Alibaba Group Holding Ltd (BABA)

[FUNMAN]

Alibaba: The Narrative Has Changed, Be Informed

Read the article at the link to see the graphics:

https://seekingalpha.com/article/4404186-alibaba-narrative-changed-be-informed

Feb. 07, 2021 2:37 PM ET

Summary

ETFs heavy on Chinese internet names such as KWEB and CQQQ continued their strong performance.

The dazzling IPO of Tencent-backed Kuaishou was massively oversubscribed both by institutions and retail investors and it opened at triple its raised offering price.

Short-seller target JOYY soared 25 percent last week and 44 percent YTD but its share price climb seemed to be more attributable to its fundamental merits than the Redditors' effect.

Alibaba delivered earnings surprises yet again with significant improvements in FCF and net cash. The management subtly guided new growth areas during the earnings call.

The media narrative has changed for the positive, boding well for investor sentiment and fueling the climb in Alibaba's share price.
By ALT Perspective for Chinese Internet Weekly

Chinese equities started the week on a good note as China's central bank continued to inject liquidity into the banking system on Monday and Tuesday. Recall that the People’s Bank of China [PBOC] drained a net of 568.5 billion yuan (US$87.9 billion) from Tuesday to Thursday the previous week. It then reversed the tightening stance on that week's Friday.

Market players saw the reversal as a reaction to the lackluster economic indicators released over the weekend and on Monday. China's official manufacturing purchasing managers index [PMI] dropped to 51.3 in January from 51.9 in December. The reading also missed a median forecast of 20 economists surveyed by Reuters.

The results from the privately compiled Caixin China General Manufacturing PMI concurred with the official version, showing the operating conditions improving at the slowest rate for seven months in January. Experts attributed the factors to the seasonal drag from the upcoming Chinese New Year festival, sporadic COVID-19 outbreaks in China, and softening overseas demand for Chinese exports.

China Caxin General Manufacturing PMI 2021 January


Just as William McChesney Martin Jr., the ninth and longest-serving Chairman of the United States Federal Reserve Bank, famously said the role of the Federal Reserve is "to take away the punch bowl just as the party gets going," the PBOC withdrew 80 billion yuan in net liquidity via its open market operations on Wednesday. That spelled the end of a series of fund injections during the preceding three working days.

The local commentary highlighted that the recent open market operations [OMOs] in balancing liquidity by the PBOC effectively demonstrated to the market its aim to prevent risks from over-leverage. That is to say, investors should not be spooked by every liquidity withdrawals. In the same vein, getting overly excited with each currency injection would also be a mistake.

What's telling was that the retightening on Wednesday occurred even after the Caixin China General Services PMI had also disappointed. The headline seasonally adjusted Business Activity Index declined sharply to 52.0 in January from 56.3 in December.

While it still signaled a modest expansion of Chinese business activity, the reading pointed to a further loss of momentum since November and was the slowest rate of growth recorded over the current nine-month period of expansion. It's worse than it looks, as the reading was far off the consensus estimate of 55.0.

That said, the PMIs played only as sideshows to the week's highlights of Alibaba Group's (BABA) fiscal year 2021 third-quarter (the calendar year 2020 fourth-quarter) results on Tuesday and Tencent-backed (OTCPK:TCEHY)(OTCPK:TCTZF) Kuaishou's initial public offering [IPO] on Friday. The outcomes from the two events were better than expectations, boosting investors' sentiment across the board.

Ahead of Kuaishou's IPO, there were already reports of massive oversubscriptions both by institutions and retail investors. Besides the attraction of owning a piece of China's second-largest short-video platform after ByteDance's (BDNCE) Douyin, investors are also comforted by the implicit support from social media and gaming titan Tencent which has a 21.6 percent stake in Kuaishou.

The retail tranche was eventually more than 1,200 times oversubscribed, setting a new record in Hong Kong. Although the waiver of handling fees and lowered loan rates by major banks in Hong Kong helped raised interest in the IPO, there had been little doubt that the IPO would be a blockbuster even without these coming into the picture.

Indeed, bids for Kuaishou's shares reached triple that of its offering price in the grey market ahead of the debut and opened near that level. Although they closed only 161 percent higher instead, no one can dispute the trailblazing Hong Kong stock offering was anything but spectacular.

Speculations that Alibaba's Ant Group could revive its IPO plans following a restructuring to become a financial holding company also buoyed market confidence that the more stringent regulatory landscape might not be as damaging to fintech enterprises as feared. More on Alibaba results in the subsequent sections.

In the past week, the representative ETFs of Chinese companies (CQQQ)(FXI)(MCHI)(ASHR) rallied together with their U.S. counterparts (QQQ)(DIA)(SPY). In particular, the Invesco China Technology ETF stood out with its 6.3 percent gain.

