BABA - Alibaba

[n.r98]

49 minutes ago, gudvangen said:

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.

I dont know if Lazada is even considered a formidable competitor to Sea anymore. Valuing it this way assumes that Sea *is fairly valued and *Lazada deserves a comparable multiple or so. Assuming increasing returns to scale, the runner-up is often left by the roadside. Not sure if margin profiles are similar as well. It could be adjusted I know and I see your point; the complexity of their business only renders a sum of the parts as satisfactory. The back of the hand multiples don't look too expensive though but I doubt it's due to inefficiency; or maybe it is and a variant perception is needed like Buff's "view" on Apple.

What I don't understand is, why Baba and not Amazon? Is the interest derived from Munger's investment or is it because of the price fall from the 52 week high? Amazon seems like an overall better franchise with not much formidable competition, shorter annual report(it matters) and situated in a more transparent jurisdiction. 

Edited May 23, 2021 by n.r98

[jgsurita]

In my view Alibaba and Amazon are at different stages of growth.

Let's remember 68% of Amazon' sales come from the US (it was 60% in 2014). So we have a company highly dependent on the US economy growth. The expected GDP growth for the US economy is under 3% annualy until 2040.

Alibaba has 10% of its revenue coming from China, which means a company dependent on China's economy. But the expected GDP now is much higher, around 6% annualy until 2040.

So we have 2x compounding growth for China's economy. That's only GDP, when we think that China has been through a change to consumption, where people are leaving poverty, growth in e-commerce consumption might be even higher than the number provided by the GDP. The penetration of smartphones is 80% in the US against 60% in China, also a gap in favor of China's e-commerce growth.

If we check the numbers, both companies have similar earnings, Amazon costs 3x what Alibaba does and Alibaba has at least 2x growth ahead. That's why I think Alibaba is really cheaper than Amazon. Of course there are some negative points for Alibaba, such as government intervention, but I think it is not in the interest of China to reduce growth of its companies, since there are US companies growing quickly such as Amazon, Alphabet and Facebook.

But that's just a comparison between the two. By analyzing Alibaba alone, I see a well managed tech company, which owns great leading businesses, have been growing for 30% per year, high profit margin (sign of moats!) and keeps looking for further great businesses to acquire, which are situated in a high growth economy, just by a ~25 PE ratio. Sounds really cheap to me!

Edited May 25, 2021 by jgsurita

[Munger_Disciple]

Good Bloomberg podcast with Carson Block: https://www.bloomberg.com/news/audio/2021-05-28/carson-block-on-the-short-selling-market-podcast-kp8otkxa

Block presents a scary picture of what goes on inside Chinese companies. 

[LearningMachine]

On 5/30/2021 at 4:16 PM, Munger_Disciple said:

Good Bloomberg podcast with Carson Block: https://www.bloomberg.com/news/audio/2021-05-28/carson-block-on-the-short-selling-market-podcast-kp8otkxa

Block presents a scary picture of what goes on inside Chinese companies. 

Thanks @Munger_Disciple for sharing.  Looks like we need to be super-careful with Chinese companies, especially those that are only listed in U.S. exchanges. 

Has anyone seen any cases of Chinese regulators going after companies listed on Chinese exchanges for making false statements to Chinese shareholders?  Looks like CCP is now going after companies for making false claims in advertisements to Chinese consumers. 

Wondering when will they start going after companies on Chinese exchanges for making false statements to Chinese shareholders? 

Is it just a matter of time, or does looking after bigger "consumer" population base gets CCP more political power than looking after smaller "shareholder" population base?

Edited June 1, 2021 by LearningMachine

[RadMan24]

Lots of fear in these China tech names. Tencent, Alibaba, etc. all are significantly undervalued. If you don't want to own Alibaba itself, buy an ETF/Index, most have Tencent/Alibaba at a combined weighting near 20-30%. If you have a 10+ year time horizon, this is a no brainer. 

[sundin]

Another positive signal on this name.  

https://www.cnbc.com/2021/06/03/china-approves-jack-mas-ant-group-to-operate-consumer-finance-firm.html

[LearningMachine]

Quote

 

Ant will hold a 50% stake in the new entity and contribute 4 billion Chinese yuan ($625.93 million) in registered capital, the China Banking and Insurance Regulatory Commission said on Thursday.

Another six shareholders will contribute 4 billion yuan and hold the remaining 50%. 

 

Wonder who are these other six shareholders, who reduce Alibaba's share effectively to 16.5% from 33% (which itself was reduced from 100% under the cover of getting "regulatory approval")?  Any of these six shareholders transparent? 

