How ALIBABA Benefits From the Chinese Tech Crackdown: 4 Areas Alibaba Investors Should Consider

hello fellow intelligent investors so in this video i want to outline why in the short term alibaba's business might be harmed by the actions taken by chinese regulators but that alibaba's business fundamental fundamentals may actually be strengthened if you are willing to take a longer term view as thomas russo wrote in his recent investor letter alibaba's shareholder should financially benefit from such reforms so without further ado let's get started [Applause] so after i've given you a general overview of the actions taken by the chinese government of the last few months in my last video in this video i will solely focus on the thesis that alibaba will navigate through the regulatory challenges and emerge even stronger and i will focus on four aspects to highlight how alibaba investors can view the recent regulatory scrutiny in a more positive flight and namely i will discuss whether alibaba can still be considered an accounting fraud how babar's e-commerce business is affected how the financial empire art group benefits from the financial restructuring demands and finally how alibaba is incentivized to heavily invest in its future all right so i will start with investors worries whether the alibaba's profits are actually real voices that alibaba is a gigantic fraud have frequently been voiced in the past and critics have pointed out that many of the yeah metrics presented by alibaba are quote fake and that some of the numbers seem quote too good to be true already back in 2015 alibaba was reporting more customers than amazon reporting more deliveries than ups and growing faster than facebook and google and their gmv per employee numbers also looked outright insane well i think as investors we should first and foremost focus on cash flow so alibaba's reported revenue and profit figures real well if there's one good thing about chinese regulatory scrutiny i think it is it is that it should give investors confidence that alibaba's yeah profit numbers are indeed real for example their 2.8 billion dollar fine represented almost 14 percent of the firm's 2023 cash flow and they now announced 15 billion dollar prosperity pledge is larger than alibaba's current fiscal year operating profits so either the numbers are real or as twitter user value investigator puts it this is a government supported stunt to hide fake burnings and moreover investors also have to acknowledge that alibaba has been audited by the global accounting firm bryce waterhouse coopers for more than 20 years now and yeah this is one of the big four global accounting firms and to quote from robert vinnell's letter once again a further criticism of alibaba is that the accounting does not reflect the underlying economics of its business it strikes me as highly implausible that the dominant e-commerce marketplace in the world's most populous country is not spectacularly profitable the extent of said profitability might reasonably be debated but not its existence next i want to focus on alibaba's e-commerce business and this is maybe the most important area to consider for investors as yeah core commerce as defined by alibaba represents 87 percent of total revenue personally i believe that the e-commerce business has not been permanently impaired sure in the short term chinese regulator spending the juice one from two practice will hurt alibaba so again this policy punished merchants who operate online stores both on alibaba and on rivalling platforms or run promotions at the same time on different platforms and if you think about it from a consumer and business innovation perspective banning this policy makes a lot of sense it doesn't get much more monopolistic if you ask me now if you are worried about alibaba's e-commerce business i think you need to ask yourself whether alibaba's e-commerce business is or was so strong and dominant dominant because of this practice or are there maybe other factors at least that protect its business and profitability well alibaba aggregates almost 1 billion chinese consumers and roughly 260 million additional yeah consumers outside of china and it connects them either to consumers that wish to buy or sell items on taobao or to businesses through its b2c platform tmall thus alibaba certainly benefits from other competitive advantages such as network effects habit-based purchases consumers trusting their platforms and so even without the choose one from two practice i think alibaba will continue to be yeah a primary dominant e-commerce platform in china and again robert vinall concludes in his letter alibaba derives its market power from other sources most importantly aggregating huge demand as such i'm skeptical the impact will be that great amazon seems to be doing fine in the west without to choose one all right next up i want to focus on or discuss alibaba stake in ant group alibaba has a 30 stake in the company that owns china's largest digital payment platform alipay and before the ipo of arm group was cancelled last year the firm was valued at over 300 billion dollars but it was then ordered to be restructured as a financial entity to reduce systemic risks but why well put in a nutshell in early 2021 loans offered by ant group accounted for nearly one fifth of china's outstanding short-term consumer debt and they did so without any capital requirements and maybe for starters capital requirements are regulatory standards for banks that determine how much liquid capital so capital that is readily available they must keep on hand so was there systemic risk caused by these circumstances i would certainly think so they had to act more responsibly and they also had to protect consumers more so being subject to capital requirements similar to a bank yeah makes a lot of sense to me yeah and both thomas russo and robert vinal they too think the changes ant group has to go through make a lot of sense and will strengthen alibaba in the long run here's what russo wrote in his letter and financial was using traditional chinese capital to fund their consumer purchase loans and was able to underwrite with limited financial reserves more importantly there were no credit checks available at the time to even begin to measure risks which aren't