BABA - Alibaba

[Lakesider]

China retail growth.

 

[CorpRaider]

I looked at it. From what I can tell first Jack Ma (with assistance from Tsai...who is still involved) stole Alipay (exploiting the weakness of the VIE) from Yahoo, etc...now CCP is taking it from Ma.  Too hard. 

Edited April 19, 2021 by CorpRaider

[wabuffo]

... first Jack Ma (with assistance from Tsai...who is still involved) stole Alipay (exploiting the weakness of the VIE) from Yahoo, etc...now CCP is taking it from Ma.

The irony of the situation is that this company is named after a fable about forty thieves.... LOL.

wabuffo

 

Edited April 19, 2021 by wabuffo

[LearningMachine]

Possibly another theft:

Quote

Minmetals said in a statement that it received a notice from the State Administration for Market Regulation in recent days about an investigation into the joint venture formed in 2015, in which Alibaba transferred its 44% stake to an unrelated firm in 2019.

Source:https://finance.yahoo.com/news/chinas-market-regulator-investigates-alibaba-115803373.htm

[CorpRaider]

2 hours ago, wabuffo said:

... first Jack Ma (with assistance from Tsai...who is still involved) stole Alipay (exploiting the weakness of the VIE) from Yahoo, etc...now CCP is taking it from Ma.

The irony of the situation is that this company is named after a fable about forty thieves.... LOL.

wabuffo

 

Haha!  Wow I'm dense for not seizing upon that opportunity for a joke!

[Jmac42600]

Just to put a comment here, I'm long BABA. Even if Revenue growth rate slows to 20%, I still think the stock is cheap at current levels. This business has so many call options baked in, their current profitability level is not reflective of their overall cash generating ability because of a lot of their investments. This is a similar dynamic to Facebook, Google, Amazon, and other big tech. They are buying unprofitable businesses and scaling them to make them profitable. Sure, margins can contract in the short term because of take rates decreasing but its likely that they don't contract much and possibly expand once some of their big bets grow to a larger % of revenue and become profitable. A few posts above it even shows Chinese Market Retail as a % of Revenue going from 77% of revenue in 2015 to 47% of revenue today, and I would expect that trend to continue. I think its a fair point to say that many of the businesses they have acquired are in competitive markets, however you can't then value them all at 0 just because there's competition. Most of the industries they've entered have enough TAM (that is growing at high rates as a bonus) for multiple players, and Alibaba has scale and resource advantage. People valuing Amazon in 2001 after the crash valued AWS at 0, and they clearly missed the opportunity there as it was near impossible to value that part of their business. 

 

Again, looking at next quarters take rate % is taking a very short term view on a business with long term potential. I would not be shocked to see Alibaba growing at high single digits in 10-15 years from now, and I don't believe that's priced into the stock today. That's my take.  

[Pistachio_Lawyer]

Problem with living under a dictatorship is that even when you don’t want anything to do with the party, the party wants something to do with you.

Jack Ma under new CCP investigation relating to ANT IPO

https://www.wsj.com/articles/ant-ipo-approval-process-under-investigation-by-beijing-11619532022

Edited April 27, 2021 by Pistachio_Lawyer

[decko]

What am I missing with BABA?  I dont see the valuation as being cheap... and im being honest with that statement.  I am not trying to insinuate anything.  I would love to hear some opinions or read some links to enlighten my dull mind.  thanks

[cubsfan]

^ You're not missing anything. It's not "cheap" - it's no cigar butt. It all depends on how you value growth.

It's quality at a reasonable price. So it's going to depend on your future growth assumptions.

If you asked Charlie Munger, he might say:

"If a business earns 6% on capital over forty years, you’re not going to make much different than 6% return, even if you buy it at a huge discount. Conversely, if a business earns 18% on capital, you’ll end up with one hell of a return long term, even if you pay an expensive looking price.”

