Alibaba: Fair Value Cut 25% but Shares Still Cheap, Discounting Ex-China E-Commerce Asset Value

We remain buyers of Alibaba BABA despite a 25% cut in our fair value estimate to USD 128 per ADS/HKD 124 per share. 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. Our alternative sum-of-the-parts valuation, which adopts a 50% discount for these five groups and strategic investments, is USD 138 per ADS/HKD 134 per share. However, we still prefer PDD Holdings over Alibaba, given its rapid market share increase and improving profitability.

The main near-term potential positive driver for Alibaba comes from a planned boost to shareholder returns on the spinoffs of its five business groups. Alibaba’s share price did rise 16% in the March quarter on this news but has since given back the gains and is down 5.4% for the year to June 30 on the uncertainty over the timing and value of these spinoffs. 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, in our view.

However, risk comes from faster-than-expected market share loss in China’s retail marketplace and greater-than-expected degradation in adjusted EBITA margin to defend market share loss. To better reflect this risk, we cut our 10-year top-line compound annual growth rate to 6% from 7.5% and adjusted EBITA CAGR to 3.9% from 6.5%. This accounts for 49% of our fair value estimate reduction. The larger 50% discount assigned to the other five business groups makes up 27% of our fair value estimate cut, and a revised valuation for Ant Group accounts for the balance.