Alibaba (Stock symbol BABA or 9618.HK) announced on 28th March 2023 that it will split into six separate businesses. This will present opportunities for its business units to grow. Each new business unit will have its own CEO and may become a standalone unit. At market close on 28th March, Alibaba’s US-listed share price closed at $98.4 which was a 14.26% rally.
This will help unlock value for Alibaba shareholders. If it goes ahead with the spinoff, the shares will be spun off to current shareholders. I am not particularly concerned whether the shares are HK-listed only, as I bought all the shares of Alibaba in HKEX. Nevertheless, shareholders should benefit from this possible spinoff.
It is currently trading at ~10.6x operating cash flow. It should resume growing its revenue as China has re-opened its economy after relaxing its COVID-19 restrictions. It is well-positioned for growth to resume. Alibaba has been a cash-generating machine, it has been growing its free cash flow over the years as revenue reached stagnantly. It is further refined by increasing its operational efficiency through cost reduction as well.
The spin-off is good as the business segments in different industries experience different growth. Some are profitable but slow-growing. Others are fast-growing but not profitable. The spinoffs allow investors to choose which type of business they prefer to keep in their portfolio.
The six businesses will be
1. Cloud Intelligence Group
2. Taobao Tmall Business
3. Local Services Group (Amap, Ele.me and other businesses)
4. Cainiao Smart Logistics
5. Global Digital Business (including Aliexpress, Lazada, Trendyol, etc)
6. Digital Media and Entertainment
Taobao Tmall will remain wholly owned by Alibaba. This will be the most important business as the majority of profit is generated but it is one of the slower-growth units. The growing middle class will increase consumer spending in China. I believe Global e-commerce will be wholly owned. If Alibaba spins off into e-commerce, cloud, and digital media as 3 separate listed companies, I won’t keep the digital media business in my portfolio. It shows declining revenue and the losses are huge.
The cloud business lost RMB 1.5 billion in the most recent quarter with a -7% operating margin. The cloud computing market in China is experiencing rapid growth. It is forecast to grow from $32 billion in 2021 to $90 billion in 2025. Say $10 billion annualized, this unit could be worth $100 billion, which will be a 10x sales multiple. A sales multiple of 5x will make a $50 billion market cap. This is around 25% of the current market capitalization of the entire company.
A spin-off will help reduce the regulatory risks. When the company is split into six different companies, the risk will reduce significantly. Chinese regulators will find it harder to justify that the company is stifling competition. It won’t be the target of Chinese regulators.
I believe this news is great for shareholders, it reduces risks while unlocking value for shareholders. We can choose which business to keep and which to reduce our exposure to.
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