Were "regulatory issues" just a cover to take 50% of yet another new entity? 

Edited June 3, 2021 by LearningMachine

[Mikekryan]

3 hours ago, LearningMachine said:

Wonder who are these other six shareholders, who reduce Alibaba's share effectively to 16.5% from 33% (which itself was reduced from 100% under the cover of getting "regulatory approval")?  Any of these six shareholders transparent? 

Were "regulatory issues" just a cover to take 50% of yet another new entity? 

Which entity is this? Are there going to be more Regulatory issues as this is the 2nd impact to Alibaba?

[LearningMachine]

1 hour ago, Mikekryan said:

Which entity is this? Are there going to be more Regulatory issues as this is the 2nd impact to Alibaba?

It is called Chongqing Ant Consumer Finance Co.

"Ant made a capital contribution of 4 billion yuan for a 50% stake, while Hong Kong-based Nanyang Commercial Bank holds a 15% stake while Taiwan’s Cathay United Bank holds 10%, it said.

Other co-founders include battery maker CATL and Alibaba-backed intelligent transport services firm China TransInfo Technology, and China Huarong Asset Management Co." See https://www.metro.us/ant-group-consumer-finance/

Edited June 3, 2021 by LearningMachine

[Spekulatius]

This entity with 2X$625M=$1.25B in capital seems too small to be solution for the regulatory issues that Ant capital is having.

The CCP stated initially when Ant was filing their IPO paperwork, that Ant was running a covert lending operation without having any capital or license to do so, and distributing their risk to banks.

If $1.3B in capital is enough to levitate the financial risk, this would have been a nothing burger. I think this is not the end of the story - it is possible that Ant is doing more JV’s with other bank, or the whole regulatory issue was just a pretense for something else.

Again, we don’t know and this is just another Russian doll in the BABA conglomerate.

 

Edited June 5, 2021 by Spekulatius

[alertmeipp]

So now Ant group is getting linked up with couple CCP backed companies and they can now offer more services than original planned. Will be interesting to see if they can charge fee for data access from other parties.

BABA's goal has always been about building a complete eco-system for online economy.  Glad to see them go for market share by re-investing. That's exactly what Amazon did in their early years.

[Xerxes]

I sold all my shares this morning, for several reasons:

 

- this has been a since 2014-long term investment for me. With cost as low as ~$67 USD, and some higher. 

- needed to raise cash, and the weakest link happens to be that one.

- i am ok with all the regulatory pressure within China, but not keen on the whole de-listing thing with my broker.

- yes, i am selling on a low multiple (high cash flow yield) basis

- still keeping Tencent (i own the pinksheet)

 

My broker is RBC, and a friend of mine has had a bad experience when his China Mobile got de-listed few months ago. Basically, he was told that he is on his own. (i.e need to do all the legwork to transfer illiquid shares to another bank (probably need to take out of TFSA)). I presume Charlie Munger and Masayoshi Son won't have a issue with their broker to convert to Hong Kong shares, but I am not them. I don't mind holding companies through thick and thin (as evidence of me holding since 2014), but "thick and thin" doesn't include wasting my time with broker that is not interested to help, specially dealing with taking out of RRSP consequences etc.

 

On a different note, i think my compounded return was about 10% since 2014 on Alibaba. Not really good when compared against S&P500 I am guessing, and definitely not good, when including also risk-adjusted return. So do I really think future return would be any different. In any case, i can still go buy Hong Kong shares or more indirectly Softbank at some point, though the latter is now a far less correlated proxy for Alibaba than it was couple of years ago.

 

So, all in all, average return on a higher unit of risk.

 

Good news is that now i got a whole pile of cash that i can think about how best to deploy.

[Monsieur_dee]

Very interesting. Which broker did your friend use? And which broker do you use? I didn't think they would have him fill out all the paperwork. 

 

If Baba got delisted and traded on otc in your TFSA or RRSP. What would be the issue since you're allowed to own otc stocks in TFSA /RRSP as long as its listed on a designated exchange. Or are you confident you'd have to sell? Was your friend forced to sell? 

 

Thanks for the Canadian perspective. 

[Xerxes]

We both have RBC Direct Investing.

For sure, one can buy pink-sheet either in RRSP and/or TFSA. That is how I own Tencent.

 

He was not forced to sell. He still has "those phantom" shares but the value showing at zero.

