Alibaba Too Much Political Risk | FAST Graphs

[Music] hello everybody this is chuck carnevale co-founder fast grass the fundamentals analyzer software tool also known by many of you as mr valuation with today's video i'm going to do a follow-up on a video that i did in july that was requested by subscribers to the channel on alibaba you know the chinese amazon if you will and i went through a nice fundamental review of the stock at that time and i also talked about what i call the political risk associated with the stock fundamentally i think it's one of the most exciting companies on the planet politically that's a different story you know investing is a complex thing as we all know but yet to me it's always been a lot about more about common sense than it is about a lot of sophisticated algorithms or you know a lot of what i would call you know fancy fundamental financial formulas and so on it really comes down to you want to invest in a great business if you're investing for growth you want to invest in a fast growing business if you're investing for income you want to invest in a business that's generating consistent income and whatever nuances you know around that is what you're investing for now alibaba is a growth stock and it's one of the fastest growing stocks on the planet and of course it's the chinese amazon it primarily works in the chinese marketplace and which is a huge and growing market has enormous potential but it does have a problem it does have some political issues that investors need to be aware of and i think that complicates investing in chinese advise vis they're called i'll get more into that here in a moment than it does just investing in let's say amazon here in the united states you know a new york stock exchange listed public publicly traded company or at least a u.s exchange listed publicly traded company now i want to go back and revisit the video before i get started on on alibaba here so let's let's go ahead and get into alibaba right now let's look at the graph the fast graphs as it sits today and then i want to compare that to what i did in july so first of all i want you to note that this is a very strong grower based on earnings per share which is what i have up here and you can see that the stock is extremely undervalued the normal multiple of this stock has been about 32 times earnings i'm going to switch this graph to operating cash flow because i think that's also another aspect that i want to look at this company also generates very strong operating cash flow so you have a very similar picture here between the two but here's the point if i go back into looking at alibaba on the july 14 2021 video that i did i want you to notice a couple of differences in what you see today very similar picture back then alibaba was trading at 209.51 okay today the stock is trading at 144.20 earnings estimates today are 9.23 back when i did the first video earnings were expected to be 9.71 for a negative 2 growth rate in fiscal 2022 which by the way ends in march just so you're clear on that so you know we're already into the 2022 fiscal year here and the reality of it is that's a significant drop today we're expecting a seven percent earnings drop now there are some issues about that that i think are important that are political and so on is what the primary involvement is has to do with certain companies ipos that alibaba and jack mall were trying to basically launch that were essentially rejected by the chinese government etc so there's political risk here i think that's the real the real key thing now i'm going to move this video up to about six minutes here on the old video i did and i also want you to take a look at forecasting because forecasting is another thing that's changed dramatically back when i did this first video you know again back in july of 2021 analysts were forecasting as i said earlier 971 1207 and 1458. if i move this back a little bit perhaps or maybe yeah there we go they were also forecasting about 14.2 percent growth for this fiscal year with a minus 2 growth followed by 24 today if i go into forecasting and look at alibaba on the same basis we're looking at 923 and 1109 for an 11 growth rate so the growth rate has dropped from 14 the term growth rate to 11 now what's interesting about that is with the recent drop in price down to 144 alibaba all of a sudden looks like it's reasonably priced relative to that growth and if that ceteris paribus all other things remaining constant or maybe that's a bad analogy if the chinese government was taken out of the picture altogether maybe it'd be a better way of saying it i think this would make this look like a very very attractive investment if i look at you know forecast growth for the longer term it looks like you know currently analysts and it's there are three analysts that are 4k from factset which is where we get our data are forecasting 15.6 growth today if i go back to the video that we did in july of 2021 the forecast growth was for 25 so once again we have a significant change in what the prospects in the future of this company are now if everything on this graph turns out to be accurate even with these adjustments downward and the forecasts continue to be accurate this would make alibaba now a true value stock in fact there was a recent article on the website seeking alpha that talked about alibaba was now a value stock you know it's of course it's a i would call it a growth at a reasonable price assuming this was nothing more than market overreaction or hype okay but what brought all this to my attention the reason i wanted to review this video all had to do with an article that was in the wall street journal over the weekend and it was called the countdown starts on chinese company d listings after long u.s china audit fight and here we have you know gary gensler the head of the sec talking about they're working on details of how the of how holding foreign companies accountable act will be implemented now what i did was for convenience i took this article and i copied it and put it in a word document because i want to go over some of the things that can serve me you can check the article out yourself in the wall street journal and again it was published october 2nd by don