-- Charlie Munger ( stresses the importance of high ROE, ROIC or ROC over long periods of time due to compounding impact)

[LearningMachine]

2 hours ago, cubsfan said:

^ You're not missing anything. It's not "cheap" - it's no cigar butt. It all depends on how you value growth.

It's quality at a reasonable price. So it's going to depend on your future growth assumptions.

If you asked Charlie Munger, he might say:

"If a business earns 6% on capital over forty years, you’re not going to make much different than 6% return, even if you buy it at a huge discount. Conversely, if a business earns 18% on capital, you’ll end up with one hell of a return long term, even if you pay an expensive looking price.”

-- Charlie Munger ( stresses the importance of high ROE, ROIC or ROC over long periods of time due to compounding impact)

Munger's statement is right on.

That said, it is not easy to predict which businesses will be able to grow 18% per year.  If you look at the top 10 highest valued businesses in 2000 after the crash, and compare them to where they are today, I don't think any grew 18% annually since then. 

Also, when you look at businesses that were able to generate 18%, with the right regulations, you can easily make sure they don't gain pricing power over their customers, monopsony power over their suppliers, can't leverage market power to grow their businesses, and can't acquire new businesses, which can then cause them to not grow 18% per year. 

China is actually taking a more market competition based approach to ensure more value goes to customers, merchants, competitors, etc. by making sure competition keeps on happening among its private businesses, which should do well for its economy overall at the expense of shareholders, while the U.S. Antitrust is almost asleep at wheel, and ok with market power getting concentrated and shareholders getting rewarded to the extent that it is ok for Apple and Google to charge 30% on their App stores.  China won't let that happen. 

Single newspaper in town can be worth orders of magnitude more than one of two or three newspapers in town.  Similarly, a single online retailer can be worth orders of magnitude more than one of multiple online retailers.  China is set on making sure it has equivalent of multiple newspapers/retailers in town in its tech sectors.

So, I think entry-price and position size does matter on Alibaba.  The entry price should be lower to reflect that Alibaba will likely not be allowed to milk as much as similar businesses in the U.S. are allowed to milk, and that high growth expectations of earnings might not pan out. 

Edited April 27, 2021 by LearningMachine

[DooDiligence]

2 hours ago, LearningMachine said:

Munger's statement is right on.

That said, it is not easy to predict which businesses will be able to grow 18% per year.  If you look at the top 10 highest valued businesses in 2000 after the crash, and compare them to where they are today, I don't think any grew 18% annually since then. 

Also, when you look at businesses that were able to generate 18%, with the right regulations, you can easily make sure they don't gain pricing power over their customers, monopsony power over their suppliers, can't leverage market power to grow their businesses, and can't acquire new businesses, to make sure they don't grow 18% per year. 

China is actually taking a more market competition based approach to ensure more value goes to customers, merchants, competitors, etc., which should do well for its economy overall at the expense of shareholders, while the U.S. Antitrust is almost asleep at wheel, and ok with market power getting concentrated and shareholders getting rewarded to the extent that it is ok for Apple and Google to charge 30% on their App stores.  China won't let that happen. 

Single newspaper in town can be worth orders of magnitude more than one of two or three newspapers in town.  Similarly, a single online retailer can be worth orders of magnitude more than one of multiple online retailers.  China is set on making sure it has equivalent of multiple newspapers/retailers in town in its tech sectors.

So, I think entry-price and position size does matter on Alibaba.  The entry price should be lower to reflect that Alibaba will likely not be allowed to milk as much as similar businesses in the U.S. are allowed to milk, and that high growth expectations of earnings might not pan out. 

I think it's more about increasing capital requirements & regulating online consumer loans, in order to put them on a more level playing field with state owned banks, who've complained about losing market share to them.

