Batman taught Xi Jinping one thing…Vengeance via /r/wallstreetbets #stocks #wallstreetbets #investing

TLDR: Alibaba is the single best investment opportunity to make A LOT of money! China is loading their clips and will unload enormous support to their stock market delivering spectacular returns.

Fear is a tool. When that light hits the sky, it’s not just a call. It’s a warning. For them. – Batman

Batman has taught Xi Jinping that it is time to act today! This write up is as long as the Batman movie so I have added my slideshow so you can stare at pictures:

Slideshow

“All Sales have an expiration date.”

Alibaba is a complex business that we cannot pitch on a page. We became interested in BABA around $210 a share and researched the stock for the past six months. As of Tuesday, we believe a unique situation occurred that turned a great opportunity into an amazing opportunity.

Summary:

Alibaba (NYSE: BABA) is one of the highest-quality businesses globally, maintaining a historical return on capital of roughly 18%, owning numerous subsidiaries and cross-holdings. The business is broken into five business segments: commerce, cloud, media and entertainment, innovation, and cross-holdings (87%, 8%, 4%, 1% of revenue) {cross holdings market value equalled 36% of BABA market cap.}. Although people recognize Alibaba as the Chinese Amazon, it is more like Google because they make more money from adverting on their sites rather than selling products. 

As of March 15, 2022, Alibaba traded at:

  • 4.81x P/E (Minority Holdings, Cash, and ST investments removed)
  • FP/E (with cash and ST investments) = 11.2
  • ROC = 14%
  • Market Cap = 294B
  • TEV = 224.5B
  • P/B = 1.73
  • FCF Yield = 26.2%
  • Price to FCF = 6.73
  • ROE = 15.52%

BABA is expected to grow:

  • revenues by 32% in next two years
  • earnings by 30.7% in the next two years

In the past seven years, BABA grew:

  • Revenues (per share) by 894.9%
  • Cash Flow (per share) by 559.5%
  • Earnings (per share) by 601.9%
  • The share price has changed by 0% 

Recent fears have led to a 70% sell-off, tanking the market cap to a low of 196 billion dollars. Pessimism is at an all-time high; an analyst (I’ll be nice and not use his name) gave a price target of $65 where nearly a year ago it was north of $300. Nothing has fundamentally changed, and the most considerable risk is China (this was why he downgraded); it is not a new risk… he is a lunatic. This example shows the fear that analysts are jumping ship when signs of change are evident.

A large MOAT protects Alibaba, and its cloud business has the potential to grow bigger than its current market cap alone. People are acting as China has never probed or cracked down on equities before. The core business has grown efficiently throughout enormous fines and regulations. The past year has been challenging for Alibaba; no other way to put it. Nevertheless, BABA still delivered 14.4% ROC and solid top and bottom-line growth. Removing fines and regulations, Alibaba had an outstanding year. Organic growth will continue and provide above-market returns shortly.

Record low multiples and continual growth through the most challenging market should be highly enticing to investors. 

Thesis:

  1. The most significant risk (CHINA) is overblown. Understanding the two central policies by the Chinese governments allows a better understanding of their crackdown and recent actions. This week the catalyst was finally given by the CCP stepping in to help boost the equity markets.
  2. The underlying business will continue to grow double-digit revenues and earnings for the considerable future. The MOAT of their Cloud delivers growth for the next decade. The commerce portion is competitively positioned to take a significant share in the international market.
  3. The valuation is Ludacris!!!!!! 
  4. Tuesday announcement creates liquidity and buy-side pressure that has never been possible. Allowing banks, insurance companies, and underwriters to own more stock in China develops an unchartered situation and will likely deliver outsized gains.

Risks and Mitigants

Starting with the risks we believe is helpful for readers, most people know about the company and why to be bullish; however, we have not seen anyone dive into China to explain the explicit risk and why we believe it is far overblown.

