BABA - Alibaba

[LearningMachine]

2 hours ago, adhital said:

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.

 

They publicly declared yesterday 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."  They then tried to walk through "0 profit growth" question later.  They're basically telling you in nice words to expect zero profit growth for year 2022.  Source: https://app.tikr.com/stock/transcript?cid=42083601&tid=263579308&ts=2249661&e=710924151&refCode=u8yosp#

 

Also, when they are saying investment will be to "support programs for merchants to lower their operating costs", they mean what Maggie Wu meant on April 11 call, that is "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."  Source: https://app.tikr.com/stock/transcript?cid=42083601&tid=263579308&ts=2249661&e=710924151&refCode=u8yosp#

Edited May 14, 2021 by LearningMachine

[Gregmal]

Looks like Dan Loeb dumped this. I have significantly more faith in what guys like Loeb, Tepper, Ackman, etc are doing then the guys everyone worships around here(Watsa, Pabrai. Spier, etc).... I could see Tepper going big on BABA. But Loeb is straight money so its if nothing else, an interesting move. 

[Xerxes]

1 hour ago, Gregmal said:

Looks like Dan Loeb dumped this. I have significantly more faith in what guys like Loeb, Tepper, Ackman, etc are doing then the guys everyone worships around here(Watsa, Pabrai. Spier, etc).... I could see Tepper going big on BABA. But Loeb is straight money so its if nothing else, an interesting move. 

That's rough ! 

haha

[adhital]

9 hours ago, Gregmal said:

Looks like Dan Loeb dumped this. I have significantly more faith in what guys like Loeb, Tepper, Ackman, etc are doing then the guys everyone worships around here(Watsa, Pabrai. Spier, etc).... I could see Tepper going big on BABA. But Loeb is straight money so its if nothing else, an interesting move. 

14% IRR since inspection is to be bragged about for third point but any individuals would have achieved >  IRR just investing in either Microsoft (17%) or Amazon (35%) and do nothing during the same timeframe. 

[MattR]

9 hours ago, Gregmal said:

Looks like Dan Loeb dumped this. I have significantly more faith in what guys like Loeb, Tepper, Ackman, etc are doing then the guys everyone worships around here(Watsa, Pabrai. Spier, etc).... I could see Tepper going big on BABA. But Loeb is straight money so its if nothing else, an interesting move. 

There are many reason one sells. There is only one reason to buy.

[RetroRanger]

10 hours ago, Gregmal said:

Looks like Dan Loeb dumped this. I have significantly more faith in what guys like Loeb, Tepper, Ackman, etc are doing then the guys everyone worships around here(Watsa, Pabrai. Spier, etc).... I could see Tepper going big on BABA. But Loeb is straight money so its if nothing else, an interesting move. 

He Had ,2% of the Portfolio in it. I rather go with guys Like Munger/Pabrai who speek with their high conviction positions .

[Gregmal]

Its just another data point to consider. Its probably never wise to "pick sides" when investing. I generally prefer to go with the side thats going to make money, regardless of who's on that side. As some have pointed out, Munger endorsed Tesco. I also forget exactly what it was, but Im pretty sure he had an opinion on Bitcoin 10-20 bags ago too. 

[PJM]

On 5/15/2021 at 4:07 AM, LearningMachine said:

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. 

I like the bear points that everyone is raising, so keep it coming. 

I agree that we need to adjust the earnings to reflect the true earning power of the company, so this is how I look at the company:

1. Core Commerce earnings - 158b. Bear in mind this number is after anti-monopoly fine, share based compensation, amortization of goodwill and intangibles as well as the losses from businesses such as Taobao deals, Freshippo, Lazada etc. If we adjust those numbers the earning power is even greater. So just based on this number the PE comes to 3734/158 = 23.6x which is not steep considering the growth in this business.

