Alibaba: Undervalued Technically But Not Politically

TLDR;

Undervalued based on financial metrics.
Track record of CCP on anti-globalization and dismantling Deng Xiaoping’s economic reforms.
Politicians are actively discouraging the leadership of the company from rewarding (foreign) shareholders.
Uncertain long shot on economic policies pursued by China as its almost impossible to foresee political risks, and it would be best to stay away from this stock.

P/E ratio of 9x at the time of writing, compared to a P/E of 41 for Amazon.com and a 49 P/E for MercadoLibre, Inc.
Revenue FY’24 : $130.4 B (+8% y/y)
EBIT FY’24 : $15.7 B (+13% y/y)
EBIT Margin FY’24 : 12.0%
Free Cash Flow FY’24 : $21.6 B (-9% y/y)
FCF Margin FY’24 : 16.6%
Solid financials since 4 yrs, still its down 70% from its historical peak.

Free Cash Flow decreased by 52% YoY due to heavy re-Investment in Alibaba Cloud infrastructure.
Since last year in June ’23, Alibaba Cloud’s Qwen LLM model has reached over 90,000 enterprise deployment.
Xiaomi has included Qwen’s Q&A capability in its smart assistant Xiao Ai found in smartphones and the new SU7 electric vehicle.
This year, in Singapore, The company released the PAI-Lingjun Intelligent Computing Service, a hybrid platform for high performance computing.

Under leadership of Deng Xiaoping, China prospered economically which later known as Dengism.
Dengism = Socialist market economy + reforms and opening up for foreign investment.
Result = More than ~700 Million people were lifted out of poverty during 1980s and 1990s.

For foreign investors to invest in the country, Variable Interest Entity (VIE) structure was introduced in 2003.
A Chinese firm forms an offshore company under VIE structure, often in the Cayman Islands. This offshore entity is given control of profits and decision-making of the local company.
Still to date west can invest via VIE structure only.
There is no legal structure in China that permits foreign ownership of local assets. Local legislation does not protect foreign shareholders either.
Risk of escalating tension between China and West + CCP turning away from Dengism.

After 3 decades of economic growth, Xi Jinping came into power in 2013.
In 2017 CCP’s leader emphasized on governmental intervention and refusal of Deng’s economic policies, indicating “new era” for China.
Later using Covid 19 as a reason, govt became more aggressive to have control over private companies
Starting 2020, Chinese stocks have lagged far behind than worldwide markets.
In late 2023, Xi Jinping urged once again private firms to be “rich and loving” in pursuing prosperity for all.
Biden administration also started to impose tariffs and sanctions on china.

To start with “New Era” Alibaba was choosen to be made example due to its strong international backing.
After an antitrust case on Alibaba, lasting for a brief period, the firm incurred a $2.8 billion fine and was made to split into multiple legal entities.
Company’s management is mandated by CCP to contribute its profits to their “common prosperity” projects and not to prioritize foreign shareholders.
Since 2020, Jack Ma, the maverick founder of BABA, has not been seen in public physically.

BABA with being profitable + Moat in cloud and e-commerce space in china = Solid.
If CCP re-opens door for globalization, stock could do a 10X return.
In FY 2024 Alibaba gave back to shareholders (Foreign + Local) about $16.5B via share buyback and paying dividends.
Company paying juicer dividends to reward foreign shareholders without necessarily going against CCP can be considered.
Due to unpredictable political landscape, investors can risk 2% of their portfolio with BABA.

Q2 2029 BABA SHARE PRICE = 129.48 * (1.07)^5 * 0.15 * 14 / [2.378 * (0.94)^5] = $219
Discount rate for BABA as 12%. (China risks using an higher discount rate + quite conservative assumptions.)