China’s risk is mainly due to the recent actions taken by the CCP and Xi Jinping. Timeline of events:

  • 2.8 billion Dollar Antitrust Fine against Alibaba
  • DIDI Removed from AppStore
  • Tutoring stocks become non-profit
  • Alibaba pledges 15.5 billion to shared Prosperity
  • DIDI Delisting announcement
  • Evergrande Defaults

US investors flooded out of Chinese equities; however, we do not believe that any of these actions were unexpected but predictable. The Chinese communist party has two main focuses Common Prosperity and Dual Circulation. As a result, the sentiment is at all-time lows, and many believe China is uninvestable. On the contrary, we believe China is highly investable and delivers the best bargain in the entire market with Alibaba.

Common Prosperity:

It is the goal of creating a vast middle class and reducing the poverty levels in China. They try to do this by focusing on areas where citizens either overspend or struggle to obtain services. For example, a massive market surprise was that they turned for-profit tutoring non-profit. That announcement created enormous amounts of fear in the equity markets. This occurred because the goal was to offer tutoring to all students, not just those that could afford tutoring services. It makes sense that they do this because limiting education will create a wide disparity between the upper class and lower class. 

To understand how the government acts, you must understand the goals of their policies. Ray Dalio made a good analogy; think of the CCP as strict parents; they want the “best” for you and sometimes overshoot trying to achieve that before realizing they have gone too far.

We are not fearful of crackdowns because of historical events. The most recent crackdown occurred in 2018 when there was a probe on video game companies. Initially, the CCP claimed that video games were going to be banned… As a result, investors fled out of these equities, and fear was extreme in Chinese equities. They still have video games today. A key to understand is that the CCP has historical evidence that they overshoot with regulations in the short term and during the intermediate to a long time ease the rules greatly. 

performance of Videogame stocks:

  • Tencent (-37%) went on to rally 150% 
  • NetEase (-41%) went on to rally 165%

Alibaba will benefit over time from Common Prosperity, delivering uncommon returns. They have pledged 15.5 billion, and a larger middle class will create wallet expansion, directly providing more revenue and profit to Alibaba. 

A quick note on DIDI is that we believe that they were rightfully delisted. They had 30+ violations before IPO and did not address these issues by national security. If this occurred in the US likely, the company is not even allowed to delist. In recent news, a Chinese official explicitly stated that they support IPOs abroad. 

Dual Circulation:

The CCP’s second goal is dual circulation. They are working on improving their internal economy while participating in global trade to double GDP by 2035. Hindering your superpowers (Alibaba, Tencent, Baidu) and causing fear will not lead to goals being met. We have seen their policies and actions show that they have realized they have overshot with their regulations, and we believe will aid in the recovery. March 17, 2022, regulators in china said help is coming, tech regulations are nearing an end, and they will buy stocks while improving monetary policies while the rest of the world is tightening policies. This is a critical point that many investors overlook; there is a very low probability of actual harm in Chinese equities any further. The fear is overdone, and this slow bleed-out is over. 

Understanding that to double their economy, they need companies like Alibaba to succeed because they are the most prominent Chinese company with access to international markets and will dramatically improve exports and manufacturing. The global market will be a direct player in the success of China, they need the world, and the world needs China. So there is no way around not having Alibaba in the mix.

Recently China has been buying planes from Boeing, which could signify they are excited to work with America rather than fight them. This is one example. Nevertheless, there are countless other “uncharacteristic” outreaches towards better trade. Investors must overlook the media talking points, as they are inaccurate. The actions are louder than words.

We do not believe that Zero-covid nor Evergrande is significant enough of a real risk to the Alibaba thesis. Evergrande default debt is in their currency (Yen), so it is manageable, and the government is stepping in and aiding in the situation. During the Evergrande announcement, Alibaba acquired a small 8-billion-dollar chip manufactured at a ridiculously cheap valuation, which is a positive. Zero-covid will likely be easing over the coming months, and we are confident that the end is near with the pandemic. This will result in another bullish outlook in China.

Statistical Analysis of China:

A statistical piece of evidence regards the National Congress of the Chinese Communist Party, where The Hang Seng index has rallied 24% leading up to the national congress party. This is based on 5 data points (1997, 2002, 2007, 2012, 2017). Going into the Chinese “election,” the last thing you want is a suffering economy and the hyper-wealthy to be upset with you. 

Post-market recession, the MSCI ETF has returned 31% in the following 12 months. Alibaba, we believe, will outpace the ETF over the short and long-term, yielding much more substantial than 31% returns over the coming 12 months.

