Alibaba Group Holding Investment Thesis
On the face of it the news over the weekend of the fine imposed on Alibaba may have been concerning, it has confirmed for us what a successful business we have always believed it to be. For this reason, we immediately increased our exposure in our core global equity strategy.
We have included a summary of our thoughts on Alibaba and why we feel in the long term it will deliver material gains for our investors.
Alibaba Group Holding (BABA:US) is a Chinese multinational technology company specialising in E-commerce, retail,
Internet and technology.
Founded In 1999 by Jack Ma and 17 other
co-founders, Alibaba provides
consumer-to-consumer (C2C), business-to-consumer (B2C), and business-to-business (B2B) sales services via web portals, as well as electronic payment services, shopping search engines and cloud computing services.
In recent years, Alibaba has expanded beyond E-commerce with their ownership of Youku (Chinese Youtube) and Cainiao (Global logistics platform) and an ownership stake in the Ant Group (the largest fintech company in the world).
The below article highlights some of the most pertinent factors that contribute to the current attractiveness of a holding in Alibaba. In addition, a summary of the positives behind the recent regulatory findings and antitrust fine is provided.
Size and Growth
Alibaba is China's largest E-commerce platform with nearly 800 million active users which is approximately five times that of Amazon, with an estimated 60 to 70 percent of the Chinese population making use of an Alibaba service.
Alibaba estimates that the average user starts off spending $400 per annum and increases to $2000 per annum within five years.
The large number of active users together with the average spending per user results in Alibaba anticipating a General Merchandise Value (GMV) of approximately $1.2 trillion in 2021 and this is expected to double by 2025. To put this into perspective, Alibaba’s GMV is nearly quadruple South Africa’s Gross Domestic Product (GDP) and has grown at 29.3% per annum since 2013. (see graph green)
The size and growth of Alibaba over recent years can be illustrated
by its staggering sales growth rate of 46.9% per annum since 2013.
Future growth prospects are buoyed
by the rise of the average Chinese consumer with the Chinese middle class anticipated to reach 1.2 billion people by 2030 and the number of Chinese USD millionaires is expected to triple over the next decade to nearly 18 million people.
In addition, China has the largest
E-commerce market in the world, with China accounting for 45% of global retail
E-commerce transactions. In addition, it is anticipated that approximately 64% of Chinese retail purchases will be made via E-commerce by 2023 (see graph blue)
Market Dominance - Alibaba currently dominates the E-commerce market with sales on its platform making up approximately 56% of Chinese retail E-commerce sales. In addition, it has nearly 3 times more monthly visits to its platform (represented by the cumulative site visits of Taobao, Tmall and Alibaba1688) than its next largest competitor, JD.com. (see graph purple)
Monetization and Profit Potential
Alibaba’s business model differs from traditional E-commerce models in that its subsidiaries offer a range of services to merchants such as supply-chain management, marketing,
research and development and financing. These additional services make switching costs
for platform users very high and has contributed to them boasting a 98% retention rate
and significant pricing power.
However, Alibaba has relatively low monetization rates in comparison to its peers, which is very promising for future profit potential with large room for improvement in these rates when the aforementioned switching costs and significant pricing power is taken into consideration. In addition, it is interesting to note that Alibaba’s closest emerging market peer, Mercadolibre, has a monetization rate
that is nearly triple that of Alibaba.
Overview of Regulation
In the first week of November 2020, China unveiled regulations to root out monopolistic practices in the internet industry, largely impacting big tech names Alibaba, Tencent and Meituan. Following these events, Jack Ma suspiciously disappeared for weeks. Consequently, over $290 billion worth of market value was destroyed and Alibaba’s share price fell over 30%.
In addition, there was uncertainty regarding the accuracy and economic reality of the financial results reported by Alibaba.
Most recently in the first week of April 2021, Alibaba was fined $2.8 billion (approximately 4% of Alibaba’s 2019 sales) for preventing sellers from using other platforms. Although it may seem counterintuitive the fine and regulatory findings are positive for three reasons, namely that -
1. The fine quantifies the negative impact of the regulatory findings;
2. It provides certainty in Alibaba’s financial results and that their reported figures can be trusted, thereby alleviating any major accounting concerns; and
3. The regulators confirmed that Alibaba has a distinct advantage over its competitors which will allow them to protect their market share and profitability.
The regulators stated that it is difficult to enter the E-commerce market. Furthermore, significant capital outlay and expertise is required to reach a critical mass in order to be competitive in the market that Alibaba dominates and continues to build on its
current market share.
The outcome of the regulatory findings bodes well for Alibaba and the recent fine imposed is the proverbial light at the end of the tunnel potentially alleviating major doubts regarding its value.