"Chinese state banks have been pushing for Beijing to curb fintech giants for years with limited success. At one point state media called Ant’s money-market funds “blood-sucking vampires” for siphoning off banks’ deposits. The move last week was a “watershed moment” for the financial regulatory framework, according to Daiwa Securities Group Inc."

www.business-standard.com/article/international/chinese-banks-biggest-winners-from-new-regulations-that-botched-ant-ipo-120111000224_1.html

Edited April 27, 2021 by DooDiligence

[decko]

Yes, agreed on valuation and Mungers belief... Most of us do..  However, Does anyone know the main reason for this belief, that its a great business, and that it will excel in the future.  What is its main advantage over others, to the point?  

[cubsfan]

^ You have an enormous moat based on a network effect. The more buyer and sellers join the BABA platforms, the more valuable it becomes to those users. Just look at Amazon. You have all kinds of online marketplaces that are tied together, in a country/area where there is a tremendous shift to the middle class consumer. The value of the platform just gets more valuable, especially when they seek to drive down the transaction cost. Tmall & Taobao are China's 2 most popular online shopping malls. If you trust it, and that becomes your default option - it's just harder to replace and compete with. Throw in globalization across South East Asia - and you potentially have a very long runway for growth beyond China.

[Pistachio_Lawyer]

53 minutes ago, cubsfan said:

^ You have an enormous moat based on a network effect. The more buyer and sellers join the BABA platforms, the more valuable it becomes to those users. Just look at Amazon. You have all kinds of online marketplaces that are tied together, in a country/area where there is a tremendous shift to the middle class consumer. The value of the platform just gets more valuable, especially when they seek to drive down the transaction cost. Tmall & Taobao are China's 2 most popular online shopping malls. If you trust it, and that becomes your default option - it's just harder to replace and compete with. Throw in globalization across South East Asia - and you potentially have a very long runway for growth beyond China.

I think the comparison to Amazon may not be accurate. Amazon operates in a different jurisdiction than BABA. When you purchase an Amazon stock you own a piece of the company. When you buy BABA you're buying into a special investment vehicle that exists solely because CCP has allowed it to exist. In United States, over regulation may lead to lengthy and expensive lawsuits. In China, the CCP can make CEOs disappear. 

 

[concerto]

12 minutes ago, Pistachio_Lawyer said:

I think the comparison to Amazon may not be accurate. Amazon operates in a different jurisdiction than BABA. When you purchase an Amazon stock you own a piece of the company. When you buy BABA you're buying into a special investment vehicle that exists solely because CCP has allowed it to exist. In United States, over regulation may lead to lengthy and expensive lawsuits. In China, the CCP can make CEOs disappear. 

 

I don't particularly understand this argument. What is the probability that China would actually do this? If they took down Alibaba because of the VIE structure, then all public Chinese companies would pretty much lose the entirety of their value overnight because they all rely on VIEs. That would be trillions of dollars in market cap vaporized instantly. How would that help the CCP maintain power and authority?

[DooDiligence]

6 minutes ago, concerto said:

I don't particularly understand this argument. What is the probability that China would actually do this? If they took down Alibaba because of the VIE structure, then all public Chinese companies would pretty much lose the entirety of their value overnight because they all rely on VIEs. That would be trillions of dollars in market cap vaporized instantly. How would that help the CCP maintain power and authority?

Bargaining chip for international negotiations?

[Pistachio_Lawyer]

1 minute ago, concerto said:

I don't particularly understand this argument. What is the probability that China would actually do this? If they took down Alibaba because of the VIE structure, then all public Chinese companies would pretty much lose the entirety of their value overnight because they all rely on VIEs. That would be trillions of dollars in market cap vaporized instantly. How would that help the CCP maintain power and authority?

We're already seeing some of that with the scrutiny Jack Ma is facing. The CCP will tolerate foreign investment in so much as it benefits its own interests. 

I guess what I am trying to say is that BABA is a fragile bet. There is a hidden downside that is being ignored because we frequently compare the stock to Amazon.

[wabuffo]

I don't particularly understand this argument. What is the probability that China would actually do this? If they took down Alibaba because of the VIE structure, then all public Chinese companies would pretty much lose the entirety of their value overnight because they all rely on VIEs. That would be trillions of dollars in market cap vaporized instantly. How would that help the CCP maintain power and authority?