The Hang Seng index has traded below book four times in history, and Alibaba has doubled the Hang Seng each of those times. Instances Hang Seng fell below book. 

Hang Seng Recovery after trading below book:

  • 2016: 85% in 23 Months 
  • 2020: 35% in 11 Months

Alibaba during the same time:

Analysis of Business:

BABA is broken into five businesses, and only three are worth talking about. Media entertainment and innovation are tiny and do not move the needle. The commerce, cloud, and cross holdings are the most critical aspects to this company. 

Commerce:

Making up 87% of revenue and delivering most of the profit growing at a 34% Revenue CAGR over the past seven years demonstrates the power of this Chinese Giant. Many people compare commerce to Amazon, and we do not think this is a good comparison for investors. The stores operate similarly, but most revenues come from the sellers paying for push ads like seen in Google. This is how BABA can maintain such strong margins. They also have very successful logistics services that improve delivery times and efficiency. For example, one of their subsidiaries, Cainiao, is 2x more efficient than a regular warehouse. Growth in china retail is slowing. However, they will continue to grow and maintain a robust bottom line for the foreseen future.

Chinese commerce growth is not the best reason for investors to like the commerce portion. They should be excited over the international growth potential. This is where the enormous market potential lies. The three notable names are Trendyol, AliExpress, and Lazada. A good reference is that the TAM for Chinese retail is only growing by 26% over the next five years, whereas the international retail market will grow 66%.

First Trendyol is their Turkish subsidy that is competing well against Hepsbiruda. Second, the Lira is finally stabilizing (We believe the worst inflation in Turkey is now over), and the bottom line should instantly improve. Third, they are growing and collecting insightful data that will transition into the rest of the middle east. Finally, being a market leader with only 12% penetration shows the vast market growth potential. The middle east is a largely untapped market, and we believe that the new users can result in ample opportunities soon. Researching MOMO (Smallfish42 had a good write-up if interested) delivered valuable insight; they plan to expand into the Mena region. These regions are not first-world countries but are the fastest growing youngest population globally. By the time the core of their population is in the 25–35-year-old range, phones and technology will substantially advance, and infrastructure will be in place. This would, in simple terms, argue that companies like MOMO (TANTAN in particular) and Trendyol are being undervalued mainly because of the favourable demographics. We strongly believe that Trendyol will be able to take significant advantage of the location, whereas companies like Amazon are not having as much success.

To further the bull case for Trendyol is the Google model. Unlike Amazon having tight margins, countries that will not spend as frequently as fully developed countries will keep their margins even thinner. Alibaba makes money off advertisers, which are more insulated to purchase frequencies.

Lazada is the southeast Asian version that has done much better than expected and has grown its penetration and top line for countless quarters. Revenue rose 43% YOY, consumer stickiness has improved for seven straight quarters, and an assortment of products is now being rolled out. With 11% penetration, we believe this will likely deliver strong growth for the next 2-4 years.

Lazada will continue to improve penetration, and we believe that the quality of consumers they are obtaining and will obtain will become vastly profitable. Many analysts thought entering southeast Asia was an enormous risk with minimal possibility of success. The contrary has occurred and will continue. 

The most exciting out of the three is AliExpress. We believe this has the most opportunity and is an immense opportunity for growth in the commerce section. AliExpress grew their sellers on site by 132% last year. This allows investors to see that buyers are on the other end if sellers are aggressively coming. They hold two huge advantages and the first being pricing power. First, they can go right at Amazon in international competition due to connecting to many manufacturers. Next, their brand recognition is significant in the global market.

As noted by Jeffery Towson via China Market Research: “AliExpress is effectively Alibaba at its most opportunistic.” we strongly agree with this statement. AliExpress will begin worldwide shipping in 72 hours for a $3 monthly subscription, and there is 0 competition at that price point. No one… not even Amazon; their premium costs nearly $30+ for a monthly subscription in some parts of the world. We believe this value proposition will create an even large MOAT over the coming years. Their cash balance can support the price. 

Alibaba is focused on the long term, this is something that management preaches, and we believe it is imperative. They are concentrated in the year 2036 to reach their goals, and they have a track record of creating enormous value over time. Their long-term vision gives management of subsidies to operate without forcing rapid growth and making educated long term decisions. An example is Freshippo. In 5 years, they were able to reach a 10-billion-dollar valuation. They are slowly and efficiently growing the company to a valuation where they now hope to take it public.

