No. of Recommendations: 13
Some extracts and comments from reading the Alibaba report.
Revenue growth 5% YoY.
Adjusted EBITDA margin decreased from 21% to 20%.
“As of December 31, 2023, we had a total of 219,260 employees, compared to 224,955 as of September 30, 2023.”
“We increased our investment in strategic priorities.”
“Increase of US$25 billion to our share repurchase program.” Well this is hugely significant and has the potential to make material reduction in the share count and of course increase existing shareholders ownership at very depressed prices. I have always wondered how much can companies actually buy back without driving up the price. I presume the just buy a percentage of the daily volume up to a given price. Given where the share price has been for the last while they must surely be hoovering up a lot of shares, with such extreme selling from Western institutions. But it’s not moving the share price up. Maybe this will start to happen over the coming months as they execute this repurchase programme. $25 billion is 14% of the current market cap.
Adjusted EBITA (excluding Sun Art Youko impairment & share based compensation) increased 2% YoY to $7.443 m.
Net income, a decrease of 77% YoY, primarily attributable to mark-to-market of equity investments (certainly fits with current rout in Chinese equities!) and the aforementioned impairments. Excluding: SBC; investment losses; impairment of goodwill; and other items: non-GAAP net income (or as Charlie Munger might have called, bullshit earnings) there was a small decrease of 4% to $6,754m. In fairness to BABA, Charlie would perhaps agree that all of those items, with the exception of SBC, are potentially non-recurring, non-cash items and not meaningful for analysis purposes.
Net cash from operating activities, was $9,115m, a decrease of 26% YoY. That is potentially more of a concern. Having said that, I remember the last time I looked at this number, it was unusually high previously, so there may be all kinds of chop around this number. Later they do talk about timing of tax payments and changes in working capital. The margin of safety with this valuation is comforting in the context of big changes in this number for reasons I can’t or haven’t tried to verify. Margin of safety is perhaps not a great concept with BABA, given the growing reputation of the CCP.
Free cash flow (Op CF less capex I believe) was $7,963m, a decrease of 31% YoY. The fact that it decreased more than Op CF, does suggest they invested more in capex, but they also note time differences of income tax payments and working capital. Annualised that would be $31,852m. But that is not taking seasonality into account. SBC P&L expense was $876 million in the Q, annualised that would be $3.5 billion.
We know FCF decreased 31% YoY in Q end 31 Dec 23. The four quarters of FCF look like this.
Q Mar 23 $4,698 m
Q Jun 23 $5,391 m
Q Sep 23 $6,196 m
Q Dec 23 $7,963 m
If we crudely assume that the 31% YoY decline happens again over the next 3 quarters, the FCF would look like this.
Q Dec 23 $7,963 m (Actual)
Q Mar 24 $3,242 m (Projection)
Q Jun 24 $3,720 m (Projection)
Q Sep 24 $4,277 m (Projection)
That would equate to a FCF before SBC annual run rate (with the 31% recent decline baked in) of $19,201 million. Take off SBC of $3.5 billion is $15,701 million FCF after SBC. The report, at least partly, attributes the decline in FCF to: changes in working capital; timing of tax payments and increases in growth capex. If that is true, then my 31% haircut is materially understating the earnings power. However, we know the organisation is in the middle of a storm on multiple fronts and there is the CCP risk.
Apple tells me the market cap is $184B. Take off $68 billion cash (see below) and divide by the $15.7B FCF (31% forward haircut and after SBC) gets me to a multiple of 7.4x (EV/FCF). Also note quite unbelievably, this excludes non-current equity securities and other investments of $31.3 billion AND investments in equity method investees (e.g. Ant Group presumably) of $29.1 billion. Even if those investments are worth a lot less than the value on the balance sheet (which is after recent impairments), we are getting all of that value for free. It’s kind of a ridiculously depressed valuation.
Unless:
A. The business is in terminal decline, or
B. The CCP completely disregards international property rights
(Cash, ST investments, restricted cash and escrow and short term equity securities, as at 31 Dec 2023 was $92 billion less debt of $23.3 billion = 68.7 billion.)
Is the business in terminal decline?
Clearly the Chinese economy has slowed massively and there are well telegraphed issues with the important property sector. Certainly, plenty of macro headwinds. But that might not last forever. Revenue growth of 5% is not suggestive of a group of businesses in terminal decline. Adjusted earnings and cashflows have declined, so they are certainly having a hard time. That fits with the growth experienced by key competitors and the incredible battering the organisation has endured from the CCP and the resulting changes in management and strategy. Not to mention being caught off guard by rising competition. Kind of a perfect storm. Maybe I’m a delusional bag holder, but I’ll take steady revenues and some margin contraction, given everything that has happened against the cheap price and conclude with continue to hold and see what happens over the next 5, 10 and 20 years.
Taobao and Tmall -- are the main profit drivers. Incredibly important to see what’s happening here. Some of the comments from the report.
