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US Equities Report

Alibaba Group Holding Limited

Nov 11, 2021

BABA
Investment Type
Large-cap
Risk Level
Action
Rec. Price ($)

 

Company Overview: Alibaba Group Holding Limited (NYSE: BABA) is a holding company that offers merchants, brands, and other organizations a technical framework and advertising reach, enabling them to leverage the power of innovative technology to engage with their customers and function more efficiently. Its operating segments are 1) Core Commerce, 2) Cloud Computing, 3) Digital Media and Entertainment, and 4) Innovation Projects and Others. As of November 09, 2021, it has 2.72 billion American Depositary Shares (ADS) listed and outstanding, with each ADS representing eight ordinary shares.

BABA Details

Key Takeaways from Q1FY22 (ended June 30, 2021)

  • Double-Digit Growth in Revenue: In Q1FY22, the company's total revenue amounted to RMB 205.74 billion, representing a 33.81% increase year-over-year from RMB 153.75 billion.
  • Contraction of Operating Margin: BABA reported an operating profit of RMB 30.85 billion for the current quarter, representing a lower operating margin of 15.0% vs. 22.57% for Q1FY21, attributable to a 758-bps increase in total operating expense ratio.
  • Decline in Net Income: The company's net income decreased to RMB 42.84 billion in Q1FY22 from RMB 46.44 billion in Q1FY21, representing non-GAAP diluted earnings per ADS of RMB 16.60 in Q1FY22.
  • Growth in Active Annual Consumers: During the quarter ended June 30, 2021, BABA's global active annual consumers increased by 45 million to ~1.18 billion, including 265 overseas million consumers.
  • Accelerated Share Repurchase Program: On August 02, 2021, BABA' board upsized its repurchase program to buy back up to USD 15 billion of its ADS (from previous authorization of USD 10 billion) by FY22 end. Since April 01, 2021, the company had repurchased ~USD 3.68 billion worth of ADS as of August 03, 2021. 

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

  • On November 01, 2021, DGene, a content creation company, raised a USD 20 million Series A round of funding sponsored by BABA to aid Hollywood content creators and restoration projects while advancing metaverse development.
  • On October 19, 2021, BluePallet, a chemical industry-focused industrial commerce platform, announced today that it has become a Global Gold Supplier on alibaba.com, BABA's B2B subsidiary and a global online marketplace.
  • On September 16, 2021, alibaba.com announced the support of JP Morgan to Alipay to provide card payment services in the US.
  • On September 09, 2021, BABA announced the launch of new Dropshipping solutions on its alibaba.com website, in addition to new platform capabilities and a USD 500,000 award programme to boost existing eCommerce firms and the rise of new eCommerce entrepreneurs.

Segment Wise Results Q1FY22

  • Core Commerce: This segment provides China and International retail and wholesale, logistics, and local consumer services via Taobao Marketplace and Tmall. Core Commerceaccounted for 61% of the total revenue in Q1FY22 and reported YoY growth of 35.20% to RMB 180.24 billion, attributable to increased online physical goods Gross Merchandise Value (GMV) on China retail platform and growth in revenue from latest monetization formats.
  • Cloud Computing: This segment offers a range of cloud services, such as database, storage, network virtualization services, big data analytics and others. It accounted for 80% of the total revenuein Q1FY22 and expanded by 29.06% YoY to RMB 16.05 billion, primarily due to a surge in revenue from the Internet, Financial Services and Retail sectors.
  • Digital Media and Entertainment: This segment provides consumer services beyond the core business operations. This segment represented 92% of the total revenue in Q1FY22 and witnessed a YoY increase of 15.43% to RMB 8.07 billion, driven by an increase in revenue from Youku, Alibaba Pictures and the entertainment business.
  • Innovation Projects and Others: This segment is engaged in innovating and developing new services and products. It reported YoY growth of 37.23% to RMB 1.38 billion.

Balance Sheet & Liquidity Position

  • Stable Cash Position: The company exited Q1FY22 with a cash balance (including equity securities and short-term investments) of RMB 483.35 billion, marginally lower than RMB 483.45 billion at the end of FY21.
  • Cashflow from Operations: Operating cash inflow in the quarter ended June 30, 2021, decreased to RMB 33.60 billion from RMB 50.10 billion in the prior corresponding period.
  • Slight Increase in Debt: BABA reported total outstanding debt of RMB 150.61 billion at Q1FY22 end, higher than RMB 149.15 billion as of March 31, 2021.

Key Metrics: In Q1FY22, BABA's operating and net margins were 15.0% and 17.9%, higher than the industry median of 3.9% and 3.2%, respectively. ROE stood at 4.7%, 530 bps more than the Q4FY21 return. Debt/Equity was 0.15x as of June 30, 2021, lower than 0.16x on June 30, 2020.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders (in terms of ownership of ordinary shares listed on the HKEX) together form around 7.11% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Co., N.A. hold the maximum stake in the company at 2.06% and 1.45%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

  • Dependence on Alipay: BABA relies on Alipay for most of the payment processing and escrow services on its platform. In FY21, ~70% of the GMV of the China retail marketplace was settled through Alipay. Hence, any decline in its quality, usability, convenience, or attractiveness could impair its operations.
  • Ownership Concentration Risk: As of July 22, 2021, SoftBank owned ~24.8% of BABA's common stock, thus gaining substantial control over its operations. This constrains the ability of other shareholders to influence corporate decisions.
  • Political and Regulatory Risk: The Chinese authorities' recent crackdown on its US-listed businesses and the consequent possibility of stricter rules could dent its operations. After the passage of a bill in the US, this could lead to the delisting of some Chinese companies from the country's exchanges (if the US authorities cannot satisfactorily audit the company for three consecutive years).
  • Competition Risk: BABA operates in the Internet & Direct Marketing Retail industry and faces direct competition from significant Chinese internet companies like Tencent and global e-commerce players, such as Amazon, which could undermine the company's business interests.

Outlook

  • Looking forward, BABA expects to invest extra profits and capital in supporting its merchants and investing in strategic areas to serve its consumers better and expand into new regions.
  • It also plans to bolster its technological advantage to encourage clients to embrace digital transformations.

Valuation Methodology: Price/Cash Flow Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last nine months, BABA's share price has corrected 39.89%. The stock is currently leaning towards the lower end of its 52-week range of USD 138.43 to USD 280.61. We have valued the stock using the Price/Cash Flow multiple-based illustrative relative valuation method and arrived at a target price with an upside of mid-twenties (in percentage terms). We believe that the company can trade at a slight discount compared to its peer's average, considering its ownership concentration, political and regulatory risks, dependence on Alipay, and stiff competition. We have taken peers like eBay inc. (NASDAQ: EBAY) and Vipshop Holdings Limited (NYSE: VIPS). Considering the strong topline performance, strong profitability margins, growth in annual active users, associated risks and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 160.19, down 1.21% as of November 09, 2021.

BABA Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.  


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