After the sharp fall, can Alibaba be able to buy at the bottom?

Paying an annual dividend gives investors a reason to hold Alibaba for the long term.

Jack Ma cashes out, postpones the listing of cloud business, and plans to pay dividends for the first time – even after the “Double Eleven”, Alibaba (BABA.N, 9988.HK) remains unabated.

First, it was revealed by the media that the Jack Ma Family Trust planned to reduce its holdings of 10 million shares of Alibaba. Later, in the September 2023 quarterly performance report, it “decided not to promote the complete split of Cloud Intelligence Group” and suspended the Hema IPO. Alibaba BABA shares took a dive last week. As of November 20, Alibaba’s market value has fallen by more than 70% from its peak in 2020.

So is now a good time to buy Alibaba on the dip?

Pictures come from the Internet

1+1 may not be greater than 2

One of the reasons why the market is disappointed with Alibaba is that Alibaba’s Cloud Intelligence Group is no longer undergoing a complete spin-off.

Alibaba said in its quarterly report: “The United States’ recent expansion of restrictions on the export of advanced computing chips has brought uncertainty to the prospects of Cloud Intelligence Group. We believe that the complete spin-off of Cloud Intelligence Group may not increase shareholder value as originally envisioned. , therefore decided not to promote the complete spin-off of Cloud Intelligence Group, but to face the uncertain environment and focus on establishing a sustainable growth model for Cloud Intelligence Group.”

A market person who focuses on China’s Internet investment told the Chinese version of Barron’s that this shows to a certain extent that splitting the Cloud Intelligence Group cannot achieve “1+1 is greater than 2 market effects.” Chen Da, a veteran U.S. stock investor, even believes that Alibaba Cloud is an enabling business. It may be better to spin it off if it remains in the body. In the future, Alibaba’s stock price will further rise, and it will largely rely on it.

On the one hand, the growth of Cloud Intelligence Group has been greatly tested in the past six months. Alibaba’s quarterly report shows that in the six months ended September 30, the cloud intelligence group’s revenue growth was the slowest among all departments. Cloud Intelligence Group’s latest quarterly revenue was RMB 27.648 billion, a year-on-year increase of 2%.

Source: Company financial report

Chart: “Barron’s” Chinese version

“Barron’s” Chinese version has pointed out in previous reports that Alibaba’s goal of splitting and listing needs to take into account the listing access requirements of each exchange, the most basic of which is profitability requirements. From this perspective, Cloud Intelligence Group’s recent performance is not a satisfactory report card for investors who expect it to become a new growth stock in China’s Internet.

On the other hand, the overall market environment is calm and restrained. KPMG pointed out in a report titled “Review of Mainland China and Hong Kong IPO Markets in the Third Quarter of 2023” that the global IPO market remains sluggish under the combined influence of four major factors: geopolitics, economic recovery, central bank interest rate hikes, and slowing inflation. , the number of listings and the amount of funds raised fell by 10% and 35% respectively compared with the same period in 2022. For Cloud Intelligence Group, it is not a good time to go public at this time.

In addition to Cloud Intelligence Group, Alibaba also said that “Hema’s initial public offering plan is on hold.”

However, on September 26, 2023, Cainiao Smart Logistics (H01941.HK) took the first step towards Alibaba’s split and listing, indicating that the possibility of listing in the future of Cloud Intelligence Group is not completely impossible.

Cainiao’s revenue increased by 25% year-on-year to RMB 22.823 billion in the quarter ended September 30, 2023, mainly driven by revenue from cross-border logistics fulfillment solutions.

Worth owning in the long run?

For Alibaba, which values ​​”customers first, employees second, shareholders third”, its first annual dividend payment also attracted investors’ attention.

The quarterly report shows that Alibaba’s board of directors has approved the distribution of annual cash dividends for fiscal year 2023 to holders of ordinary shares and holders of American depositary shares, with an amount of US$0.125 per ordinary share or US$1.00 per American depositary share respectively. Payment in U.S. dollars. Dividends total approximately $2.5 billion.

However, this good news was overshadowed by the news that the Jack Ma family trust reduced its holdings.

According to the U.S. SEC, Jack Ma’s family trusts JC Properties Limited and JSP Investment Limited plan to reduce their holdings of 5 million shares of the founder of Alibaba each on November 21. This caused Alibaba’s US and Hong Kong stocks to fall by 9.14% and 9.96% respectively on November 16.

On the evening of November 17, a lawyer from Jack Ma’s office responded that the sale plan disclosed this time is a long-term plan. Jack Ma is firmly optimistic about Alibaba. The current stock price is far lower than the actual value of Alibaba, and he will still firmly hold Alibaba shares.

So is Alibaba currently undervalued?

The aforementioned market observers believe that Alibaba’s annual dividend is an important signal, indicating that the Internet giant has begun to pay attention to shareholder returns, giving investors a reason to hold Alibaba for the long term; at the same time, this is not the first time that Jack Ma has reduced his holdings. Alibaba, the market’s focus will eventually return to the company’s strategy and business levels.

Judging from Alibaba’s 2023 fiscal year annual report, Jack Ma and his family trust do not appear in the list of major shareholders, which also means that their shareholding ratio is less than 5%. This reduction will further reduce the proportion of Alibaba shares it owns.

Even so, the market response shows the founder’s influence. After two trading days of decline, Alibaba’s US stock price has reached US$77.6, with a market value of 197.6 billion. On November 20, Alibaba’s Hong Kong stock price narrowed its decline from last week, closing at HK$74.45.

UBS believes that even if Alibaba founder Jack Ma is no longer involved in the company’s operations, selling his shares at a time of depressed valuations may hurt investor sentiment. Even if the agency believes Alibaba is moving in the right direction, the company needs to prove to investors its long-term investment potential in the short term. The agency gave Alibaba’s U.S. stocks a “buy” rating and a target price of $120.

However, some institutions believe that the change in the Cloud Intelligence Group’s spin-off and listing plan is a big negative. Morgan Stanley slashed the target price of Alibaba’s U.S. stocks by about 27% to $110, and made it the industry’s top choice due to the uncertainty of the mainland consumer market, the unclear growth prospects of the cloud computing market, and the suspension of the Cloud Intelligence Group split plan. The stock was changed from Alibaba to Tencent Holdings (0700.HK).

Nomura said that regardless of the reasons behind Alibaba’s decision, Alibaba Cloud will remain as part of Alibaba Group, and Alibaba’s shareholders will be able to indirectly benefit from the future growth of Alibaba Cloud’s assets.

Text | Lin Yidan, writer of the Chinese version of “Barron’s”

Editor | Yu Zhou

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(The content of this article is for reference only and does not constitute any form of investment or financial advice; the market is risky, so investment must be cautious.)