ChartData by YCharts

The CQQQ ETF, which has Baidu (BIDU), Tencent, and Meituan (MEIT)(OTCPK:MPNGF)(OTCPK:MPNGY) as the top three holdings comprising 32.2 percent of the portfolio (as of February 5, 2021), found itself in a favorable position as the trio saw share price gains of 14.9 percent, 6.8 percent, and 11.8 percent respectively. Mainland Chinese continued to lap up Tencent shares via the Southbound Stock Connect program, a phenomenon that has been happening for several weeks already.

Interestingly, the CQQQ ETF's ninth-largest holding JOYY Inc (YY) also notched up a strong appreciation last week with its share price soaring 24.7 percent. Year-to-date, JOYY has climbed 43.5 percent, an impressive performance considering that we are just five weeks into 2021.

Given the epoch-making GameStop (GME) mania we experienced in the past two weeks, I wouldn't blame you for thinking that JOYY was a beneficiary of the phenomenon as it is also a target of short-sellers. Famed short-selling outfit Muddy Waters had in mid-November warned that Baidu was about to step into the shoes of General Motors (GM).

Recall that GM announced in September a strategic partnership with Nikola (NKLA) and a deal to take a stake in the electric vehicle maker. The share prices of both companies skyrocketed on the news but subsequently plunged following fraud allegations targeting Nikola by Hindenburg Research. In a similar fashion, Carson Block of Muddy Waters accused JOYY of "massive fraud" in both its YY Live and Bigo Live units soon after Baidu announced the acquisition of JOYY's live-streaming business in China (YY Live).

However, as you will see from the following chart, the appreciation in JOYY has been gradual, unlike the volatility experienced by GSX Techedu (GSX), a popular short-seller target. The stock of the latter truly exhibited a price movement reminiscent of what GameStop and BlackBerry (BB) experienced in the past two weeks.

ChartData by YCharts

The difference can also be gleaned from the data. GSX Techedu has 27 percent of its shares outstanding short while it is 9 percent for JOYY, roughly one-third that the former. Accordingly, even with a lower traded volume on average, in theory, short-sellers would only take around half the time required for GSX Techedu to cover the short quantity at JOYY. Thus, it appeared that JOYY's share price climb is more of its fundamental merits than the Redditors' effect.

ChartData by YCharts

The KraneShares CSI China Internet ETF (KWEB), did well relative to the broader Chinese ETFs, closing up 10.2 percent for the week. As its name suggests, the KWEB ETF has its makeup of internet stocks to thank for the outperformance. As we know, the sector is flaming hot right now, even as regulatory uncertainties continue to plague certain companies.

Among the key holdings of the KWEB ETF, the share prices of streaming video-platform operator Bilibili (BILI) and online group buying champion Pinduoduo (PDD) shone. Their shares rose 22 percent and 18 percent respectively.

The dazzling IPO of Kuaishou could have spurred investors to think Bilibili would similarly enjoy the clamoring of its pending secondary offering in Hong Kong. Sharing a personal experience, I have switched to using Bilibili recently for my fix of Chinese entertainment. My video-watching on Google's (GOOGL)(GOOG) YouTube has been incessantly interrupted by advertisements, spurring me to find alternatives.

Perhaps many others are thinking the same and finding their way to Bilibili. International users play a small part in its business. However, since Bilibili is listed in the U.S., as more investors become acquainted with the platform, the greater visibility the stock receives. My usage led me to discover several useful and free features provided by Bilibili that were unavailable on YouTube. This goes to show the impetus Bilibili provides to users to shift to its paid version as the advantages go way beyond just ad-free.

There aren't any apparent factors driving the share price of Pinduoduo but the market seemed to be excited about the massive shift to groceries group-buying model that has also pushed the share price of Meituan higher. Notably, Pinduoduo is expected to announce its Q4 2020 results soon. Thus, bullish shareholders could have added to their holdings ahead of what they anticipated to be stellar quarterly results.

Although Trip.com (TCOM) is not a top 10 holdings of the KWEB ETF, I think it deserves a mention as its technical charting looks interesting. The stock broke out of a multi-year downtrend in November 2020 and has managed to stay above the resistance-turned-support line. This is despite a dismal travel booking season for the Chinese New Year is a foregone conclusion due to the ultra-cautious stance several provincial governments have taken this year to prevent further fresh outbreaks of COVID-19 cases.

Yet, the bearishness surrounding the badly hit travel stock did cause it to breach the support line of the uptrend formed since the March 2020 trough on an intra-week basis on Monday. A strong spurt on Friday on higher-than-usual trading volume returned the stock firmly above the support and kept the On-Balance-Volume indicator on the uptrend.



