Best Deep-Value Large-cap Growth play - Alibaba (BABA)Macro Reasons
-China has a population of 1.3billion VS US's 0.33 Billion, about 4x more
-Rising Chinese middle class with a growing disposable income
-It is estimated that China's GDP is set to overtake the US in 5-8 years
Fundamentals Reasons
-With 56% of the e-commerce market share in China and a growing e-commerce pie, Alibaba is poised for greater growth in 5-10years
-Supported by Cainiao logistics to enable efficient e-commerce delivery and Alipay to complete its transactions/funding for their merchants, it forms Alibaba's iron triangle to capture a large market share in the e-commerce related space.
-Dominant Cloud player at 40% market share, this segment just turned profitable recently and will contribute to its growth strongly like Amazon's AWS (30% margins)
Valuation
FCF: 26Bil USD per year i.e 9.6 USD per share (2.711 Billion shares outstanding)
20X multiple(Bottom valuation) : 192 USD per share
25X multiple(Bottom valuation) : 240 USD per share
Net Cash of 20 USD per share (462bil RMB Cash - 115bil RMB Debt = 347 RMB Net Cash = 54bil USD net Cash )
Fair Value at current conditions = 212 USD per share (20X FCF) - 260 USD per share (25X FCF)
FCF 10 years later: 9.6 USD *4.04 (15% CAGR for 10 yrs) = 38.78 USD per share
20X multiple (10% discount rate - 5% perp growth): 775 USD per share +20USD net cash =795 USD per share
795/215 (Current share price 14th June 2021) = 3.70X in 10 years* i.e 14% CAGR
*Very conservative estimate of 15% CAGR FCF & terminal multiple of 20X, also assuming all FCF are re-invested in other biz and not distributed via dividends/ buybacks
Technicals
Seems like it is at its bottom after a 30% slump in its share price, touching a very strong upward sloping support line indicating the bottom is near. Incidentally, it corresponds with the bottom valuation of 212 USD per share (20X FCF + net cash).
Addressing Risks
Risks of VIE structure & CCP risk are unfounded, one can easily exchange its ADR for the equivalent HK shares at the ratio of 1ADR:8 HK shares and Alibaba is too big to fail for the CCP. The recent USD2.8 Billion fine on BABA is only 4% of revenue and not as dramatic as the 30% slump in BABA's recent valuation (from $310 to $211 per share). Also, the CCP has recently approved Ant Group’s new license to operate Chongqing Ant Consumer Finance, in which it has a 50 per cent stake. This indicates that the CCP doesn't want to tear down Alibaba but rather work towards a more successful China together.
