BABA | A trillion dollar criticism
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Chinese tech titan Jack Ma had been having it rough ever since his criticism of Beijing triggered a backlash on his companies and wealth but a recent development may change the tide.
On Friday, China's central bank announced a fine of 7.12 billion yuan, or $985 million, for Ant Group the fintech giant co-founded by Ma that operates the Alipay payments app signaling that its years-long regulatory crackdown is ending.
But the years-long crackdown has taken a heavy toll on Ma's wealth and the market valuations of the companies he holds stakes in. Alibaba the flagship company he cofounded saw a 45%, or $620 billion, drop in market value since shares hit their peak in 2020, per Bloomberg's calculations on Sunday.
Ant Group is now valued at around $78.5 billion marking a steep 75% discount to its valuation of $315 billion in a scuttled IPO before Beijing's regulatory crackdown in 2020.
The collective $850 billion wipe out in Alibaba and Ant's valuations has sent Ma's net worth plunging from about $61 billion in October 2020 to $34.1 billion as of Monday
On a personal level, Ma has also been lying low for more than two years.Ma angered Chinese authorities after giving a speech in October 2020 in which he criticized China's financial regulatory system and claimed Chinese banks were operating with a "pawnshop" mentality. His words prompted intense regulatory scrutiny of his businesses including Alibaba and Ant and a wider crackdown on tech firms in China.
In January, he was spotted in Bangkok, where he visited a Michelin-starred street-food restaurant and watched a Muay Thai fight. He also popped up in Hong Kong in the same month.
In March, Ma returned to a school he founded in his hometown of Hangzhou in eastern China.
In April, he was appointed an honorary professor at the University of Hong Kong. In May, Ma took up a teaching position in Japan, one of the first public roles he has assumed since disappearing from the spotlight in 2020.
Last month, Ma attended the Alibaba Global Mathematics Competition finals in Hangzhou, where Alibaba is based.
Alibaba shares in Hong Kong were up 3% at 86.90 Hong Kong dollars apiece at midday, buoyed by news of the fine. The company's shares in New York closed 8.1% higher at $90.55 apiece on Friday.
On Friday, China's central bank announced a fine of 7.12 billion yuan, or $985 million, for Ant Group the fintech giant co-founded by Ma that operates the Alipay payments app signaling that its years-long regulatory crackdown is ending.
But the years-long crackdown has taken a heavy toll on Ma's wealth and the market valuations of the companies he holds stakes in. Alibaba the flagship company he cofounded saw a 45%, or $620 billion, drop in market value since shares hit their peak in 2020, per Bloomberg's calculations on Sunday.
Ant Group is now valued at around $78.5 billion marking a steep 75% discount to its valuation of $315 billion in a scuttled IPO before Beijing's regulatory crackdown in 2020.
The collective $850 billion wipe out in Alibaba and Ant's valuations has sent Ma's net worth plunging from about $61 billion in October 2020 to $34.1 billion as of Monday
On a personal level, Ma has also been lying low for more than two years.Ma angered Chinese authorities after giving a speech in October 2020 in which he criticized China's financial regulatory system and claimed Chinese banks were operating with a "pawnshop" mentality. His words prompted intense regulatory scrutiny of his businesses including Alibaba and Ant and a wider crackdown on tech firms in China.
In January, he was spotted in Bangkok, where he visited a Michelin-starred street-food restaurant and watched a Muay Thai fight. He also popped up in Hong Kong in the same month.
In March, Ma returned to a school he founded in his hometown of Hangzhou in eastern China.
In April, he was appointed an honorary professor at the University of Hong Kong. In May, Ma took up a teaching position in Japan, one of the first public roles he has assumed since disappearing from the spotlight in 2020.
Last month, Ma attended the Alibaba Global Mathematics Competition finals in Hangzhou, where Alibaba is based.
Alibaba shares in Hong Kong were up 3% at 86.90 Hong Kong dollars apiece at midday, buoyed by news of the fine. The company's shares in New York closed 8.1% higher at $90.55 apiece on Friday.
