China facing equities are running, and Alibaba is certainly enjoying a more favourable backdrop underpinned by hopes that recent stimulus will turn the dial on Chinese growth. We last wrote about BABA in May, highlighting that many Chinese consumer-facing stocks were experiencing a double whammy of regulatory pressures & soft demand, pushing valuations down to extreme levels, with BABA trading on a PE of just 9x. At the time, the centralised Government was applying extreme regulatory pressure on companies that were becoming ‘too liberal’ for want of a better term. That led to a growing belief that China had become uninvestable and that valuations, as attractive as they were, did not create enough margin of safety for the unpredictability of how regulation was administered.
- We now see a Centralised Government almost forced to concentrate on stimulating growth, and that’s a very different backdrop to four months ago when the stock was trading below $US80. While the share price has rallied over 30% since then, it’s coming off an incredibly low base and still trades at a material (30%) discount to its historical earnings multiple.
As a refresher, Alibaba is a very interesting company and very much a ‘canary’ for the Chinese consumer. It’s not a retailer in the traditional sense, it’s more a place where all the functions associated with retail meet. For example, if you combined eBay, PayPal, Google, FedEx, all of the wholesalers, and a good portion of manufacturers in the U.S. + of course, a big payments/financial services division and put them all in one place, you’d get something like Alibaba. It’s essentially a data-driven ecosystem that is faster, smarter, and more efficient than traditional business infrastructures.
- While Resources have been in focus in the past week, and rightly so, there are few companies more exposed to a recovery in the Chinese economy than Alibaba. We said in our last update, that if we did not already own it, we would buy it, and we retain that view despite the recent share price gains, though consolidation around current levels seems more likely in the very short term.
MM remains long & bullish BABA
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