Alibaba Group Holding Limited (BABA)

Equity
China
Consumer Cyclical

RISK

RETURN

Key risk factors

Strong trading liquidity

Resilient to price shocks

Moderate default risk

Key return factors

Low dividends

Somewhat favourable analyst view

Good margins and returns

Corporate actions & dividendsDividend of CNY 1.640 with an ex-date of 13 Jun 2024.

Company profileAlibaba Group Holding Limited, through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally. The company operates through seven segments: China Commerce, International Commerce, Local Consumer Services, Cainiao, Cloud, Digital Media and Entertainment, and Innovation Initiatives and Others. It operates Taobao Marketplace, a social commerce platform; Tmall, a third-party online and mobile commerce platform for brands and retailers; Alimama, a monetization platform; 1688.com and Alibaba.com, which are online wholesale marketplaces; AliExpress, a retail marketplace; Lazada, Trendyol, and Daraz that are e-commerce platforms; Freshippo, a self-operated retail chain; and Tmall Global, an import e-commerce platform. The company also operates Taoxianda, an online-offline integration service for FMCG brands and third-party grocery retail partners; Cainiao Network logistic services platform; Ele.me, an on-demand delivery and local services platform; Koubei, a restaurant and local services guide platform; and Fliggy, an online travel platform. In addition, it offers pay-for-performance, in-feed, and display marketing services; and Taobao Ad Network and Exchange, a real-time online bidding marketing exchange. Further, the company provides elastic computing, storage, network, security, database and big data, and IoT services. Additionally, it operates Youku, an online video platform; Alibaba Pictures and other content platforms that provide online videos, films, live events, news feeds, literature, music, and others; Amap, a mobile digital map, navigation, and real-time traffic information app; DingTalk, a business efficiency mobile app; and Tmall Genie smart speaker. The company was incorporated in 1999 and is based in Hangzhou, the People's Republic of China.

Valuation: Fairly valued

Multiple

TTM

NTM

P/E

18.20

16.80

PEG

2.50

P/B

1.50

1.10

P/S

1.40

P/FCF

9.00

10.00

EV/EBITDA

7.90

7.60

From both historical and forecast perspectives, the stock is fairly priced compared to similar stocks. Specifically, the stock is fairly valued on P/E, neutral on EV/EBITDA, and underpriced on P/FCF.

Performance: Mixed

The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 2ppts over past six months and grown 7ppts faster in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Somewhat favourable

The average target price is 100 and suggests 23% upside potential. Usually, this means a BUY recommendation among investment firms, or a recommendation to increase one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 145.9. This translates into 80% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 80.0. This is equivalent to 2% downside potential in the worst case.

Profitability: Good

RoE

Alibaba Group Holding Limited reported a return on equity (RoE) of 8.0% in the last 12 months, down from 10.1% in FY23. The market consensus projects an RoE of 9.7% in FY24, again behind its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 4.5% in the last 12 months, a decrease from 5.6% in FY23. The market analysts predict that RoA will be 5.4% in FY24, again weaker than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 5.9%, below the peers. The consensus estimate for FY24 for RoCE is 10.3%, again behind the peers.

Net margin

EBITDA margin

Historically, BABA has reported good net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 8.5%, down from 10.8% in FY23. The company has reported average EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 17.1% in the last 12 months, a decline from 17.9% in FY23.

RoIC / WACC = 1.3(average value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 1.3 in the past several years. This ratio implies a average shareholder value creation.

Growth: Poor

Revenue

EBITDA

EPS

Free cash flow

BABA reported revenue of CNY 941 168mn in the last 12 months, up 1% from FY23. The dynamics of cash flow, as measure by free cash flow (FCF), were rather similar. EPS fell 20% from FY23 to CNY 31.40. Market expects EPS to reach CNY 31.60876 in FY24.Revenue growth has been constrained in the past several years (negative-to-neutral), while EBITDA has declined in recent years (negative). This all contributed to fast EPS growth (positive). Free cash flow has naturally followed the declining EBITDA. We emphasize the highly volatile dynamics of EPS.

Dividends: Low

The company pays dividends on rare occasions. There have only been a few years with dividend payments in the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are unclear. In the past 12 months, the dividend yield has barely been above zero and was substantially below that of its peers.

Default risk: Moderate

The risk of default is moderate. We note strong positions in its industry, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors and we point to slow historical revenue growth, and negligible return on capital.

Volatility: Average

In normal market circumstances, BABA is moderately volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will move slightly wider than the index. The stock's losses on its worst days (less than 1-5% of the time) will range from moderate to notable.

Stress-test: Resilient

In highly turbulent market conditions, BABA is not overly volatile. In other words, the stock will fall less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be low.

Selling difficulty: Very low

BABA boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains extremely favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Low

The institutional, legal, and compliance risks associated with the company's country are close to minimal. In combination with rigorous business standards, shareholder rights are well protected.

Other risks: Negligible

No other major risks have been identified.