Alibaba Group Holding Ltd is a holding company that provides the technology infrastructure and marketing reach to help merchants, brands and other businesses to leverage the power of new technology to engage with users and customers to operate. The Company operates four business segments. The Core Commerce segment provides China retail, China wholesale, International retail, International wholesale, Cainiao logistics services and local consumer services through Taobao Marketplace and Tmall. The Cloud Computing segment provides complete suite of cloud services, including database, storage, network virtualization services, big data analytics and others. The Digital Media and Entertainment segment provides consumer services beyond the core business operations. The Innovation Initiatives and Others segment is to innovate and deliver new services and products.
Headwinds or noises. The recent negative news for the e-commerce giant was a fresh round of checks on state-owned companies and banks regarding the financial exposure to Ant Group. As Alibaba owns about one-third of Ant, the shares were sold down again owing to the concerns of another new round of crackdown which could result in some headwinds.
Technology re-rating amidst the rate hike cycle. The worst start of 2022 for the US market was driven by the Federal Reserve’s more aggressive than expected rate hike and balance sheet reduction. Technology companies’ shares have been hammered and under selling pressure. However, Chinese technology peers have already re-rated due to policy and geopolitical risks. Comparatively, Chinese companies are less impacted by the sell-off given that downside is limited. YTD, China has recorded more ETF fund inflows than the US.
Growth is the anchor for valuation. Investors have been averaging down into BABA’s shares since its downturn in 2021 given cheap valuations. We use PEG as a simple valuation metric. Based on Bloomberg estimates, BABA EPS is expected to drop by 20.64% YoY in FY22 and rebound by 13.0% YoY in FY23. Its FY23F PER is at 12.35x. The PEG is about 0.95x, which is lower than the US big tech giants’ averages of between 1.0x and 2.0x.
3Q22 earnings showed mixed signals. 3Q22 Non-GAAP EPS of RMB16.87 beat by RMB0.82. Revenue of RMB242.58bn grew by 9.7% YoY, missing by RMB3.21B. The top-line growth was the lowest in 8 years. The updated market consensus of the EPS growth in FY22/23 is -21.23%/12.4% YoY respectively, which translates to 12.9x/11.6x forward PE. The current PER is 14.6x. Bloomberg consensus average 12-month target price is HK$188.89.