lin and ying yang in hong kong in new york and don lim in new york and ying yang and hong kong okay and you know he wants to hold foreign companies accountable the head of the sec does okay and what you know the reality of it is i've highlighted some things here that just really troubled me as i went through this article because i had a client's request i do have a small position in alibaba for one client personally i'm you know reticent to invest in these international stocks but i'll get into more of that here in a few moments but the point is the sec expects u.s regulators could flag chinese companies in 2022 if they don't get access to audit work involving 2021 financials of those companies okay and so you know some investors anticipating this potential problem have started exchanging their american depository receipts which is the only way you can you know invest in the united states as a u.s citizen in these chinese companies for shares trading on the hong kong stock exchange which is a little tricky and i'll get into that a little bit more in detail okay but the bottom line is as the article went on to report we see liquidity moving gradually but consistently to hong kong over the next couple of years so any of you that are holding the adrs as i am might have a day of reckoning coming that you would need to take some action with the problem is the stock price is pretty low right now and most everybody would show a loss if they were to liquidate their alibaba shares rather than convert them but nevertheless the bright side of that is that they also believe that data shows that most trading still occurs in these chinese adrs rather than on the hong kong exchange but again the problem is that could change because u.s regulators said they never got the transparency they needed into the work of auditing firms on chinese companies because china wasn't routinely handing over the papers they needed for negotiating in good faith now that's very interesting like you know there was charlie munger for example warren buffett's partner was on record saying people worry too much about the lack of transparency on chinese companies you know china is a huge market and that is something that needs to be considered in this discussion and the growth potential over there is enormous on the long run okay but you know you do have the chinese government intervening even though you know it opposes politization of securities regulation and it welcomes dialogue to find a solution so you know there is hope that the u.s and the chinese government could get together in 2015 both countries met in beijing to try to establish protocols after two weeks the talks broke down one deal breaker chinese officials weren't willing to let the u.s inspect the audit papers precisely of alibaba and baidu two of the most valuable chinese companies listed on american stock exchange now i'm not sure how to pronounce that chaswat das the pcaob's chief negotiator said he understood from prior talks that china that access would be granted and took their response that they needed to consult with other ministries as a sign that they weren't negotiating in good faith the chinese side had expected the us to eventually come around to regulatory equivalence which is an arrangement that china does have with other international groups like the european union it basically means that china would accept the work done by the chinese regulator as if they had done it themselves now unfortunately the u.s says that's not acceptable okay which is you know kind of interesting so there's kind of a stalemate there so in the absence of a resolution the holding foreign companies accountability act was introduced in march of 2019 the proposal was seen as imposing critical limitations on the pca obs ability to conduct inspections according to the oversight letter now around the same time to add you know fuel to the fire we had this luck and coffee an upstart rival to starbucks admitted to fabricating revenues expenses which cast even more doubt on the credibility of chinese you know accounting and whether these adrs were producing you know good records based on all this controversy i've been sharing out of this article now in june the senate passed another bill that if enacted would shorten the three-year timetable for delisting to two years so it's getting eminent in other words it's you know this looming thread of d listings gives the u.s officials key leverage on the negotiating table against the chinese which is this is an opinion now but if the u.s is going to have any success in negotiating table this legislation has to be implemented said mr doss who is now a lawyer at king and spaulding llp in washington so there you have it you know there's obviously a lot of issues now by the way if you're not familiar with who the pcaob board is it's the public company accounting oversight board okay which is a non-profit organization that regulates auditors of publicly traded companies the purpose is to minimize audit risk so that's really what they're trying to do okay so another issue i think with the chinese you know investing in chinese vise is that you also have to recognize there was an article in the wall street journal over the weekend by the asian investor the gentleman goes by that i thought was very interesting and he says you know he said he was wrong about alibaba stock he said that you know he had i guess invested in it but he brings up a very important point he is common prosperity he says no phrase scares the living hell out of non-chinese investors more than the phrase of common prosperity the concept of a shared prosperity or redistributed wealth has deep roots in china's political life and culture in the chinese communist party uses the justification for a widening crackdown on the economy in 2021 which is also by the way part of the angst that's causing these chinese stocks almost across the board to be dropping now and they have targeted financial institutions primarily that offer cryptocurrencies in fact i understand they've banned them e-commerce businesses which of course is alibaba and ride-hauling companies education enterprises to name just a few so there's you know a real issue there okay now i do want to talk about this thing