Alibaba’s Historic Restructuring Will Unlock the Value of Its Key Business Segments; Shares Cheap

Wide-moat Alibaba Group’s plan to split itself into six main companies is a continuation of the policy of empowering business units, which began in 2020. Alibaba's shares rose 14% in U.S. trading on March 28 following the news. We expect this restructuring to enhance the operating efficiency and margins of Alibaba Group's business units. We are maintaining our fair value estimate, based on a discounted cash flow model of the consolidated business, of USD 177 per ADS (HKD 171 per share), and we believe Alibaba is significantly undervalued. We estimate the value of the separated business units to be essentially the same as our fair value estimate based on a sum-of-parts valuation, indicating that a future spinoff of the businesses could unlock further value. The key assumptions in our SOP valuation are 11 times fiscal 2023 price/earnings ratio for the China commerce business and 4.9 times fiscal 2023 price/sales ratio for the international commerce business—the latter multiple is based on the average multiple of its peers. The most cash-generative Taobao Tmall business group will remain wholly owned by Alibaba Group. We think all of these other five businesses can meet the requirements of Hong Kong Stock Exchange Main Board listing rules, thus eventual listing of these businesses, potentially after three financial years, is possible, in our estimate. As a holding company, we suspect Alibaba Group may experience a holding company discount, offset by the crystallization of the value (and potentially higher valuation) of these five other business groups. Under SOP valuation, assuming a 20% holding discount of all the five business segments, we think Alibaba’s current value would be USD 172 per ADS (HKD 166 per share).