Alibaba has focused on spending large amounts of Capex to improve their international markets exposure because they realize they have the infrastructure and ability to dominate over every potential competitor. An example is that Amazon has spent enormous amounts on planes and trucks, whereas Alibaba has spent on Wearhouse efficiency, nearly fully automating Cainiao factories. Another area is self-delivering vehicles that are 1/3 of the cost and 40% quicker at delivering the last mile. 

The critical takeaway is that TMALL and Taobao are great. They are reaching mature cycles, and the transition by management has been fantastic. They have improved consumer stickiness by 1.8x while growing their loyalty programs by 50%; these we believe are key with significant competition growing with JD,.com (NYSE: JD) and Pindupduo (NYSE: PDD). This demonstrates the value proposals the customers are accepting. 

The value expansion and growth will slow dramatically in the two flagship Chinese commerce stores, and investors should not worry or use these two businesses to base earnings. The new growing markets are not in China. They are global. BABA has positioned itself well to compete and dominate, taking market share. TMALL and Taobao will continue to deliver, but multiple expansions will occur from Lazada, Trendyol, and AliExpress growth prospects. 

Cloud:

The single best reason to invest in Alibaba is the cloud space. Alibaba controls 38% of the Chinese cloud market share. They have an enormous advantage, like AWS in America. The cloud is nearly non-existent in terms of earnings and has a considerable potential to be a primary driver of profits in the future. Operating margin expansion will grow to a minimum of 30%. This will further enrichen their margins and ROC.

Amazon states their cloud operating margins at 30%, but they misrepresent this by inputting their internal cloud costs. We computed a 34% operating margin and believe that they will continue to improve their operations. This is something that many analysts seem to miss. Maybe this is what our good friend at JPM skipped over when he delivered a $65 PT… or perhaps he just missed everything. We believe that Alicloud is a very close comparison to AWS. They both have substantial market share and operate similarly.

The Chinese cloud market is poised to grow quicker than the global cloud market by 16%. As a result, China’s cloud at one point will likely make up close to 1% of their GDP, and currently, it makes up 0.1%. 

The cloud market is multiplying and will likely occur in China on a lagged basis. The CCP and governments will need cloud, companies and organizations will begin to use cloud software. We are very bullish on the cloud industry and believe Alibaba is the cheapest way to make a significant play on cloud software. Alicloud is going to deliver continual growth by improving the underlying service. As they improve the software, they are not hiking the costs. We believe this is the correct move with such market dominance by managing to begin to take market share and grow in international markets. In addition, Alibaba has already started to develop in-house microchips, which will cut their cost significantly and deliver less dependence on chip manufacturers. This will allow more cloud data to be used while spending less on their hardware costs to maintain the cloud without outages.

Cross Holdings:

The final aspect of the business analysis is the cross-holdings. Their current market value equals 70 billion dollars. Doing valuations for each allows understanding the quality businesses that Alibaba finds and backs financially. This delivers good insight into how management thinks and how they will likely spend money in the future.

The list of companies we did total DCF Valuations for include:

– Hello Group Inc.

– Bili Bili

– smart

– Mango Excellent

– STO Express

– YTO Express

– ZTO Express

– Red Star

– Focus Media

– Ant Financial

It became evident that Alibaba has some interesting investments. The express companies are all logistic companies that operate in Asia. Many of the companies are not attempts at unicorns but highly stable and predictable businesses that will be of benefit to Alibaba. Management seems to favor quality and insight over promised money tomorrow (high multiple stocks).

Microsoft Comparison:

History does not repeat, but it sure does rhyme. 

Microsoft from 2006-2013:

– Revenues grew 112%

– Earnings grew 121%

– Cash flow grew 193%

· During the same time, the share price did not change. The combination of the weakened valuations and strong buybacks (2010 mega-caps like AAPL, MSFT, SBUX… used buybacks to try and elevate very compressed valuations) founded an enormous market rally. 

Microsoft from 2013-2020 rallied 1500% with multiple readjustments and continual value creation.

