Even as regulators finalise fines on Alibaba Group (BABA)’s Ant Group for wrongdoings in corporate governance, consumer protection, and anti-money laundering requirements, investors hope things will ease for the internet giant, and the sector as a whole.
In Morningstar’s latest review of Alibaba Group, the fair value estimate of the company's stock has been adjusted downward by 25% to US$128 for the ADR listing and HK$ 124 for its Hong Kong listing. The adjustment comes after Alibaba Group's landmark reorganization plan, and keeping in mind the morphing online consumption landscape in China.
To reflect the conglomerate value, our analysts also provided an alternative sum-of-the-parts valuation, which adopts a 50% discount for these five groups and strategic investments. In this case, Alibaba is valued at US$ 138 per ADS or HK$ 134 per share.
Even after the adjustment, Alibaba still trades a deep discount. “At the current share price, investors are only paying for the value of Taobao and Tmall Group, Alibaba’s strategic investments, and cash and cash equivalents while getting the value of all the other five businesses groups for free, based on our analysis,” Chelsey Tam, senior equity analyst at Morningstar, says, explaining the new fair value estimates for Alibaba.
We Are Positive on the Upcoming Changes
The announced spinoffs of the holding groups could be a near-term catalyst, according to Tam, who believes the split will unlock enterprise value and boost shareholder returns.
Despite a short-lived rally in Alibaba’s shares after the reorganization statement and the management reshuffle plans, Tam believes the looming uncertainty over the timing to execute the plan and the terminal value of the initial public offerings under discussion capped optimism.
Shares in Alibaba are down around 5% year-to-date. “We believe Alibaba is committed to the spinoffs, and having these business groups responsible for their own profit and loss will lead to financial discipline and improved margin,” Tam says.
Using Alibaba’s peers which have undergone similar splits as a guide, Tam thinks there is likely to be a discount to intrinsic fair value in Alibaba’s subsequent spinoffs. “[A discount of 50% in our view is a reasonable discount to ascribe to the value of these holdings at the Alibaba level. This is larger than the 20%-30% holding level discount traditionally seen at industrial conglomerates,” she says.
There Are More Attractive Peers to Alibaba Right Now
Despite Alibaba Group's stock's attractive valuation, our analysts believe there are better options for investors seeking exposure to the e-commerce space.
“Alibaba’s market share loss has been faster than expected. Alibaba’s e-commerce share of total retail sales in consumer goods in the country for the first time in a year, down 100 basis points on our estimate in 2022 to 17%,” she adds.
The market share loss is expected to continue with the ratio sliding to 13% in a decade. A smaller market share will also be translated into profitability impacts. In Tam’s estimates, the revenue growth rate for each of the next 10 years is thus adjusted downward to 6% from 7.5%.
To counter the market share loss, Tam thinks Alibaba will compete for the market of value-for-money products that PDD currently dominates. She also sees see some threats from video-streaming platforms, for example, Douyin, moving to traditional search-based e-commerce.
“Alibaba is slower in adapting to market changes and is lesser known for value-for-money products. We still prefer PDD Holdings over Alibaba, given its rapid market share increase and improving profitability,” she says.
PDD is currently trading at a 4-star rating or a 29% discount to its fair value estimate of US$ 105.
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