2. I think it is fair to at least add back the anti-monopoly fine of 18b which is non-recurring, which brings the PE to 3734/176 = 21.2x

3. Other segments - Now within other segments, the only one I consider valuable is Cloud computing which has massive potential in China. I don't know who the winners will be, but Alibaba will be one of the major players and it is already profitable on operating earnings basis from last quarter (308m in q4). But to be conservative lets just consider this as an upside optionality here without putting a number.

4. I agree that we don't want to add the Investment revaluation income as well as equity-method Investees Income but it is comforting to see that the total holdings of cash, equity securities & investments and equity-method investments amounts to 911b (US$140b). Bear in mind these are BV, so the MV may be higher or lower (especially ANT). If we want we can put a value to that number to adjust the market cap, but to be conservative I put zero value to it.

5. Now coming to zero profit growth - We need to think whether this is purely a business decision to reinvest all the profit growth in strengthening the business or it has to do partially being on the right side of the regulators and govt. Even if we think it is a rationale business decision, it is not be bad idea to invest and widen the moat by supporting the merchants in order to increase consumer wallet share and penetrate deeper into the market. I think of this as Capex to grow the business.

6. Another important metric to look at it is CFO of 232b and FCF of 173b, both at very healthy levels. So you have FCF yield of 4.6% which is not bad I'd say. Again one may need to adjust these cash flows, but even after that cash flows are still healthy.

After considering all these factors, I do not think BABA is expensive given that it is the largest player in China and continues to expand significantly within China, across the region and new businesses such as Cloud computing.

The factors that bothers me is that the company is not doing meaningful buybacks given the cash position, constant selling by insiders, massive SBC etc. 

Disc: Holding

 

 

 

 

Edited May 17, 2021 by PJM

[Tintin]

I've spent the past month going quite deep into BABA (and yes, it was Munger that sent me there).  My take is as follows;

 

I believe that there's an inordinate amount of irrational fear regarding Chinese regulators and the VIE structure that has pushed the stock price down.  China has no incentive to permanently handicap one of its greatest companies, and the relatively lenient SAMR fine is pretty compelling proof to that.  Yes, there's still plenty more talk of further regulation in the pipeline, but it appears to be little more than noise.

 

I think the worries over US delisting of the ADRs are off the table for the moment too - an utterly pointless move anyway given that the ADRs are fungible.  US Shareholders will simply move their holdings to Hong Kong and with very minimal cost involved.

 

With regards to the VIE structure, I think it's obvious to anyone who does a little reading on the subject that the whole arrangement is completely illegal under Chinese law!   It's a useful tool that probably allows the CCP to hang the sword of Damocles over smaller fish, but there is no way they are going to rule against BABA or any of the other major companies that have ADR holders.  China is desperate for foreign capital inflows, so I see the chances of a Chinese court coming in and ruling against the VIE structure as being somewhere within the probabilistic realm of 0% to 0.1%.  And for the same reason, I don't think we'll be seeing Jack, Joe, or Simon trying to steal the company from the shareholders as was the case with Ant.  Oh the times they are a changin' - if they tried to pull a similar stunt this time, I think there's no doubt that they really would go missing.  Anything that threatens China's current ability to attract foreign capital is simply not going to be tolerated.  If you hold the ADRs, you can rest easy.

 

But there's a lot of things I see that aren't so palatable for BABA shareholders, which can pretty much be summed in one word - accounting.

 

The complexity of the Company's structure, the baffling array of shells and holding vehicles, the related party transactions, the sheer number of investments that it has in 3rd parties.  That almost made me want to put it in the 'too hard' pile straight away.  But I persisted nonetheless.

I'll have to credit a guy called Stephen Clapham for much of what follows as I found his insights to be very interesting.  In a nutshell, he has raised very legitimate concerns about the value of BABA's Balance Sheet investments and goodwill.  Notwithstanding the fact that GAAP rather stupidly obliges companies to record changes in the carrying values of their investments as either profits or losses on their Income Statements, it is not credible to argue that the changes BABA records almost always only go one way - up.  Given that the company is essentially providing VC seed funding to so many different ventures, it's absurd not to see far higher levels of impairment to these assets.  There just isn't that high enough of a success rate when bankrolling start-ups.

