long as there is so much capital flowing into this area(check what PDD, JD and now Bytedance plans to do) it will be hard to make money here.

[gudvangen]

23 minutes ago, LearningMachine said:

@gudvangen, thank you for sharing your thoughts.  Really like how you critically think about a business even if you happened to follow Munger to invest 20% of your net worth in it.  Are you waiting for exit opportunity to exit completely or reduce your percentage invested in it? 

Really like how you also noticed the share-based compensation was high.  Agreed this needs to be subtracted.

Regarding subtracting RMB 66,305MM investment gains, that is fine eye for detail.  It is so easy to gloss over that.  They subtract that when going from GAAP to Non-GAAP on slide 16 presumably because GAAP requires those to be included in the income, but they didn't want to include that for Non-GAAP? How did you figure out they are including the RMB 66B investment gains in the Marketplace-based Core Commerce EBITA RMB 229B figure on slide 9?  Because, there is no other place to put it?  How do you know for sure that they are doing that?  Where do you think those investment gains are coming from?  Their self-made appraisals of investments?  They can book any figure for that then, can't they? 

Also, kudos to you for noticing in yesterday's earnings call "0 profit growth" for 2022 to "invest all of our incremental profits in this coming year into core strategic areas such as technology innovation, support programs for merchants to lower their operating costs, user acquisition and experience enhancements, merchandising and supply chain capabilities, infrastructure development and new business initiatives."  

I didn't find the "0 profit growth" part surprising because they had already made a public promise to CCP & merchants at the April 11 call "to both reduce fees and charges to help merchants and brands, at the same time also invest and spend more for them. So the impact going to be both reflected in both top line and bottom line. So overall, we have reserved billions of RMB in additional annual spending to support initiatives in the future year."

I'm ignoring their adjusted EBITA or whatever useless metric they are advertising and calculating my own core earnings. Two simple way to value it 

First take core commerce earnings, put a multiple on it and then add value of non ecommence businesses like cloud, ant etc. On that basis BABA looks cheap and that's why I bought it. Hope was that the investments will slowly turn profitable accelerating earnings growth.

The trend is still there but now the initiatives like Taobao deals, merchant support, etc is wiping out the earnings gains from those segments.

I still own it and haven't made up my mind about what to do next yet.

[Thelilyinvestor]

https://www.dataroma.com/m/holdings.php?m=PI

Mohnish Pabrai has bought Alibaba, along with Charlie Munger and there is a chance Li Lu has an investment in it in HK, very interesting to say the least...

[LearningMachine]

13 minutes ago, gudvangen said:

I'm ignoring their adjusted EBITA or whatever useless metric they are advertising and calculating my own core earnings. 

@gudvangen, that's an awesome way to approach it.  For 2021, you mentioned you are getting true income close to 130B after subtracting investment gains of 66B and share based compensation of 32B.  Before that subtraction, looks like you were at RMB 228B.

Is that just for all of core commerce earnings?   How did you get at that RMB 228B figure?   I was thinking you were using Marketplace-based Core Commerce EBIT figure of RMB 229B.  However, looks like you're starting with RMB 306B Customer Management Revenue figure, or total Core Commerce Revenue figure of RMB 621B, and then subtracting all expenses, including payroll, etc.?  Would really appreciate if you could share your math to compare notes. 

 

Edited May 14, 2021 by LearningMachine

[gudvangen]

The 130B figure is net income after all expenses not the core e-commerce. I'll share my valuation math which splits e-commerce and investment valuation soon.

[LearningMachine]

1 hour ago, gudvangen said:

The 130B figure is net income after all expenses not the core e-commerce. I'll share my valuation math which splits e-commerce and investment valuation soon.

Got it, thanks. Share-based compensation went up to RMB 50.120B in 2021, almost as much as net income itself .   Here is what I see overall:

	RMB MM
Revenue	717,289
Cost of revenue	-421,205
Product development expenses	-57,236
Sales & Marketing Expenses	-81,519
General & Administrative Expenses	-55,224
Share-based compensation	-50,120
Net income	51,985

I didn't add investment income shenanigans, which are likely based on self-appraisals and thus didn't subtract investment gains.  I also didn't subtract the anti-monopoly fine as it is hopefully one-time thing.

With 22,024 million diluted shares outstanding now, Market Cap @ 204.60 HKD is 4,506,110.40 million HKD = 3,734,338.52 million RMB ~= 3734B RMB

3734/51.985 = 71.82 P/E based on overall earnings. 

What am I missing? 

Edited May 14, 2021 by LearningMachine

[adhital]

9 hours ago, gudvangen said:

First of all you need to look under the hood and subtract off investment gains which was 71B in 2020 and 66B in 2021.

I think, some % of ROE from 437B equity & investments balance sheet item  should be accounted as an earning. substracting off 100% of this gains from income statement is too punitive to overall valuation.  

9 hours ago, gudvangen said:

But in 2022 management is expecting zero earnings growth

They're saying they'll be investing all the incremental profits to either core or a new areas of business (OPEX or CAPEX). and the guidance is 30% 2022 revenue growth. margin will compress but that does not mean 0 growth. 

 

2 hours ago, gudvangen said:

Economics 101....a business that earns less than it's cost of capital destroys value when it grows

do we really need them to earn  it's cost of capital from all new projects or initiatives? Bezos' had the same model and investors didn't complain for so long when it had no earning. 

 

Edited May 14, 2021 by adhital

[adhital]

57 minutes ago, LearningMachine said:

RMB MM Revenue 717,289 Cost of revenue -421,205 Product development expenses -57,236 Sales & Marketing Expenses -81,519 General & Administrative Expenses -55,224 Share-based compensation -50,120 Net income 51,985

I think you may be double counting share based comp. It's already included on all the areas of expenses. 

 

[adhital]

and looks like all the analyst so far are on board with it 

[LearningMachine]

2 hours ago, adhital said:

I think you may be double counting share based comp. It's already included on all the areas of expenses. 

 

Thanks @adhital for catching that. 

Some of those cash & investments are because of the additional notes they sold.  To be balanced, including half of investment income as it is likely based on self-appraisals:

	RMB MM
Revenue	717,289
Cost of revenue	-421,205
Product development expenses	-57,236
Sales & Marketing Expenses	-81,519
General & Administrative Expenses	-55,224
Income from Investments	36,397
Net income	138,502

 

3734/138.5 =~ P/E of 27 

That high P/E has to be based in faith that earnings will be growing at a high rate.  However, they have said earnings will not be growing at all into 2022.   So, it requires faith that earnings will be growing at a high rate in the future. 

Edited May 14, 2021 by LearningMachine