Alibaba is the leader in Chinese e-commerce

Ticker: BABA

Author: Stock Analyst  Date: 2021/02/25

Alibaba is China's largest e-commerce company. In addition to e-commerce, Alibaba's assets include cloud business, fintech, logistics services and much more.

We rate Alibaba Buy with a target price of $ 312.1. We estimate the potential at 23.5% in 12 months.

Alibaba is the leader of the world's largest Chinese e-commerce market. The company's revenue and EBITDA grew by 43.6% and 30.6% in the last quarter - impressive growth for a company of this size.

Alibaba is well on its way to becoming one of the global leaders in the growing cloud market. The revenue of this direction is growing by 60% per year and is comparable to the revenue of the third-largest cloud service in the world, Google.

Alibaba has about a third in fintech Ant Group, which had an IPO valuation of up to $ 320 billion. However, the IPO was suspended due to regulatory claims from the authorities. Resolving this issue could be a positive trigger for stocks.

The company has a number of new initiatives in growing industries, such as a communication platform or a food delivery service, that could show significant financial growth in the future.

Issuer Description

Alibaba is China's largest e-commerce player. The company operates both in the online retail segment and in the B2B segment. Among the most important activities within the Alibaba e-commerce segment, it is worth noting:

  • retail trade in China: Tmall, Taobao, Freshippo, etc .;
  • international retail: Aliexpress, Lazada, Trendyol;
  • wholesales in China: 1688.com, Lingshoutong;
  • international wholesale: Alibaba.com.

The most significant in the context of revenue are: Tmall - a Chinese platform for the sale of original goods from official brands, focused on the middle class; Taobao (the name can be translated as "in search of treasures") - a Chinese C2C marketplace containing hundreds of millions of goods of any type; and Alibaba, an international B2B wholesale that connects suppliers and buyers from over 190 countries.

Among the less significant areas of Alibaba's business are:

  • Cloud Services - Alibaba is currently vying with Google for the title of the world's third largest cloud provider. The leaders are Amazon and Microsoft.
  • Digital Services & Entertainment - Alibaba owns Youku, the third-largest video user in China, and Alibaba Pictures, which has invested in films such as Mission: Impossible: Rogue Tribe, Teenage Mutant Ninja Turtles 2, Star Trek: Infinity, and dr.

The most significant in the context of revenue are: Tmall - a Chinese platform for the sale of original goods from official brands, focused on the middle class; Taobao (the name can be translated as "in search of treasures") - a Chinese C2C marketplace containing hundreds of millions of goods of any type; and Alibaba, an international B2B wholesale that connects suppliers and buyers from over 190 countries.

Among the less significant areas of Alibaba's business are:

Cloud Services - Alibaba is currently vying with Google for the title of the world's third largest cloud provider. The leaders are Amazon and Microsoft.

Digital Services & Entertainment - Alibaba owns Youku, the third-largest video user in China, and Alibaba Pictures, which has invested in films such as Mission: Impossible: Rogue Tribe, Teenage Mutant Ninja Turtles 2, Star Trek: Infinity, and dr.

Despite a huge number of initiatives in a wide variety of areas, 89% of its revenue for the 3 months ending December 31, 2020, Alibaba received from various types of e-commerce.

From the point of view of profitability, the role of online trading is even more important - it is actually the only profitable direction in terms of EBITDA.

It is interesting to note that, for example, Taobao (C2C marketplace) does not take commissions for a transaction or access to a trading platform, as most players in the e-commerce market do. The online platform makes money primarily on advertising from individual sellers. This is one of the details that helped attract new sellers and made Taobao the largest C2C company in the Chinese online retail market.

Alibaba's fintech division, which is concentrated in Ant Group, 33% of which is owned by Alibaba, deserves special attention. Ant Group owns payment service Alipay, the largest payment service in China with 711 million monthly active users.

In addition to the main payment functionality, Ant Group provides its users through partner banks with a number of additional services: microcredits, insurance, capital management, etc., receiving a percentage of the partner bank's proceeds in each of these operations. In the first half of 2020, these value-added services contributed 63.4% of Ant Group's revenue.

In addition, Alibaba has minor stakes in a number of public companies:

  • 35% in the Chinese supermarket chain Sanjiang;
  • 31% on the Chinese microblogging service Weibo, which looks like a mixture of Twitter and Facebook;
  • 31% in a large Chinese retailer Sun Art Retail;
  • 20% in a large Chinese retailer Suning;
  • 14% from Singapore postal operator SingPost;
  • 11% in the logistics company YTO Express;
  • 8% in the Wanda Film cinema network;
  • And in a number of less significant companies.