And as for the related-party transactions... the audit fees are very much on the low side.  So who was going through all these transactions in detail to make sure the shareholders weren't getting stitched up?

I'm trying to get my head around Munger's way of thinking as I do not believe that he would have missed this stuff.  My belief is that these accounting irregularities might not be quite as black and white as westerners would recognise them.  I cannot comment on Chinese culture or business practices as I am completely ignorant on them, but as Munger has a far greater understanding of such practices, it is possible that he recognises that a little bit of hokey-pokey is accepted as pretty standard in Chinese accounts, and the fact that it goes on does not necessarily translate into saying the company is a complete sham.  Were any US companies engaged in such practices then I think he'd be running a mile, but perhaps his close relationship with Li Lu has helped him to view the matter through a more nuanced prism?

One other thing that I am struggling with - BABA's financing cash flows.  I believe that Ben Graham said words to the effect of "Always look in the Cash Flows from Financing.  That's where the ghosts are hidden."  Over the past 6 years, BABA's figures have shown that its Operating Cash Flows have been more than enough to finance its CapEx, acquisitions, and investments in third parties.  This being the case, why has it had positive inflows from financing in almost every year?  And the amounts aren't even small!  It just does not sit right that so much debt has been taken on and so much dilution has taken place if the company is generating that level of operating cash flow.

I recently started reading Duncan Moore's book on Jack Ma, and there's a quote in the book about Ma always wanting to have a nice big war-chest available for M&A situations, and always wanting to get capital flowing in when he didn't need it because the worst time to seek it is when you actually do need it!  And I guess that's a fair point, but I still just can't reconcile the need for all this financing cash if the operating businesses are doing so well.

In conclusion - at the risk of stating the obvious, I am not on the same level as Munger, not even close.  The fact that he's sat on his hands for over a decade doing nothing and then suddenly pulls the trigger on this... I think we'd be very foolish not to pay a great amount of attention to that.  I don't know of many other people whom I would entrust more with fiduciary responsibility than him, and it's obvious that he is not going to just take a bet on something with DJC's shareholders' money.  He wears that responsibility very heavily.

But I am struggling to get conviction on this to the point where I could 'own' the decision myself. 

But it's Charlie!!

I think the compromise is to shamelessly clone a smallish position.  Granted, if Charlie is not around for much longer then it becomes very hard to have an exit strategy from a shameless clone.  But at that point, I think the focus then turns to Pabrai.  Charlie has clearly shared his secrets with him.

[adhital]

1 hour ago, Tintin said:

Notwithstanding the fact that GAAP rather stupidly obliges companies to record changes in the carrying values of their investments as either profits or losses on their Income Statements, it is not credible to argue that the changes BABA records almost always only go one way - up.  Given that the company is essentially providing VC seed funding to so many different ventures, it's absurd not to see far higher levels of impairment to these assets.  There just isn't that high enough of a success rate when bankrolling start-ups.

It seems that the core e-com is selling anywhere between 4 to 5% earning or FCF yield. Assuming they keep compounding core-earning growth at 20% and if the cost of equity is 7% for this investment, I should expect 12-15% IRR or better depending on core EPS growth, and for long time given remaining TAM. All other balance sheet items like cloud, different ventures etc., can be treated as a free call option.

as raised on this post earlier, what's the probability that the future reinvestment is profitable i.e. exceed its cost of its capital helping core-EPS growth? that's the question. 

[Gregmal]

On 5/14/2021 at 6:02 PM, Gregmal said:

Looks like Dan Loeb dumped this. I have significantly more faith in what guys like Loeb, Tepper, Ackman, etc are doing then the guys everyone worships around here(Watsa, Pabrai. Spier, etc).... I could see Tepper going big on BABA. But Loeb is straight money so its if nothing else, an interesting move. 