 

Perhaps the issue for them (RBC) is that they can only convert New York shares into actual Baba shares in Hong Kong (and not any pink-sheet), but since RBC doesn't provide trading services in Hong Kong and elsewhere that is causing issues. You, as an investor, cannot trade in Hong Kong (or for that matter LSE or elsewhere) shares on RBC but you can trade pinksheets. So, you cannot make a phone call and simply ask RBC to flip. I did call RBC back Nov last year and ask them the very same question, the person how i spoke to was actually knowledgeable but even him wasn't able to provide warm and fuzzy answer. (i.e. no clear roadmap).

 

That said, there is usually a lag time between a de-listing (if and when) and actual de-listing. And if one really wants Alibaba, one either needs to buy on Hong Kong (either pinksheet or actual shares on exchange) or be sure damn sure that his/her broker will support a de-listing and re-listing into Hong Kong (i.e. flip). I am guessing all the international broker platform would do that but RBC is North American centric. Can you believe that RBC told my friend, that he maybe have to call the company (China Mobile) directly ??

 

On my comment about RRSP/TFSA, if i am holding Baba shares in TFSA and now are de-listed. There is no market for them. They appear at zero (my friend's China Mobile appears at zero in his TFSA), so he has to open a trading account with another bank (HSBC or perhaps an international platform), probably need to withdraw from his TFSA the illiquid shares (doing so will likely destroy TFSA capacity that you cannot backfill/use next year, because the value that the system sees is zero). Why does he need to withdraw from TFSA, i not sure (but i think) as Canadian you may not to be able to own international assets except for U.S. in ones registered account. Though I may be wrong.

 

This is not a when, it is an if and when ... so very likely that it may not happen, but bottom line, no clear path for me personally and just too much trouble if it does happen, and all this for what ? a Cayman Islands-registered entity. I just got better things to do. 

Edited June 8, 2021 by Xerxes

[Spekulatius]

^ For that very reason, I sold my BABA shares, but kept my HK 9988.HK shares when I reduced my position a few days ago. The possible delisting is just another issue on the horizon.

I think if I decide to increase my position in these Chinese companies, I am just going to buy either SoftBank or Naspers and call it a day.

[Gregmal]

While I havent sold, I am kind of sharing the same sentiment and definitely considering it. I dont have any problem with the business risks, or even the China risks, but the US approach to these things under Trump and now carrying over with Biden is very off-putting. As is how kind of consensusy this became after all the Munger followers jumped in. I hate being in crowded trades. We should have got more of a run than we did, and had a lot of money come in and soften the fall. Many of which I assume dont fully understand or appreciate what theyre dealing with. In absolute terms, I actually think the China tech cos are extremely attractive. But part of that is likely because its so difficult and will continue to be difficult for a US investor to navigate them. 

[skanjete]

Why do you guys think a delisting could be imminent? 

I thought a delisting could be implemented at the earliest in 3 years?

This seems plenty of time for BABA or China/US to iron out some of the more pressing issues. 

Besides, there's always the possibility to open an account with a broker which allows transfer to Hong Kong shares. 

[decko]

On 6/7/2021 at 3:23 PM, Xerxes said:

We both have RBC Direct Investing.

For sure, one can buy pink-sheet either in RRSP and/or TFSA. That is how I own Tencent.

 

He was not forced to sell. He still has "those phantom" shares but the value showing at zero.

 

Perhaps the issue for them (RBC) is that they can only convert New York shares into actual Baba shares in Hong Kong (and not any pink-sheet), but since RBC doesn't provide trading services in Hong Kong and elsewhere that is causing issues. You, as an investor, cannot trade in Hong Kong (or for that matter LSE or elsewhere) shares on RBC but you can trade pinksheets. So, you cannot make a phone call and simply ask RBC to flip. I did call RBC back Nov last year and ask them the very same question, the person how i spoke to was actually knowledgeable but even him wasn't able to provide warm and fuzzy answer. (i.e. no clear roadmap).

 

That said, there is usually a lag time between a de-listing (if and when) and actual de-listing. And if one really wants Alibaba, one either needs to buy on Hong Kong (either pinksheet or actual shares on exchange) or be sure damn sure that his/her broker will support a de-listing and re-listing into Hong Kong (i.e. flip). I am guessing all the international broker platform would do that but RBC is North American centric. Can you believe that RBC told my friend, that he maybe have to call the company (China Mobile) directly ??