financial presented by the time it reached its peak just prior to its collapsed ipo on financial had a credit scoring system untested in a recession regulators did not know if and financials security would work in a downturn and feared the rapid growth of such loans today alibaba actually benefits from the financial system protection against anne financial's prior risks of lending with little idea of credit risks and robert vinall wrote this was a disaster waiting to happen and was untenable from a regulatory perspective potential shareholders in ahn can be thankful that regulators did not wait until after the ipo to announce the actions it was a shareholder friendly move for which they have received little credit as a result of the changes and will most likely have to retain 30 percent of the loans in intermediates and hold appropriate levels of capital against them the consensus is that this makes the business less valuable as it will slow down growth and bind greater levels of capital this may turn out to be the case however it may also make the business more valuable in the long run by better aligning the interests of consumers banks and and around responsible lending and ensuring that art is appropriately capitalized to withstand periods of economic volatility and then finally one might mention that generally there is a perceived government pressure to invest heavily in future technologies and innovation beijing has welcomed domestic investments and as a result alibaba has pledged to dramatically enhance investments and domestic spending alibaba ceo daniel tsang said after the most recent quarter we announced a plan to invest all of our incremental profit this year into core strategic areas such as technology innovation support programs for merchants to lower the operating cost user acquisition and experience enhancement merchandising and supply chain capabilities infrastructure development and new business initiatives and of course this may slow down profit growth in the short term net profits declined eight percent last quarter and alibaba's operating margin narrowed from 23 percent to 15 yeah has baba stepped up investments in new businesses but as shareholders all we should focus on is growth in free cash flow per share over the long run so i think prioritizing value-creating investments is actually a good thing for long-term investors and thomas russo wrote during decades of alibaba's greatest greatest growth mr ma evidenced a preference for taking on projects which more often than not eroded reported profits as investments he selected for greatest long-term growth and intrinsic value on a per share basis burdened reported profits in the near term take ali cloud for example as of 2021 alibaba's cloud business represents almost 10 percent of total revenue and this business division is still not profitable but likely turning profitable yeah sometime soon and it is growing very quickly too it's the third largest cloud provider behind microsoft azure and aws yeah and i believe at scale it is likely to be a highly profitable high margin business with huge barriers to entry so reinvesting profits in this space for example is something long-term investors should love to see and to quote yeah robert vinale one final time if alibaba cloud follows the same trajectory as aws it could easily become as valuable as alibaba's marketplaces business today it is due to turn profitable this year so it is on the right track so what's the bottom line here of course there are risks autocratic decisions that need no public authorization are something many people are not used to in the west and it is hard to predict maybe i should say impossible to say what the chinese communist party will decide in the future we also haven't talked about the risk of confiscation the risks that come with the vie structure so the variable interest entity structure meaning that investors do not technically have an ownership stake in the underlying businesses and we also haven't discussed the d-list de-listing risk in the us however when i am confronted with all of these bearish china and alibaba headlines i always have to think of nat friedman ceo of github who said pessimists sound smart optimists make money i think i have shown four examples that illustrate how the chinese regulatory actions have disrupted certain business areas of alibaba in the short and maybe near term but will make the business stronger if you are willing to take a longer term view and i think thomas russo summarized it fabulously in his letter he wrote we believe however that alibaba will financially recover from near-term disruptions and once again evidence the extremely crucial role alibaba has long played in chinese commerce i believe this is to be the case given the following advantages it possesses i.e the financial strength of alibaba its dominance in commerce platforms that continue to be indispensable for its manufacturers and merchants its commitment to invest heavily in new ventures even when such investments cause near-term results to quote suffer its robust and fast-growing cloud business and its prospects for enhanced business practices that i believe will arise from many of the very same reforms that are being poorly received by equity investors today i think even though alibaba's business is confronted with certain political economic and regulatory headwinds there is a good chance that the business itself will continue to do well in the future at the end of the day it's cash flow not news flow that creates sustainable shareholder value and you get all of this right now at a low to mid teen free cash flow multiple which seems attractive considering the firm's ability to reinvest its profits into yeah value creating projects and having a ceo that also buys back shares when the business trades at low the evaluation multiples but as always this is just my personal of opinion and of course you have to do your own digital diligence as i've said there are certainly risks that are somewhat hard if not impossible to predict and with that i think we can wrap it up here as always may your finances and investments prosper good luck [Music] you

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Id: IibvH8fFOck

Length: 14min 21sec (861 seconds)

Published: Wed Sep 15 2021