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Fiscal Q1 2024 has been an eventful couple of months for Alibaba Group Holding Limited (NYSE:BABA). In addition to the new organizational structure announced earlier this year, which management had provided confirmation on during the F4Q23 earnings call alongside a roadmap for prospective IPOs and spinoffs for some of Alibaba's fastest-growing units, the company also announced an overhaul of its senior leadership team at the group level shortly after. And more recently, the regulatory probe on Ant Group that marked the beginning of a yearslong regulatory crackdown on big tech has come to a close, with Beijing's financial regulators levying a RMB7.12 billion ($984 million) fine on the company.From a non-company-specific standpoint, Alibaba has also faced a whirlwind of macroeconomic impacts on its performance. They range from management's optimism on user and order growth exiting April and potentially better-than-expected sales during the "6.18 shopping festival" period that leads up to mid-June, to a rapidly deteriorating consumer backdrop exiting the calendar second quarter based on the latest economic data. The mixed observations continue to underscore an uncertain demand environment for Alibaba's macro-sensitive consumer-facing businesses.
We have been seeing some pretty good numbers, good results in March and April, especially in terms of growth in users and growth in orders. And I think there are several reasons for that. First, of course, is the [recovery] that's been unfolding. And secondly, I think it's the long-term effect of our efforts around cost optimization and efficiency enhancement that are starting to pay off.
Source: Alibaba F4Q23 Earnings Call
Yet, investor optimism appears to be growing that Alibaba stock might finally be ripe for a rebound as Beijing shifts to a tone of support for the private sector in efforts to bolster China's post-pandemic economic growth. Coupled with the completion of the Ant probe, which is symbolic of Beijing's easing grip on the private sector, a significant regulatory risk overhang has essentially been lifted from the stock. PCAOB inspections have also been proceeding with positive progress in compliance with Washington's requirements, further alleviating delisting risks that have been previously weighing on the performance of U.S.-listed Chinese stocks.
The Alibaba stock's depressed valuation multiple, despite recent gains, on a relative basis to its U.S. counterparts also reflects the market's pricing of the underlying business' weakened fundamental prospects. The "permanent installation of a much higher regulatory barrier" for Chinese big tech in recent years has effectively restricted Alibaba's growth trajectory, and the situation has only been exacerbated by near-term macroeconomic headwinds that have picked up in China as the reopening narrative loses steam. But the potential introduction of additional government support to stimulate the Chinese economy could provide respite for the stock and add fuel to the recent rally.
Our long view on Alibaba stock is that it will continue to trade at a steep discount to its U.S. peers due to the inevitable exposure to greater-than-usual regulatory and geopolitical risk. With BABA's former breakneck growth and profitability prospects tempered by permanently tightened antitrust oversight and intensified competition, the latest set-up could benefit from further gains driven by the return of market interest, especially on the grounds of diversification from U.S. market exposure amid recessionary-driven volatility that is still brewing.
Organizational and Governance Structure Overhaul
In our previous coverage on the stock, we had discussed the potential implications of Alibaba's organizational restructuring efforts, including heightened investors' expectations for follow-through progress in renewing growth and value accretion, especially amid the mixed reopening outlook in China. In the latest development, Alibaba has followed up with an overhaul of its governance structure at the group level, replacing longtime CEO Daniel Zhang - which has recently taken up the role of leading the restructured cloud unit - with the company's Co-Founder and current Chairman of Taobao and Tmall, Eddie Wu, Joseph Tsai, the Executive Vice Chairman of an early investor in Alibaba, will replace Zhang's previous role as Chairman of the board.
Recall that management had set out three core strategies - namely, consumption, cloud computing, and globalization - earlier in the year for fiscal 2024, with three ensuing key focus areas to adequately respond to the relevant opportunities:
We will focus on the following areas in such a competitive market. Number one, acquisition and retention of high-quality users; number two, maintaining our platform's deprecated consumer mindset; and number three, most importantly, creation of new demand through supply side innovations.