i i told you i went about the variable interest entities or vies that are what are the basis for trading in chinese adrs technically you are not allowed to owe shares in a chinese company as a us citizen now you've done it through these variable interest entities that enable chinese companies to raise money okay now what these really are are you know their contractual obligations if you will that allow you to you know have certain contractual calls against these chinese businesses but you technically don't own them okay so they're companies that are controlled via a series of contracts to affect ownership but not direct ownership and of course alibaba this is another article it was in the wall street journal on september 30th that talked about the risk of investing in these adrs now there was another article this is a rather old article a couple of years ago that talked about fungability and what the big deal with alibaba's fungible shares on the new york and hong kong exchange is essentially all this article is saying is that these shares are fungal meaning that one transfers fluidly into the other but again that's even something that could be a possibility but the bottom line is there are people that are moving into hong kong but investing in hong kong i came across an article in benzinga that talked about how to buy stocks in hong kong and you know it is a little tricky now you can do it there are you know u.s stock brokerage firms i think the big one was ameritrade that they talked about interactive brokers that you can go and buy you know hong kong shares directly on the hong kong stock exchange but i think there's even restrictions on that and i'm not an expert in that so i don't want to you know hold myself out as an expert but the bottom line is you know investing in these vies is not the same as owning the companies outright so the bottom line is if you look at this from purely a fundamental point of view i do believe that the potential long-term growth is extraordinary i do think when you consider you know how far this stock has dropped again you know back in june it was 220 when i did the article in april it was 230 or 2 40 and it has fallen substantially even more as i checked the last time i looked today it was down about three to five percent today actually 2.86 you know as i'm producing this video right now so there's you know an awful lot of pressure but you can go across the board with these chinese stocks the point is i just don't really know what to advise anybody you know the reality is if you're willing to speculate you know alibaba is extremely cheap right now if all these issues that i've discussed in this video get resolved this thing could be a screamer but there's an enormous amount of risk here because if it was actually you know if the adrs were considered defunct they weren't allowed to trade anymore you had to you know get out of them you're certainly going to take a loss so the question is you know how much politics really has to play here the reality of it is if you're looking at the standard investment principles you know buying value investing in great companies that sound values etc alibaba would check all those boxes you know low amount of debt a plus rated you know fast growth even at these lowered numbers this company still has enormous growth potential but you're dealing with risks here that are outside of what i would call normal fundamental investing and so i wanted to update everybody on where it stands at alibaba i'll be quite candid about it i am very concerned about this stock now not the business not the company and not its future it's whether or not we as u.s citizens will be able to participate in that growth at least through the adr you know concept that it currently trades that are the vie the variable interest entities which you know are very very nebulous they're simply contractual obligations and those contracts can be violated the problem is it'll be the u.s investor investing in these adrs that's caught holding the back great business great company huge market you know it has all the attributes of what you'd want to invest in but i guess the key thing is that what you want to do today perhaps you know should i invest in alibaba and i'm going to switch to operating cash flows here so that i can show amazon when you know which is the chinese amazon when i can invest in amazon right here in the good old us of a where and if i look at it not from earnings but from a point of view of operating cash flows amazon looks extremely attractive at these levels and it has you know very significant growth expectations going forward the reality of it is it's a little pricey for the next couple of years perhaps but longer term it looks real good if you look at it trading on its normal multiple of 20 times 25 times cash flow amazon would be very cheap so the question is do you want to participate in you know the e-commerce business through the chinese adr alibaba or would you rather do it through the u.s here in amazon and i'd vote for amazon anyway i just wanted to bring you this update i hope you enjoyed this video there's a lot of political issues here that again go beyond traditional analysis that i think investors need to be aware of this article that you know came out in the wall street journal this weekend is what really instigated me to go ahead and bring you this updated video i hope you enjoyed it i hope you got something out of it if you did give me a like ring the bell and subscribe to the channel for more videos like this anyway i appreciate y'all thanks for watching and i'll be talking again real soon you

Channel: FASTgraphs

Views: 6,114

Rating: 4.9290466 out of 5

Keywords: Alibaba, alibaba stock, alibaba stock analysis, baba stock analysis, chinese stocks, alibaba stock prediction, stock market, baba stock, value investing, baba stock news, alibaba stock news, investing 101, alibaba stock forecast, baba stock forecast, alibaba stock price, stock market for beginners, baba stock review, alibaba story, chinese stock market, stock investing, alibaba, baba, valuation, Mr. Valuation, FASTgraphs, fastgraphs, investing, growth, Chinese, Chinese stock

Id: KQ8KWeTjWxU

Length: 18min 57sec (1137 seconds)

Published: Mon Oct 04 2021