alibaba goes public

I have noted my thoughts on Alibaba earlier in August. The market is keen to value the company's equity in the range of $200 b; and I argued that to get to that number the company has to achieve revenues of $87 b in 2024. 

I also argued that to get the right perspective we should translate those revenues into Alibaba's GMV (market value of Gross Merchandise Volume) and then into China GMV, and check whether the overall market (China GMV) appears to be achievable.

Subsequently, the company filed its revised prospectus. Based on the revised numbers I attempted to see what it will have to do to get that $200 b.

The key change has been much higher reinvestment rate required to achieve the growth rate. This is what I got:

Can Alibaba achieve those revenues and maintain higher margins during the growth period? By 2024, the China market has to see $5,697 b and Alibaba has to see revenues of $91 b. I have assumed that the market share of Alibaba would reduce gradually from dominant 84% to yet significant 50%. It cannot keep those large operating margins for too long; and it is the same for return on capital. After 2024, the expectation is that Alibaba would become a mature business behaving like one with all the caps in place.

And how can we ignore that tangled web of corporate legal structure?

cash is not showing up at ndtv

The market price changes

When this company came out with a public offering in May 2004 at Rs.70 per share, the market value of its equity became Rs.4.25 b. Later in March 2005, it went up to Rs.12.5 b. Sometime in June 2008 the company's equity was selling at Rs.30.2 b.

Alas, today it is selling at Rs.5.49 b (Rs.85.15 per share), which is actually a remarkable recovery from a low of Rs.1.6 b in December 2011 (Rs.24.75 per share). So we might say a very smart investor (or should we say a speculator?) who bought in 2011 would have made a lot of money. Never mind the story of this company which is equally remarkable. 

The story

The story of this business is rather simple. From the time its stock became publicly traded, it has never made any money. Revenues increased by more than 20% annually from 2004 to 2014, but operating profits, never (ok, except 2005) did. So far over last 11 years, the company incurred cumulative operating losses of Rs.13.8 b on cumulative revenues of Rs.40.5 b. Its operating margins are negative; its net margins are negative. Its return on capital is negative; its return on equity is negative. It has never earned any free cash flows. It has not paid out any dividends for the last 6 years. Yet, it is selling at Rs.5.49 b; isn't that remarkable?

The qualification
The company has also received negative remarks from its statutory auditors regarding management remuneration.

Long term shareholders

The story has turned out to be not that great for long term shareholders.

They would have been better off investing in the index itself.

The majority shareholders
While the promoter shareholding continues to be high (61.45%), the institutional shareholding is 6%. BNP Paribas and Tarra Fund hold about 5.78%. Other major shareholders do not seem to be interested in trading. That leaves shareholders owning about 10% of the company's stock who would be setting the prices. And they have set the prices as the story got unfolded.

The future
Either the business is pretty bad (which I don't think), or it has been rather badly managed. Value unlocking can take place in such a case when the business is run more efficiently. If the (controlling) stake sale is made to a better manager the operating margins and return on capital might improve, hopefully. If they do, the value of the company should increase.

If there is status quo, the story gets worse.