 

On my comment about RRSP/TFSA, if i am holding Baba shares in TFSA and now are de-listed. There is no market for them. They appear at zero (my friend's China Mobile appears at zero in his TFSA), so he has to open a trading account with another bank (HSBC or perhaps an international platform), probably need to withdraw from his TFSA the illiquid shares (doing so will likely destroy TFSA capacity that you cannot backfill/use next year, because the value that the system sees is zero). Why does he need to withdraw from TFSA, i not sure (but i think) as Canadian you may not to be able to own international assets except for U.S. in ones registered account. Though I may be wrong.

 

This is not a when, it is an if and when ... so very likely that it may not happen, but bottom line, no clear path for me personally and just too much trouble if it does happen, and all this for what ? a Cayman Islands-registered entity. I just got better things to do. 

 

 

 

I own BABA in one of my funds...  At IBKR.    thoughts on Interactive?  before I have to call their dismal customer service.

 

 

 

 

[Spekulatius]

15 minutes ago, decko said:

 

 

 

I own BABA in one of my funds...  At IBKR.    thoughts on Interactive?  before I have to call their dismal customer service.

 

 

 

 

Before I would call IBKR's customer service, i would just sell BABA and buy 9988 in HK. Ought to be way easier.

[Monsieur_dee]

Again this is just for team Canada. I assumed I'd be able to swap my adrs for shares on HK exchange with questrade. Spoke to them today and no. Called IB & same answer. However I am able to flat out buy the Baba HK shares in a cash account through ibkr. Or they could even swap adrs in a cash account for $500. Another option for me is purchasing them through questrade in my RRSP or TFSA. For $195 USD per trade . 

 

Americans seem to be fine as they will be able to swap. 

 

Any other Canadians with other brokers that have some insight? Maybe we get screwed as a whole & no Canadian broker offers a swap. 

 

 

[Xerxes]

Unfortunately i only work with RBC so wouldn't know anything outside that.

Just out of curiosity can we, Canadians, hold direct Hong Kong or LSE or Bourse de France shares in our registered account (RRSP / TFSA) ?

 

But overall I agree with Spek,

 

From a portfolio management point of view (putting aside all the de-listing concern), is Alibaba, the business, is best use of capital at this point, given all other alternatives ?  I presume the answer is yes for many.

 

If it is yes, than buy direct through Hong Kong as a new position. And/or sell in NY and buy there direct if working with an existing position. Or convert if you can, if brokers allows it.

 

Wasn't the MSCI index moving its Alibaba holding from New York to Hong Kong.

Edited June 9, 2021 by Xerxes

[Monsieur_dee]

14 minutes ago, Xerxes said:

Unfortunately i only work with RBC so wouldn't know anything outside that.

Just out of curiosity can we, Canadians, hold direct Hong Kong or LSE or Bourse de France shares in our registered account (RRSP / TFSA) ?

 

But overall I agree with Spek,

 

From a portfolio management point of view (putting aside all the de-listing concern), is Alibaba, the business, is best use of capital at this point, given all other alternatives ?  I presume the answer is yes for many.

 

If it is yes, than buy direct through Hong Kong as a new position. And/or sell in NY and buy there direct if working with an existing position. Or convert if you can, if brokers allows it.

 

Wasn't the MSCI index moving its Alibaba holding from New York to Hong Kong.

Yes I read that about the msci too. 

 

I personally don't think the delisting is going to happen. Just short term noise. But the fact that my shares would be 'ghost shares' does make me a bit uncomfortable. 

 

If you go on cra website you're allowed to hold securities as long as they trade on 'designated exchange' 

 

https://www.canada.ca/en/department-finance/services/designated-stock-exchanges.html

 

At $195 USD a trade with questrade. I may be tempted to sell the ADR's & buy them on the Hong Kong exchange. 

 

I'm going to call a few more brokers but I'm guessing it will all be the same. 

[formthirteen]

The Sad End of Jack Ma Inc.:

https://www.forbes.com/sites/georgecalhoun/2021/06/07/the-sad-end-of-jack-ma-inc/

 

“It is hard to overstate the importance in China of Mr. Ma and his two companies. They have become synonymous to innovation. The media in China calls the country’s rising tech sector, ‘The era of Ma.’”

 

 

[Xerxes]

^^

If the Ma Inc. had lost half of its value since the Ant debacle, than selling 30% below peak, ain't that bad.

[Spekulatius]

Adding a hypothetical 50% IPO pop to Jack Ma's value is a bit disingenuous.

Also, how much did pay Jack Ma exactly for his Ant stake? If there is still 30% of $106B in value left for something he got basically for free, well that isn't that bad either.