Alibaba from 2013-2021

– Revenues grew by 894%

– Earnings grew by 602%

– Cash flow grew by 559%

During this timeshare, the price has not changed. Investors can buy Alibaba at 2013 prices with 6x improved fundamentals. Alibaba has issued a 15-billion-dollar buyback program. They currently have 7 billion (estimate) left to spend on buybacks.

We added this comparison just to demonstrate how times of worry and lacklustre results create far above-average returns over the coming years. Of course, we understand that the underlying businesses are different, and MSFT never was forced to deal with an extensive regulation. However, these situations are similar where they were trading at absurdly cheap valuations and issued large buyback programs.

Valuation:

With very different businesses within Alibaba, we used a SOTP valuation. There are three good comps (Amazon, JD.com, and Pinduoduo), and the others (Tencent, Baidu, Coupa, Snowflake, Google, Microsoft) operate in one of the key business segments to BABA. We valued each minority holding and added it back and removed majority holdings to the proper percent of ownership.

Historically Alibaba has traded on a yearly avg. Price to an earnings range of 24-33x, the median is 29, and the mean is 28.33.

Relative Valuation:

The three main competitors (JD, PDD, and AMZN) are not nearly as cheap as Alibaba… Alibaba performs better in each category (Unadjusted TTM P/E, Unadjusted NTM P/E, EV EBITDA, EV/REV, OP. MARGIN) aside from EV/REV, which JD.com was cheaper. Considering that JD.com’s operating margin does not compete with Alibaba, so they are forced to sell more to yield the same dollar value.

DCF:

Since we cannot add charts or tables in applications, I will briefly walk through the SOTP valuation. We used a model like Aswath Damadoran and do not use exit multiples but calculate for “infinite growth.”

Commerce: we believe that the predictability is still at large. In the most recent quarter, earnings grew by 10%. However, guidance was not changed, and their goal is 20-23%. We believe that this is more than doable; the government interference will be at lows for the first time in 12 months. We believe that the value creation will combine the growth of the international subsidies with improving top-line overcoming three years, while Tmall and Taobao deliver larger margins as they mature and minimize spending.

Cloud: the continual growth will occur at double digits for nearly next decade, the addressable market is massive and being top four globally and number in China holding 38% of market share. We believe that the real growth occurs when non-tech companies transition to cloud software needs, this will create an even bigger market and deliver higher margins because needs will be less than the current users, most big tech companies. The margins we believe can grow north of 30% operating margins.

Cross holdings: We believe the intrinsic value is near 120 billion dollars. They have seeded some highly successful stocks and others who operated very effectively in their respective regions. For example, they own profitable shipping and logistics companies in Asia.

Ant Financial is a big area where nearly 50 billion is locked up until the IPO; we believe that regulators are not overstepping because Alipay and Ant are primarily connected to the Chinese consumer credit and need to have an infrastructure in place before going public. This is a catalyst and is currently, in our opinion, the same as restricted cash. Many investors believe that the Ant IPO will reach 300-500 billion valuations. We believe this is mainly steep. However, we can imagine American investors would essentially like to invest, creating overvaluation.

Simplistic base case:

Alibaba will not be as affected as the market believes by the government delivering a valuation that likely trades at a PEG near 0.15. This is paying nearly nothing for future growth. We believe that Alibaba will continue to grow in the international and Chinese markets. The cloud will become to impact earnings materially over the coming years. The market is so pessimistic that when Alibaba turns around, there will be enormous margin expansion to the mean. We value Alibaba on a SOTP valuation of $303.41. Based on our analysis, Alibaba cross-holdings will not grow materially over the coming years, growing 6.4% a year. We believe this is mainly conservative and delivers even more safety in buying the stock. The float is being bought in aggressively, making the valuation much higher over the coming quarters and years. The return on capital and FCF yield will begin to grow along with the growth of the cloud business.

Analyst Accuracy:

Analysts have been largely inaccurate, especially struggling in times of crackdowns. The data goes back to the fourth quarter of 2014. Overall, BABA earnings have outperformed analyst expectations by 6% over the past eight years. Analysts have struggled to create price targets during crackdowns. BABA has beat 17 earnings and missed 11, with nine being related to crackdowns. This demonstrates that when the air clears, Alibaba will likely return to exceeding expectations and reverting to the mean of 6% avg. Beats.