Company strategy

In its presentation, Alibaba notes 3 main sources of growth for the company, which are divided into 11 strategic areas:

Growth in consumer spending in China:

  • Growth in the number of users of the company's digital services
  • Increasing its share in retail and payment services market
  • Increase in the number of goods provided, based on the needs of consumers
  • Creation of new online / offline retail formats based on the company's digital technologies
  • Development of Alipay to the status of a super-application, covering most of the potential user needs
  • Development of cloud business and data processing technologies:
  • Empower your classic lines of business with cloud and data technologies
  • Transferring all supply chains to the digital environment and using AI for optimization
  • Moving the entire infrastructure of entrepreneurs to the cloud
  • Moving work relationships online with services like Ding Talk
  • Building new solutions for various business areas (for example, retail, finance, transport, healthcare, etc.) based on cloud technologies, big data and artificial intelligence

Globalization:

  • Expanding Alibaba's Digital Ecosystem to Global Markets

With these strategic directions, Alibaba aims to grow to 2 billion users by 2036, create 100 million jobs, and foster 10 million profitable SMEs. At the same time, by 2024, the company intends to increase the number of annual buyers on its online platforms in China to 1 billion (in 2020 there were 779 million).

Market position

Alibaba is currently the dominant player in the Chinese online retail market, accounting for about 62% in 2019.

Like the rest of the world, China saw a significant increase in retail turnover in 2020: $ 2297 billion against $ 1801 a year earlier, while the share of online retail in total retail turnover grew to 44.8% from 34.1% a year earlier. ... Further, market expansion is expected to slow down, but overall growth by 2024 will be 55.2% compared to 2020, which creates the preconditions for continued growth for Alibaba.

Risk factors

The main risk for Alibaba is regulatory pressure from the Chinese government. In November 2020, the regulator stopped the IPO of the fintech subsidiary of Alibaba Ant Group. The company could be valued at $ 320 billion and raise $ 34 billion, making it the largest IPO in history. The official reason for the cancellation of the IPO is the tightening of the rules for issuing loans to the population on the part of online platforms: from 2022, online platforms will have to finance at least 30% of the loan amount, which will significantly affect Ant Group's business. Now online platforms act rather as intermediaries between the client and the bank, taking a commission for themselves and practically not using their capital in the transaction. The severity of the change pushed Ant Group's estimate to $ 108 billion, according to Bloomberg Intelligence. Ant Group is currently in the process of restructuring to meet the new requirements of regulators, it is not yet known how this may end.

At the same time, WSJ sources reported that the failure of the IPO was due to the fact that the Chinese authorities found out that one of the beneficiaries of the Ant Group were allegedly political opponents of Chinese President Xi Jinping. Other sources link the IPO failure to criticism of the Chinese and global financial risk management system by Jack Ma, founder of Alibaba.

A less significant source of regulatory risk was the antitrust investigation launched in December 2020 against Chinese tech giants. In early February, the Chinese regulator issued a demand not to enter into price collusion and not force sellers to choose between the largest online platforms in China.

Financial performance

For the 3rd fiscal quarter of 2021 ending December 31, 2020 (Alibaba has a fiscal year ending March 31), Alibaba reported revenue growth of 43.9%, EBITDA of 30.6% and adjusted earnings per share of 29. five%. The entire e-commerce industry has become a beneficiary of the pandemic in 2020, and Alibaba's financial results are further proof of this. It should be noted that about 7% of the growth in financial indicators in dollar terms was due to the strengthening of the yuan against the dollar, and about 10% of the growth in revenue was due to the consolidation of financial results of the retailer Sun Art in October 2020.

Among the segments, the fastest growth in revenue in dollar terms was shown by international wholesale (+ 63.5%), logistics services (+ 61.2%) and cloud technologies (+ 60.4%). The company's most significant e-commerce retail business in China grew 48.4%.

The improvement in financial results was partly due to improved operating results. The number of buyers on Alibaba sites in the 12 months ending December 31, 2020, has grown to 779 million people. against 711 million a year earlier. The number of monthly active users of Alibaba apps reached 902 million versus 824 million a year earlier.

Evaluation

To evaluate the company, we used two techniques - assessment by multiples relative to peers and assessment relative to our own historical multiples.

The multiples estimate relative to peers implies a target capitalization of the core business of $ 910.6 billion. Add to this the cost of shares in public subsidiaries, as well as the cost of a stake in Ant Group, based on a conservative estimate of $ 108 billion (post-IPO estimate, according to sources Bloomberg), we get a target capitalization of $ 950.6 billion, or $ 351.4 on ADS.

Historical value analysis (median forward P / E and EV / EBITDA since the beginning of 2019 are 27.5x and 21.8x, respectively) suggests a target capitalization of $ 738.2 billion, or $ 272.9 per ADS.

Combined target price of $ 312.10 per share for 12 months. with a potential of 23.5% to the current price, which corresponds to a Buy rating.