Source: Alibaba F4Q23 Earnings Call
The latest "management shake-up" is likely to ensure an independent tone at the top of the group and across the restructured businesses to ensure focus on unlocking new and incremental value to shareholders. For instance, the cloud unit has long been speculated as a prime candidate for a spinoff since even before management's announcement of Alibaba's organizational restructure, given its relative independence from the company's broader consumer-facing business.
Alibaba even considered spinning off the cloud business last year with a potential valuation of more than $100 billion, say the people, asking not to be named because the discussions are private. The company eventually shelved the plan because of business and political obstacles, they say.
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By replacing those at the helm of Alibaba at the group level, the company ensures no overlap of management as Zhang focuses on directing the cloud unit towards a growth roadmap in urgent need of a rewrite. Recall from some of our previous discussions on the stock, Alibaba's cloud unit has been facing heightened regulatory scrutiny due to cybersecurity concerns. This has caused a "broad swath" of state-backed agencies and businesses to favor "state-backed cloud platforms instead," challenging Alibaba's ambitions in expanding its market share gains. On the regulatory front, heightened geopolitical tensions between China and the West also risk limiting the cloud unit's access to advanced technology critical to its developments in emerging high-performance computing, cloud, and AI technology trends.taken together, the cloud unit's performance has been tepid at best in recent years. The headwinds have been clearly reflected in the unit's stark y/y growth deceleration and consecutive periods of sequential declines, representing more than just cyclical challenges to the industry as warned by hyperscalers in the U.S.
With Zhang now at the helm of the cloud unit, it makes sense to bring a breath of fresh air and independence back into the leadership structure at the group level. The set-up could potentially reinforce strategic operational focus at the business unit level to ensure better capitalization of secular tailwinds ahead - especially with the advent of generative AI applications. Recall from Alibaba's F4Q23 earnings call earlier this year that management highlighted two key forward growth drivers for the cloud unit: 1) expanded computing requirements from AI applications; and 2) the provision of "models as a service" to facilitate the development and deployment of AI applications.
Today, the age of AI brings two new historic opportunities to Ali Cloud. Firstly, the emergence and the broad application of artificial intelligence, large models and various vertical models have raised the new requirements for computing power…The second opportunity lies in building model as a service or mass on top of our foundation in us and parts. The cloud unit's focus areas are in line with our expectations discussed in the previous coverage, which outlined the potential for participation in cloud total addressable market ("TAM") expansion given the incremental demand for HPC capacity to facilitate both the development and training of large language models, as well as the deployment of related applications. The integration of Alibaba's recently introduced "Tongyi Qianwen" large language model and "Tongyi Wanxiang" AI image-generating tool, as well as their integration across internal platforms (e.g., DingTalk) and availability to customers via a marketplace-like cloud service is also expected to further the unit's monetization of AI opportunities. This is corroborated by strong take-rates of related services disclosed by management during the F4Q23 earnings call, which implies pent-up demand which Alibaba's cloud unit is well-positioned to address - the company has acquired more than 200,000 customers for trial access to Tongyi Qianwen. And the latest reshuffling of the company's governance structure will likely ensure better focus on execution at the business unit level to further optimize growth and realization of efficiencies going forward.
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There is an opportunity in every crisis. However, seeing the opportunity takes more than linear and first-order thinking, which only shows the crisis. The careers of many high-profile investors are largely defined by seeing an opportunity amid a crisis that no one sees. Today I will focus on Alibaba Group Holding Ltd and Charlie Munger for two main reasons. The first reason is more obvious. Munger, or his Daily Journey Corp, holds a sizable position in BABA. He started the position against prevailing sentiment and when the stock price was severely battered. As you can see from the chart below, Munger's portfolio currently has a total of 4 positions. And BABA is the third largest one, representing more than 15.2% of the overall portfolio.บันทึกช่วยจำ
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