Source: ALT Perspective (drawn using the charting tool of TradingView.com)

Coming back to Alibaba's results as promised, you wouldn't believe that Alibaba scored another quarter of positive surprises both on revenue and earnings given the ho-hum reaction its stock has received last week. Its fiscal year Q3 2021 revenue beat by 2.1 percent while its non-GAAP earnings beat by 6.6 percent. On a GAAP-basis, the earnings beat was a whopping 72 percent primarily due to one-time gains.





Source: Seeking Alpha Premium data

For a company growing its revenue at 37 percent year-on-year and trading at a price-to-earnings ratio on a forward-basis at 25.6 times, it is a screaming buy. That is until you realized it's a Chinese internet giant where the media and observers tend to have a negative bias. For instance, an article noted, "without the Sun Art contribution, Alibaba's revenue would have risen by a more modest 27% for the December quarter, representing a 3 percentage point decline from the previous quarter."

However, that is ignoring the impact of the hypermarket operator's lower profit margin on the group's overall narrative. Furthermore, it's not like Alibaba can choose to exclude Sun Art's figures in the next few quarterly results. Sun Art's revenue growth stagnated in 2020 and it doesn't take much imagination to think the outlook would not be much brighter for the brick-and-mortar retailer.

A key highlight in the results was Alibaba Cloud posting a profitable quarter for the first time. The cloud services segment delivered an adjusted EBITA of RMB24 million (US$3 million) in the quarter ended December 31, 2020. In the same quarter of 2019, the division registered a loss of RMB356 million.

The management attributed the reversal primarily to "the realization of economies of scale." The amount is puny relative to the full adjusted EBITA of RMB61.3 billion brought in by Alibaba during the December quarter. Nonetheless, it was no mean feat, considering that Google Cloud had billions of dollars more in revenue than Alibaba Cloud on an annualized basis but still lost $5.6 billion in the last quarter.

For a behemoth like Alibaba, there are too many moving parts to study in-depth. The time and effort required for an individual investor to understand the quarter-to-quarter changes are simply too onerous. I found it meaningful to look at higher-level metrics like the free cash flow trend and net financial debt. In the December quarter, Alibaba improved on its free cash flow to $25.4 billion, helping to boost its net cash (negative net financial debt) to $52.7 billion.

ChartData by YCharts

Next, I like parsing through the earnings conference call to catch hints dropped by the management. For instance, if you are thinking about where the growth in its e-commerce business could come from, Daniel Zhang, the chairman and CEO of Alibaba Group implied its experiment with groceries could extend into a full-fledged service.

"Today, we're still in the pilot test for Taobao Grocery in some of the cities. And so today, only a small portion of Taobao users can access the service. But over time, we will roll this service out across the country and the collaboration with multiple suppliers across Alibaba business."

Alibaba's results presentation slides also provided a good overview of the breadth of its various businesses. In particular, the section on "New Seed Businesses" and "Innovation Initiatives & Others" are areas to watch.



Source: Alibaba Group

Another useful feature you can use in Seeking Alpha Premium is the tracking of consensus EPS revision trends. At one glance, it's clear that analysts had revised their EPS estimates for Alibaba for the next few quarters downwards. While this does not seem like a positive thing, the fact that the share price is heading upwards contrary to the revision suggests that a worse scenario could have been priced in earlier. The lowering of the bars could also increase the chances of the company delivering earnings surprises.



Source: Seeking Alpha Premium

The quarterly results were not the only attention-grabbing news item for shareholders. The progress Ant Group, the fintech giant in which Alibaba Group has a 30 percent stake, achieved was cheered by investors. Ant Group and the Chinese regulators agreed on a proposal to turn the company into a financial holding company, paving the way for a restart to its IPO plans.

Investors are of no delusion that the transformation would curtail Ant Group's prospects. Nevertheless, the negative press the IPO suspension received had seemingly chopped off an excessive chunk off the valuation of Alibaba Group that any relief would go some way to restore that unjustified sell down.

Alibaba's US$5 billion debt sale also turned out to be a positive for the company beyond the funding the exercise would bring. The glowing media coverage also boosted the confidence of shareholders. The headlines including "Alibaba's bumper bond sale draws US$38 billion avalanche of orders", "Alibaba's $5 Billion Bond Sale Shows Jack Ma Fans Still Believe", and "Alibaba Jumbo Bond Sale Shows Investor Faith in Ma's Future" were a far cry from just a few weeks ago. In mid-January, the media was screaming a bearish stance with "Alibaba's Jumbo Bond Deal Goes Quiet With Jack Ma Out of Sight" and "Alibaba's Jumbo Bond Sale in Doubt" instead.

As explained in a past issue of the Chinese Internet Weekly, I found the KWEB ETF holding the most representative stocks in the sector. As such, an overview of the week's share price movements of the top few holdings of KWEB as compared with the ETF itself is provided as follows for convenient reference especially for the stocks mentioned in this article.

ChartData by YCharts
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Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Disclosure: I am/we are long BABA, BIDU, JD, YY, TCEHY, TCOM, INFO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.