The history here is one of stealing the good assets and leaving behind the poor return, capital-intensive assets that need a steady stream of US bagholder shareholder money.  Ant Financial/AliPay was the test case.  It happened before - it will probably happen again.   There is no foreign shareholder protection against that happening.

Jeff Bezos however can't steal the Amazon cloud service business from Amazon shareholders and place it in a company that he solely controls.

wabuffo

Edited April 28, 2021 by wabuffo

[n.r98]

I don't get the direct comparison either. First it was BABA as the Amzn of China, then it was JD.com if I'm not mistaken. Now there's a fierce contender in PDD. Ofc there are nuances, ARPU, logistics, types of goods sold, quality etc. But one should consider that Amazon is almost literally a monopoly in the Western world with no definite threatening contender yet. 

But I'm no expert in the Chinese space and many smart fundies are playing the field and have picked their horseman of choice. Just perhaps worth questioning whether one truly understands the space he/she is dealing in or is it just some mixture of anchoring/confirmation bias? 

Edited April 28, 2021 by n.r98

[concerto]

6 minutes ago, wabuffo said:

I don't particularly understand this argument. What is the probability that China would actually do this? If they took down Alibaba because of the VIE structure, then all public Chinese companies would pretty much lose the entirety of their value overnight because they all rely on VIEs. That would be trillions of dollars in market cap vaporized instantly. How would that help the CCP maintain power and authority?

The history here is one of stealing the good assets and leaving behind the poor return, capital-intensive assets that need a steady stream of US bagholder shareholder money.  Ant Financial/AliPay was the test case.  It happened before - it will probably happen again. 

wabuffo

I agree and see this (perhaps a less draconian version of this) as the largest regulatory risk to foreign shareholders. I wouldn't be surprised if, at some point, BABA (and perhaps all large Chinese megacap tech businesses) will transition to some sort of hybrid SOE structure where the CCP exercises control and manages the business for the benefit of the Party and not for shareholders. In other words, a structure similar to what the Chinese telcos are today, which has driven consistently mediocre results for the past few years.

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.

[wabuffo]

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

Edited April 28, 2021 by wabuffo

[concerto]

Just now, 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.

wabuffo

 

Got it, I misunderstood. You're right.

[DooDiligence]

Yeah, I'm in over my head (as usual) and sold out for a small gain. If Munger would not have bought, I wouldn't even be looking here.

[cubsfan]

BABA is more like Google than Amazon. It's an advertising business model doing transactions at cost basically. BABA clobbered Ebay with this approach. There is no disputing that there is competition, no one said they are a monopoly. But their leadership is clear. My position is sized based on the VIE structure - yeah - US politics could interfere with BABA - same as Apple in China. My Berkshire position is 20%, BABA will never come close to this. Everybody has to make their own growth assumptions on BABA. My opinion, the runway is long in China and SE Asia. Why can't the consumer space grow 20% per year in China for the next few years??  It's underdeveloped and shifting somewhat from solely an export economy.

You also have a terrific cloud business, which BABA leads in China. That business is in it's infancy. Look what AWS has turned into for Amazon. You have other skunk work businesses that may turn into leaders just like Tmall and Taobao. The network effect of these business is not at all hard to see.

Anyone that is frightened of the VIE story or lack of China internal growth shouldn't touch BABA. 

 

[Lakesider]

On 4/27/2021 at 5:29 PM, decko said:

What am I missing with BABA?  I dont see the valuation as being cheap... and im being honest with that statement.  I am not trying to insinuate anything.  I would love to hear some opinions or read some links to enlighten my dull mind.  thanks

One question I have been asking myself that has brought me great sucess with recently is, "How long will it be until the current valuation is cheap using simple metrics like PE?"  

You might find this as helpful as I have or might not get why I find it helpful at all.