(June 17): Stocks around the world have bounced back with a vengeance from the selloff in May. While the jury is still out as to whether a trade deal between the US and China can be had, equity markets have been given a lease of life — by the US Federal Reserve.
The central bank hinted that it would cut interest rates should there be signs that the domestic economy is weakening on the back of ongoing trade conflicts and a global economic slowdown. If the Fed does in fact reduce rates, it could trigger a fresh round of monetary easing worldwide.
Several countries have cut rates this year, including Bank Negara Malaysia. Lowering the price of money will buoy asset valuations, including stocks and property. Already, we are seeing bonds and stocks once again rallying in lockstep. The Standard & Poor’s 500 index is only 2.5% off its all-time high.
One stock that has borne the brunt of selling related to recent trade war fears is Alibaba Group Holding, which lost about one-quarter of its value from the beginning to end of May. Its share price fell from a high of US$195 to as low as US$149 during the month.
The stock is highly visible and an easy target for investors selling the trade war theme, which, unfortunately, also coincided with the emergence of an indiscriminate seller, its second-largest shareholder, Altaba.
Altaba was created as a spin-out of the remains of Yahoo!, after the latter’s operating business was acquired by Verizon Communications. Its only assets are shares in Alibaba — some 283 million (a stake of about 11%) at end-March 2019 — and cash.
In early April, Altaba’s board of directors approved a plan to dispose of its Alibaba shares (through the open market and/or private placements) and shut down by year-end. Up to half of the 283 million shares are to be sold before its special shareholder meeting, to approve the liquidation and dissolution plan, scheduled for June 27. Between May 20 and June 7, its holdings in Alibaba were pared down to 223 million shares.
Alibaba’s share price has recovered some lost ground over the past few days. It is possible that the stock overhang could exert more downward pressure in the near term. That said, the issue is by now a known risk factor in the market, therefore quite likely priced into its share price.
Current valuations are attractive relative to the company’s long-term growth prospects. The stock is trading at a forward price-to-earnings ratio (PER) of roughly 24 times. By comparison, Amazon.com shares are priced at nearly 60 times estimated earnings. Alibaba’s valuations also compare well against traditional retailers such as Walmart (22 times), Costco Wholesale (30 times) and Target (15 times) — and the company has a much stronger growth outlook.
Alibaba reported top line sales growth of 51% for the financial year ended March 2019, to RMB376.8 billion ($74.3 billion). Excluding new acquisitions, organic growth was still a robust 39%.
Management guided for revenue to hit RMB500 billion in FY2020, which translates into an estimated growth of 33%. By comparison, Amazon’s revenue grew 31% in 2018 to US$232.9 billion and Walmart reported 2.8% revenue growth for the financial year ended January 2019.
Unlike Amazon, whose profits come primarily from its cloud business, Alibaba’s core commerce operations are highly profitable with an Ebitda (earnings before interest, taxes, depreciation and amortisation) margin of 42.1%. Core commerce accounted for 86% of total revenue, of which 90% is derived from the domestic Chinese market (primarily through its Tmall and Taobao platforms). The company’s international wholesale and retail platforms include Ali-Express and Lazada.
Alibaba intends to expand its e-commerce footprint to lower-tiered cities in China, leveraging its Alipay customer base, and aims to add 150 million to 200 million new users in the near future. Although the average spend per user is lower, the potential for growth remains as disposable incomes rise.
The company plans to digitise the entire retail value chain under its “new retail” strategy, and to provide seamless online-offline services as well as promote stronger alignment between vendors and customers.
The rest of its businesses — such as cloud computing, digital media and entertainment and food delivery platform, Ele.me — are still in the investment stages and loss-making. Strategically, however, these ventures, together with its 33% stake in Ant Financial, serve to strengthen Alibaba’s ecosystem (and user database) across a broad swath of the economy.
Alibaba Cloud is among the four largest cloud providers in the world, including Amazon, Microsoft and Google. Revenue for the segment grew 84% in FY2019. The business is not yet profitable as Alibaba focuses on gaining market share. But the business is widely seen to have strong prospects — on the strength of its one-stop suite of products and features, from basic infrastructure (IaaS) to big data analytics, machine learning and artificial intelligence applications. The company is rolling out more data centres worldwide and especially in the fast-growing Asia-Pacific, where it holds a dominant market share.
Alibaba’s free cash-flow generation remains strong, totalling RMB104.5 billion in FY2019. Coupled with net cash totalling RMB68.9 billion, the company can support further investments in and grow its other ventures.
The e-commerce giant is reported to be finalising a submission for a secondary listing in Hong Kong, likely to happen within the next few weeks. The exercise is estimated to raise up to US$20 billion, which will further boost its war chest.
Perhaps more importantly, trading closer to home and in the region where the company has a strong business presence could result in better valuations and provide a buffer to the trade war discount. Shares in Tencent Holdings are trading at a forward PER of 30 times.
My Global Portfolio continued to fare well in the week ended June 13, gaining 1%. This raised total portfolio returns to 5.3% since inception. The portfolio is outperforming the MSCI World Net Return Index, which is up 4.6% over the same period. Following the latest acquisition of 150 additional shares in Alibaba, cash holdings were pared to 16.7% of the total portfolio.
In addition to the Global Portfolio, I also have a Malaysian Portfolio, which is carried in The Edge Malaysia and available on www.absolutelystocks.com. This portfolio is up 50.8% since inception in October 2014. By comparison, the benchmark FBM KLCI is down 10.2% over the same period.
Last week, I acquired JHM Consolidation in this portfolio. JHM is a one-stop EMS/OEM for tooling fabrication, design and assembly and testing of LED lighting modules/applications, mainly for automotives. The company is expanding its operations catering for the industrial sector and, most recently, into aerospace. You can visit AbsolutelyStocks for more details on the company.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
This story appears in The Edge Singapore (Issue 886, week of June 17) which is on sale now. Subscribe here