“We are in the process of revitalizing Taobao and Tmall Group and positioning it for future growth. Our growth strategy is to put users first, build ecosystem for brands and merchants to thrive on our platform, and realize technology-driven innovation. We are committed to building an e-commerce ecosystem where brands, merchants and manufacturers operate with high efficiency, thereby providing multi-tiered Chinese consumers with good products and services at attractive prices”. (I guess this reads more like a marketing document, than providing me with any tangible evidence on effective strategies.)
“The number of merchants operating on our platform during the quarter continued to grow at double digits year-over-year, and this double-digit growth trend has sustained over the past four quarters”. (That sounds good.)
“Following a successful 11.11 Global Shopping Festival, order volume grew double digits year-over-year during the second half of the quarter. This reflected increasing consumer demand and willingness to make purchases on our platform driven by our price-competitive strategy”. (Okay that’s sounds good, but then again as Charlie Munger said, it’s a retailer. Here we see the price-competitive strategy. Will be useful to see if Pinduoduo and others are finding it any harder than previously, with Taobao and Tmall’s focus on their price-competitive strategy. I see Pinduoduo report earnings in mid March.)
“On the other hand, we have been successful in retaining and growing premium shoppers as the number of 88VIP members continued to increase double digits year-over-year, surpassing 32 million. (More good news.)
Cloud Intelligence Group -
The valuation of Alibaba means we essentially get this business for free, but it’s a very important business and will be a key driver for shareholder returns from here. Market leader in a protected large market. Huge trends towards cloud, cyber security and more recently AI, make this a potentially very valuable asset. I read recently that the Chinese are getting closer to the top end chips that the US has blocked them from getting: another potential catalyst.
From the report. Revenue $3,953 m for 3% YoY growth. “We continue to improve revenue quality by reducing the revenue from low-margin project-based contracts. On the other hand, revenue from public cloud products and services grew healthily which contributed to profitability improvement”. (They mention progress and innovations in AI and cloud leadership. From the segment table in the report we see the cloud EBITA is small, at $333m for the Q but it has indeed increased by 86% YoY. That all sounds like a credible story and okay progress. A 25% increase in revenue is probably required to get the attention of the stock market but this is maybe not disastrous).
Cainiao Smart Logistics -
Revenue grew 25% YoY to $4,011 million from cross-border fulfilment solutions. It has gone from breakeven to making $540m on an annualised basis at EBITA level. Maybe promising. Lots of positive comments in the report on Cainiao. Shareholders today get it for free but maybe it’s valuable – “Cainiao continues to execute its strategy of building a global smart logistics network, reinforcing comprehensive end-to-end capabilities in first-mile pick-up, line haul, customs clearance, sortation, and lastmile delivery. To support cross-border business development, with the upgrade of end-to-end capabilities, Cainiao further expanded its premium 5-day delivery service coverage, adding two more countries during the quarter. The order volume for the premium 5-day delivery service achieved robust triple-digit quarterover-quarter growth.”
Local Services Group -
Revenue grew 13% YoY. “Local Services Group’s annual active consumers reached over 390 million and their annual purchasing frequency grew strongly year-over-year”.
It lost $290 million at EBITA level, which was a third less than the same Q in the previous year. Although it’s a loss making business, it is interesting and good to see it is growing and losses a reducing. I am imagining the word local in the name explains what it does. Food and grocery delivery (Ele.me); on-demand local services e.g book appointments like beauty saloons, pet stores, entertainment venues; travel and navigation (Amap) a leading navigation app in China – booking flights, hotels and travel; online to offline integration – bridges the gap between online and physical stores. Stick a .com at the end of these business and go back in time to 1999 and you could probably IPO them for billions!. My only thought here is, okay this is probably a very difficult business, long slog business. However, if you build services that customers love and use, it could be valuable long term. A toll bridge. Network effects. Economies of scale. Helping the CCP with common prosperity. The number of active users at 390 million is a big number. I know that in most economies, it’s the small and medium sized businesses that are actually the biggest part of the economy. Maybe this is a very nice long term expansion of the Alibaba ecosystem that helps current shareholders returns in future decades. Obviously if it’s spun off, SHs would need to get equity to benefit.
Digital media and Entertainment Group -
Another loss making group at $73m at EBITA level and the losses increased by a third this quarter. Revenue increased 18% YoY. “Strong revenue growth of offline entertainment businesses of Alibaba Pictures. During the quarter, Damai, a subsidiary of Alibaba Pictures, consolidated its industry-leading position by servicing almost all the major concerts in China, which contributed to rapid GMV growth year-over-year. Total box office of movies produced, promoted and distributed by Alibaba Pictures’ movie segment accounted for more than half of China’s total box office during the quarter.”
I will probably listen to the conference call and see if I can learn anything further. Please do point out any errors, or nonsense in the above and provide any insights you have on Alibaba.
I'm down 50% on my investment in Alibaba. This is not investment advice. Posted to see if I can learn something.
