Alibaba Group - Re-assessing valuation of the new six business units
- Alibaba announced it will reorganise its businesses into six units
- Potential separate listings to support near-term re-rating
- We revisited the valuation of individual businesses
- Our bull case analysis suggests further valuation upside of c.20% from our current TPs of HK$167
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Alibaba (9988 HK) announced to re-organise its businesses into six units yesterday evening, according to local media. An internal letter from CEO Zhang was also circulated in the market. The company further made an announcement on HKEx after market close.
The six new units are, (1) Taobao Tmall business, (2) Cloud intelligence, (3) Local services, (4) Global digital business, (5) Cainiao, (6) Digital media and entertainment. Each business unit will have flexibility to raise outside capital and potential to seek IPO, with the exception of Taobao Tmall, which will remain wholly owned by Alibaba Group. Management believes that the re-organisation will empower individual units to be more agile and respond faster to market changes etc.
We revisited the potential valuation of Alibaba’s individual business units, and concluded that there could be an extra 7%-25% upside from our target price. Our current valuation is based on (1) Core commerce: 15x PE FY3/24F core commerce earnings (HK$132); (2) Cloud: 5x PS on FY3/24F (HK$26); and (3) Digital media and entertainment: 5x PS on FY3/24F (HK$10). The potential upside to our TP will come from (4) Local services and (5) International commerce.
(1) Taobao Tmall Business. It is basically China core commerce. This segment includes Taobao, Tmall, Taobao Deals, Taocaicai, 1688.com and other businesses. Taobao and Tmall is the largest e-commerce platform in China with GMV market share of 45% in 2022, followed by JD.com and PDD. Taobao Deals and Taocaicai are new initiatives for Alibaba to attract new users in lower tier cities, while it has limited revenue and GMV contribution. We expect c.9% p.a. adjusted earnings growth for Taobao and Tmall during FY3/22F and FY3/24F (vs 20% p.a. from FY3/19F- FY3/22F).
Valuation Analysis: We value core commerce at 15x FY3/24 adjusted earnings, -1S.D. below historical average. Before the market adopts SOTP valuation, the stock used to trade at an average of c.20x adjusted PE. In view of a lower growth profile, we are applying a lower multiple. The target PE is also conservatively lower than PDD’s 25x P/E.
(2) Cloud Intelligence. This segment includes cloud, AI, DingTalk and other businesses. Alicloud is the largest public cloud service provider in China with c.37% market share in China and ranked No.3 globally. The cloud business remained at early stage in China. We expect Cloud revenue to grow at 13% CAGR from FY22 to FY25F, driven by digitalisation demand from key vertical sectors including internet, retail and public etc. The EBITA of cloud business turned positive in FY3/23 and we believe operating margin will continue to improve to mid- single digit from c.2% now. New AIGC implication will further increase the cloud computing demand and facilitate the digitalization pace.
Valuation Analysis: We value cloud segment at 5x FY3/24 PS, largely in line with historical average of Amazon’s cloud AWS. The multiple is higher than cloud peers like KC cloud of 1x P/S, due to Alibaba’s large business scale and better economies of scales riding on Alibaba’s ecosystem.
(3) Local Services. This segment includes food delivery platform Ele.me, Amap and other businesses. Ele.me is the second largest food delivery platform in China with c.30% of market share and it contributed majority of the revenue for this segment. The business model is similar to Meituan’s food delivery. It is still loss-making while Meituan is already profitable. We expect narrowing losses from this segment in coming years, driven by improved unit economics and expanded category for Ele.me. We expect c.14% p.a. revenue growth for local services from FY3/22F to FY3/24F.
Valuation Analysis: We currently do not give separate valuation to local service business due to very limited disclosure on revenue mix and operating metric. If we were to assign 4x P/S for Ele.me, the valuation could reach HK$311bn or HK$15 per share. Given that its current profitability is lower than Meituan, a lower valuation of Rmb233bn based on 3x FY3/24 PS will be our bear case valuation. Bull case valuation is HK$388bn, based on 5x FY3/24, same as Meituan’ s food delivery multiple.
(4) Global digital business. This is basically international commerce. This segment mainly including Lazada, AliExpress, Trendyol, Daraz, Alibaba.com and other businesses; Lazada and Trendyol are leading and marketplace e-commerce platform in Southeast Asia and Turkey. AliExpress and Alibaba.com focus on international wholesale business. The segment is loss making but operating margin is improving due to more value-added service offerings. We expect c.10% p.a. revenue growth for global digital business from FY3/22F to FY3/24F.
Valuation Analysis: We currently do not give separate valuation to local service business due to very limited disclosure on GMV mix and operating metric. If we were to give 3x FY3/24 PS, with reference to SEA Limited (SE US, largest commerce players in Southeast Asia), it would yield our base case valuation of HK$ 318bn, or HK$15 per share. Based on SEA’s historical range, our bull and base case valuation are HK$212bn and HK$424bn on 2x and 4x P/S respectively.
(5) Cainiao. Cainiao is a logistics solutions provider for Alibaba merchants. It generates revenue by providing domestic and international one-stop-shop logistics services and supply chain management solutions. The segment remains loss-making but its operating margin is improving due to increased revenue contribution from the international fulfillment solution services it offers. We expect c.13% p.a. growth in revenue for its global digital business from FY3/22F to FY3/24F.
Valuation Analysis: We did not give a separate valuation for Cainiao, as it just started to monetise and there are no comparable domestic peers in China. If we were to assign JD.logistics’’ 1x FY23 P/S valuation to Cainiao, it is equivalent to HK$80bn or HK$4 per share. Based on JD Logistics’ trading range, the bull and bear base valuations are 2x and 0.5x P/S, respectively, or HK$8 and HK$2 per share, respectively.
(6) Digital media and entertainment. This segment includes Youku, Alibaba Pictures, and other businesses. Youku is the third-largest online long-form video platform in China in terms of MAU, after iQiyi and Tencent Video. Alibaba Pictures (1060 HK) is a movie producer and distributor. This segment provides synergies in offering entertainment experiences, increases customer loyalty, and improves monetisation for content providers across the ecosystem. We expect c.3% p.a. revenue growth for the global digital business from FY3/22F to FY3/24F.
Valuation Analysis: Our base case valuation is based on benchmarking a global player like Netflix’s 5x forward P/S, or HK$10 per share. as Alibaba has a well-established portfolio of entertainment businesses such as film production, content creation and video platform. Our bear case valuation is based on benchmarking domestic video platform player iQiyi’s c.1x P/S, or HK$41bn or HK$2 per share. Our bull case is around 6x P/S or HK$12 per share.
Ant Group. This is the fintech arm where Alibaba owns 33%. This is not one of the six units mentioned in the latest corporate re-organisation. The market is suggesting a valuation of c.US$60bn (compared with US$300bn in its previous IPO attempt three years ago). This will be translated into HK$7 per share for Alibaba.
Conclusion
The additional valuation mainly from Local services and international ecommerce business will offer range from 7- 25% upside to current valuation. We currently rate BUY with TPs of HK$167, and expect that the latest development of Jack Ma showing up in mainland China and announcement of re-organisation will support a re-rating in the medium term.
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