Interesting to see Tepper cut this substantially, and then loaded up on energy stuff. Some people just know how to make money, for everyone else, there's value investing...

[TwoCitiesCapital]

On 5/17/2021 at 3:38 PM, Gregmal said:

Interesting to see Tepper cut this substantially, and then loaded up on energy stuff. Some people just know how to make money, for everyone else, there's value investing...

Lol!

[zhengmit]

GMV: I think most people know that GMV is inflated.  It includes that people put in shopping cart but never check out.  It doesn't include returns which should be deducted from GMV.  JD started to use this inflated GMV to report the number in 2017 so you can go back and see.  I think JD's GMV is 43% inflated based on 2016 numbers.  I would assume BABA's GMV is inflated more.

Commissions: they used to report separately so you can figure it out using adjusted true GMV.  Based on my calculation, I think TMall's commission rate is in the range of 10% and Taobao is about 5% as Taobao doesn't charge commission.

Money losing business: I think Tudou (Netflix like) is losing money and earn below cost of capital.  However, if Alibaba is willing to let Tudou go (merge with IQiyi or Tencent), it will immediately yield a lot of money.  I think Gaode (Google Map) is very valuable.  The most obvious one is Cloud.  Assuming 10x forward sales, it is probably worth $130bn (assuming 40% YoY growth), not to mention there are a lot of investments, including Ant Financial.

Valuation: using core profitability Y229.134bn and assuming 20% growth, it is trading at 19.6x forward PE or 15.2x PE excluding Cloud (ignore option expenses and 30% tax rate).  Core profitability is deteriorating: it used to be 78% but now is below 70% in 4Q.  Maybe they are giving discount to CCP demand.  It is a relatively attractive investment opportunity but I just don't see it is a 2x or 3x type.  It is super complex but has lots of optionality.  I also don't know how the culture of the company will change going forward.

[Lakesider]

Do you think product development expenses are owners earnings like PJM suggest above, some of the expense could be treated in the same way as Growth capex? Thinking of how people were wrong on amazon when it seemed unprofitable. 

[LearningMachine]

1 hour ago, zhengmit said:

GMV: I think most people know that GMV is inflated.  It includes that people put in shopping cart but never check out.  It doesn't include returns which should be deducted from GMV.  JD started to use this inflated GMV to report the number in 2017 so you can go back and see.  I think JD's GMV is 43% inflated based on 2016 numbers.  I would assume BABA's GMV is inflated more.

Thanks zhengmit for sharing.  This is super-helpful. I'm curious how credible is your source that GMV inflation is due to including not-checked-out items and returned items?  Are you speculating it as a possibility or you know for sure? 

If they are inflating GMV, that means they are making false statements about either take rate or revenue - because both can't be true if GMV is not true. 

If they are willing to stretch the truth with GMV, is it possible that they are willing to stretch the truth for other things, e.g. take-rate, revenue numbers, cash-flow numbers, etc.?

Anything you know that could explain @Tintin's observation above that even though they claim high operating cash coming in, they have to fund investments using more debt and share sales?  Any chance it is because they are stretching the truth on cash coming in?

Edited May 20, 2021 by LearningMachine

[Arski]

This, of course, depends on whether the Chinese government is willing to allow BABA, but because the Chinese market is experiencing good secular growth and the country will continue to get more important and expand their power in the world, I think BABA has a reasonable chance of becoming the first $10 trillion company in the world.

[zhengmit]

GMV: this is widely known.  

This is BABA's old GMV definition, not sure how it looks now

This is JD's GMV definition, which is modified based on Alibaba's definition.  This happened in 2017 so you can compare results in 2016: reported in 2016 vs. restated 2016 results in 2017 to see how much is inflated.

[Cicero]

@zhengmit The data point on JD is quite compelling. You made a very interesting point that you thought BABA would count items merely in shopping carts as GMV. If they did it would pretty clearly violate their GMV definition as items in a shopping cart can hardly be viewed as "confirmed". What makes think that BABA is doing  exactly that? 

