AnalysisHKEx

10 things to know about Alibaba Group before you invest

Founded in 1999, Alibaba Group simplifies commerce for manufacturers, wholesalers, distributors, traders, retailers and consumers in China and Southeast Asia via its online platforms such as Alibaba, Taobao and TMall. They are backed by various infrastructures like Cainiao (its logistics network), Ant Group (its fintech firm), and Alibaba Cloud (its cloud computing arm). As of 24 September 2020, it has a market capitalisation of HK$5.7 trillion.

In this article, I’ll summarise Alibaba’s segmental results, its financial results, and make a list of its latest strategic investments.

Here are 10 things about Alibaba Group you need to know before investing.

1. Alibaba derived RMB436 billion or 85.5% of its group revenues in 2020 from its Core Commerce segment. This segment comprises its operations of online retail and wholesaling sites in China and Southeast Asia, logistics, and local consumer services sites. The remaining 14.4% of group revenue was contributed from its Cloud Computing, Digital Media & Entertainment, and Innovation Initiative segments.

Source: Alibaba 2020 annual report

2. The Core Commerce segment has achieved a CAGR of 47.4% in revenue over the past four years. This means an increase in revenue from RMB92.3 billion in 2016 to RMB436.1 billion in 2020. This is attributed to higher sales of P4P marketing services, in-feed and display marketing services offered to merchants, and commission income for the successful sale of its goods on its online platforms (Alibaba, Taobao, TMall, Lazada, and AliExpress).

In addition, this segment received additional sales by offering logistics services via Cainiao; commission and delivery fees via its online food delivery service platform, Ele.me; and its recently launched retail and direct businesses which operate mainly under Freshippo and TMall Supermarket.

3. The Cloud Computing segment has achieved a CAGR of 90.8% in cloud computing revenues over the past four years. This means an increase in revenue from RMB3.0 billion in 2015 to RMB40.0 billion in 2020. Its sales growth was driven by the rising volume of users and time spent on its public and hybrid cloud businesses during the four-year period.

4. The Digital Media & Entertainment segment has achieved a CAGR of 61.4% in revenue over the past four years. This means an increase in revenue from RMB4.0 billion in 2016 to RMB26.9 billion in 2020. Most of the increase was attributed to its consolidation of YouKu into Alibaba in 2017, rising revenue of mobile search, newsfeed and game publishing from UC Web and its consolidation of Alibaba Pictures into Alibaba Group in 2020.

5. The Innovation Initiatives segment has achieved a CAGR of 38.3% in revenue over the past four years. Segmental revenue increased from RMB1.8 billion in 2016 to RMB6.6 billion in 2020. As I write, Alibaba’s main initiatives include its development of AMAP, a mobile digital map and real-time traffic information service provider in China; DingTalk, a digital collaboration workplace app which offers new ways of collaboration among modern enterprises in China; and TMall Genie, an AI-powered smart speaker.

6. Overall, Alibaba has achieved a CAGR of 49.8% and 33.1% in its group revenues and operating profits respectively over the past four years. Group revenues have grown from RMB101.1 billion in 2016 to RMB509.7 billion in 2020. Operating profits grew slower than revenue because its Cloud Computing, Digital Media & Entertainment, and Innovation Initiatives segments were unprofitable over the past four years despite attaining growth in revenues.

7. Shareholders’ earnings have increased from RMB71.5 billion in 2016 to RMB149.3 billion in 2020. This led to higher earnings per share from RMB3.63 in 2016 to RMB7.10 in 2020. However, Alibaba’s shareholders’ earnings had been skewed by a number of one- off revaluation gains of its investments. They include:

YearAmountTransaction
2016RMB24.7 billionDeemed disposal gain from deconsolidation of Alibaba Pictures
2016RMB18.6 billionRevaluation of previously held equity interest in Alibaba Health and gains from disposal of certain investments & businesses
2018RMB22.4 billionNon-cash gain arising from previously held equity interest in Cainiao Network
2019RMB21.9 billionNon-cash gain arising from previously held equity interest in Koubei
2019RMB5.8 billionNon-cash gain arising from previously held equity interest in Alibaba Pictures
2020RMB71.6 billionOne-time gain from its receipt of 33% equity interest in Ant Group
2020RMB10.3 billionOne-time gain from its contribution to the AliExpress Russia business

8. For the past five years, Alibaba has generated RMB593.9 billion in cash flows from operations and raised RMB128.8 billion in both net equities and debt. Here’s a partial breakdown of how Alibaba had spent its cash reserves:

  • RMB138.5 billion in net capital expenditures
  • RMB91.7 billion in net acquisitions of investment securities
  • RMB153.5 billion in net acquisitions of equity investees

Hence, Alibaba’s cash balance has increased from RMB108.2 billion in 2015 to RMB346.0 billion in 2020.

9. Alibaba has made numerous strategic investments in recent years. The key investments include:

  • Red Star Macalline Group Corporation Ltd. Red Star is a leading home improvement & furnishing shopping mall operator in China. In May 2019, Alibaba subscribed to exchangeable bonds that are issued by the controlling shareholder of Red Star for RMB4.4 billion. The term of these exchangeable bonds is for a period of five years and they could be exchanged into ordinary shares of Red Star at an initial price of RMB12.28 a share. In addition, Alibaba purchased a 2% stake in Red Star for RMB390 million.
  • China TransInfo Technology Co. Ltd. In June 2019, Alibaba acquired a 15% interest in China Transinfo for RMB3.6 billion. It is a smart city infrastructure and service provider, offering mainly intelligent transportation operation services in China.
  • STO Express Co. Ltd. In July 2019, Alibaba acquired a 49% equity interest in an investment vehicle which holds 29.9% in equity interest in STO Express for RMB4.7 billion. As a result, Alibaba holds a 14.7% indirect stake in STO Express, a leading express delivery services company in China.
  • HQG, Inc. (Kaola). In September 2019, Alibaba acquired a 100% equity interest in Kaola for RMB13.3 billion. Kaola, an import e-commerce platform in China, was acquired to further elevate Alibaba’s existing import services across the Middle Kingdom.

10. Ant Group is all set for an IPO that is expected to be the largest in history. In September 2019, Alibaba received a 33% equity interest of Ant Group. Ant Group is a technology company offering digital payment and financial services for consumers and small & micro businesses in China and the world. These services are provided for via the Alipay app and Ant Fortune, its wealth management platform. It also offers micro-financing and insurance products to its users by forming partnerships with banks, insurers, and other lenders in China.

In August 2020, Ant Group filed for IPO on the HKEx. Its IPO prospectus is not yet finalised with numerous key information being redacted. But, suffice to say, Ant Group has built a massive economies of scale with a huge user base:

Key StatisticsCurrent Figures
Alipay (Annual Active Users)1+ billion users
Total Payment Volume in ChinaRMB118 trillion
InvestmentTech: Assets Under ManagementRMB4.1 trillion
Consumer and Small & Micro Business Credit BalanceRMB2.1 trillion
Insurance Premiums and ContributionsRMB52 billion

The fifth perspective

Alibaba has delivered tremendous growth in sales, profits, cash flows and has chosen to use its financial resources to expand both organically and inorganically via making a series of strategic investments. This is opposed to paying dividends to its shareholders.

Looking ahead, it aims to serve over 1 billion consumers in China by 2024, up from 780 million presently and will pursue its expansion plans globally via Lazada, AliExpress, and Ant Group.

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Ian Tai

Financial content machine. Dividend investor. Produced 450+ financial articles featured on KCLau.com in Malaysia and The Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular host and presenter of a weekly financial webinar with KCLau.com. Co-founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

2 Comments

  1. Mr Ian Tai,
    Thanks for the wonderful articles. I have been following your articles since you uploaded them. Keep up the good work.

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