The average price target for Alibaba is $159.36, which we believe is fundamentally cheap, and the analysts have shown to consistently change price targets related to fear or greed in the market. Looking at many of the recommendations seems to be a contrary indicator. This low-price target represents 40%+ upside. This is a considerable margin for safety, especially with our 303-dollar price target.

Buyback:

Alibaba issued a 15-billion-dollar buyback and has 7 billion dollars remaining. We estimate that by the time they have fully utilized their buyback, they will have reduced the shares outstanding by 5-8%. This is a meaningful buyback that will deliver enormous benefits to shareholders; they will be able to continue to buy their float in for the coming years.

Moat:

 Alibaba operates a defensible MOAT. They have brand loyalty and have been improving consumer repeats. They have years of data over competitors and have shown to understand wallet expansion better and position themselves to capitalize on these consumers over competitors.

The next defence is pricing power. Compared to Amazon in the international battle, there is an enormous discount in pricing power. Therefore, unlike America, they can compete on price in international fighting, which is much more critical in these global markets. Moreover, the power of their manufacturing connections delivers enormous possibilities to take market share based on pricing. This will hold off local companies.

Special situation:

We believe that this week delivered an enormous opportunity for all Chinese equities. I have seen the countless write-ups on Alibaba and was hesitant to write however with the news from Tuesday I believe I was obligated to write this report. As stated in the State Council address of the public that the tech cramdown was nearing an end, they will support tech and housing companies, stimulate their economies using monetary policies and new loans, and state the insurance companies increase their exposure to stocks.

This news, we believe, is a special situation because of the effects that will directly help Alibaba. This will likely deliver enormous amounts of support to Alibaba price and may change market sentiment (the main reason for the plumet).

Ending of crackdown:

The government realizes they have overstepped in their actions. Deciding to turn tutoring non-profit laid off nearly three hundred thousand people, and after the cuts from tech companies, a million-plus Chinese citizen will likely be out of work due to regulations. They have realized that time to ease restrictions is needed. Looking back to Common Prosperity, this makes sense; laying off a million people creates large amounts of poverty.

Support of the economy:

The monetary policies will include stimulus, and they will not expand property tax. This is very exciting for two reasons. The first is that monetary stimulus equals higher spending, and being directly affected by weak Chinese consumer spending (recent quarters) will likely reverse and deliver strong sales over the year. Alibaba will likely re-capture the sales missed in Q1 by weak consumer spending. This is another bullish indicator to point to the company’s 20-23% expectations to be accurate. The following reason that this will benefit Alibaba is that the property tax will aid home builders and the Evergrande situation. Many new developers will begin as they will not have to deal with higher tax expenses. This also shows that communism and capitalism can co-exist (this is one of the largest reasons to be a BABA bear); holding taxes relatively low is more of a capitalist approach. They are also issuing new loans that will directly be pumped into their economy, benefiting their dual circulation system strengthening Alibaba’s domestic sales. This will correlate easily to the bottom line and deliver almost 30% FCF for investors.

Insurance:

“China’s banking regulator said that it would support insurance companies to increase investment in stock markets.” The insurance regulator stated that trusts and wealth management would be asked (by communist gov, which means do!) to support and stabilize capital markets. The stock investments made by these entities will likely be a benefactor to Alibaba. In addition, many of the investors and insurance companies will probably invest in the highest quality large cap. companies to “mitigate risk” This will deliver liquidity and buy-side pressure that has rarely, if ever, been this present.

Delisting and accounting:

The state continued to discuss how good progress between American and Chinese governments has been working on improving transparency in the accounting of Chinese equities. This is spectacular news as this will likely bring trust from foreign investors and deliver more liquidity from investors who were primarily feared of delisting due to the inaction of the Chinese government

Other risks:

Russia-Ukraine War:

This seems to be the one thing that still possess fundamental risk to Alibaba. We do not think that Alibaba is the only stock at risk because every company faces direct geo political risk regarding the Russia Ukraine war.

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise hold a material investment in the issuer’s securities.

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Submitted March 27, 2022 at 01:50AM by Flyingbaboons8
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