Could it be that the GMV is "only" inflated due to brushing? 

[LearningMachine]

Can folks who know please share some credible data on the accounting questions raised above? 

Anyone has any credible data on whether along with false statements on GMV, they are also making false statements on Revenue, Take Rate, and Cash coming in?

I've already got a position in "wireless nerves" for the AI organism-under-development (:-)), and need a bigger "brain" (cloud computer) position for it at a reasonable price :-). 

Amazon, Google and Microsoft are already pricing in the possibility of developing the brain.  Alibaba is more reasonable-looking and there is a chance it might end up developing part of that brain but hard to trust the numbers in a regime where people are more afraid of saying bad things about CCP and not afraid at all about making false statements to shareholders.

Edited May 21, 2021 by LearningMachine

[adhital]

@LearningMachine I think the main issue we have is that GMV is not a defined accounting term and the numbers are unaudited. In the absence of accounting rules, Alibaba or JD or any companies are allowed to define GMV as it chooses 

[wescobrk]

My apologies if this has already been posted, but does BABA have any hedges for currency exposure? Another potential benefit is if one wanted to have a little less dollar exposure and wouldn't mind owning some renminbi.

Edited May 21, 2021 by wescobrk

[Spekulatius]

1 hour ago, wescobrk said:

My apologies if this has already been posted, but does BABA have any hedges for currency exposure? Another potential benefit is if one wanted to have a little less dollar exposure and wouldn't mind owning some renminbi.

The renminbi is pegged against the USD and pretty much trades in synch. There is no reason for them to be hedging.

[wescobrk]

7 hours ago, Spekulatius said:

The renminbi is pegged against the USD and pretty much trades in synch. There is no reason for them to be hedging.

that's true, I can't believe I asked that question.

I'll blame it on sleep deprivation.

Thanks for the response. 

[gudvangen]

This is just speculation....BABA inflates GMV to 1) Show its bigger market share over competitors 2) Artificially reduce the take rate figures to show CCP that its not misusing the platform powers and making small return.

[gudvangen]

Its tough being a value investor these days when so many promising companies are actually loss making and growing rapidly.  How do you analyze a loss making enterprise with no end in sight ? So I wouldn't fool myself in believing I can predict the outcomes for these venture investments inside BABA.

But simplest way to look at it is take the core-ecommerce business(include CAINIAO,LAZADA,Aliexpress,TAOBAO,TMALL,1688,etc) and put a multiple on this.

Then do your best guess on market value of rest of the businesses. One way is to look at a similar competitor and see its valuation.

Lazada competes with Sea Ltd. which is valued at 130B USD.

Ele.me competes with Meituan which is valued at 215B USD.

Alipay is worth anywhere from 100-250USD depending on if they can get license to run as a financial company with capital and if they don't have to share the proprietary credit scoring data.

Cloud is another 50-100B with reasonable P/S figures.BABA cloud serves 80% of chinese corporates and unlike US where cloud services are becoming commodities, in China cloud providers have to first help businesses digitize data and then put it in cloud. Since the cloud services are more customized for each vertical its a much more sticky/moaty business vs american counterparts. So how much is such business worth in future ? I would guess a lot.

If you subtract the estimtated value of these investments from BABA's market cap Alibaba looks damn cheap. But you won't be able to come to the same conclusion via doing a DCF or putting a multiple on net income. Just like you won't be able to use PE ratios and justify  valuations for Meituan or Sea Ltd.

So honestly  a simple thought process for buying BABA for the core ecommerce assuming at some point you would be able to spinoff/sell Alipay/Ele.me/Lazada/Cloud Computing at market valuations. If tech bubble doesn't totally crash in the next 5-10 yrs these investments will only get more valuable over time. Although you may not see positive contribution to  income statements from these businesses value is still being created(atleast for now) if you trust the comps.