Alibaba FQ4 2022 – Zero-fun Covid

Half out of the woods

• Alibaba reported good FQ4 2022 results and ended the worst year in its history on a high note but then went on to suspend its guidance as a result of the zero Covid policy in China which is playing merry hell with the economy.
• FQ4 22 revenues / EBIT were RMB204bn / RMB16.7bn nicely ahead of consensus at RMB200bn / RMB5.2bn.
• This represented 9% YoY which came as a great relief as it was widely feared that the regulatory clampdown and the Covid lockdowns had caused more damage.
• Alibaba has had a very difficult fiscal 2022 with the regulatory clampdown, a calamitous decline in sentiment towards Chinese technology and now zero Covid.
• This has all come at a time when the company has been investing heavily in future growth which combined with the difficult environment is why its profitability took such a big hit.
• Alibaba has also withdrawn its fiscal 2023 guidance because it simply does not know what the overall impact of the zero Covid policy is going to be on its business, which is a very reasonable position to take in my opinion.
• I suspect that by the end of the summer this year, the Chinese government will have realised that it has no choice but to live with Covid if it wants its economy to recover.
• This will result in a rapid relaxation of restrictions which have been so draconian, that there have been loud murmurings of dissent from the Chinese population.
• My partner, Alavan Independent thinks that social unrest is what the government of China fears more than anything else and as a result, I suspect that it will be very keen to get the economy back on track as soon as it can.
• Hence, I suspect that Alibaba will have a difficult first half as demand for discretionary items remains weak but that there will be a big bounce when the restrictions finally end.
• Furthermore, towards the end of this fiscal year and into fiscal 2024, Alibaba should start to see the results of its investment program meaning that growth should re-emerge and margins should begin to go back up.
• I don’t think that growth is going to go back to the 30% it has historically enjoyed, but I think somewhere between 10% – 20% growth with better margins is probably sustainable over the medium term.
• This is not included in consensus estimates which are forecasting that Alibaba will limp its way to recovery and that profitability will not really improve.
• Hence, it is going to take some time for Alibaba to recover, but given the valuation of the company, it is a wait worth enduring.
• Alibaba is on calendar 2022 PER of around 14x putting it close to the bottom of the range for the technology sector.
• On top of that, Chinese technology is very unpopular at the moment meaning that there are not that many sellers left in the market.
• There are currently also very few buyers.
• I suspect that when Covid zero ends and the fundamentals begin to show some signs of life, there will be a spike in interest and money will start to flow back in once again.
• The threat of delisting from the NYSE has largely abated with the recent pronouncements from the state which have made it clear that the VIE is a viable structure and can remain (see here).
• Therefore, there will be a vehicle by which US investors can invest in Alibaba once again once their fear has once again morphed into greed.
• Alibaba has been by far my worst position in the last 12 months but I think the fundamentals remain intact and so I am happy to sit on it with a 3 to 5-year view.