Guys - As mentioned I will refrain from bringing further China investment discussions to the board but for those that were interested specifically in the BABA case, I am consolidating the discussion around the BABA thesis into this thread.
In another thread I made the point to Bear that I believe an analog for BABA’s valuation could be viewed by considering that:-
For BABA’s 260B you are getting the equivalent of Amazon (400BN), Youtube (est. valuation 100BN) via its ownership of YuKou, eBay (40BN) via its AliExpress & Taobao auction sites, PayPal (50BN) via its earnings stake in AntFinancial/AliPay.
Then factor in China never built an offline retailing commerce equivalent of WalMart etc - but instead of a belated nationwide physical retailing build out, Chinese are going straight to online commerce so BABA is actually also the equivalent of US’ WalMart to a degree.
Then factor in China has 3x the population of the US…
Then factor in China is growing 2x the rate of the US economy…
Then factor in its assets in India - Snapdeal & PayTM stakes (another 1Bn people) and SE Asia - Lazarda (another 1Bn people)…
Then you have all their strategic initiatives like AliHealth thrown in for free.
I believe whether on the basis of a direct comparison with Amazon or on a like for like sum of the parts, BABA is undervalued. As a result, in full disclosure:- I bought in last year originally in the dip at $73, topped up after earnings at $91 and added again with the recent sell off at $89.
On the Alipay front, firstly there have been eventual disclosures on this story (although we will never know the basis of the he said/she said claims) and agreement reached between AliBaba (and its stakeholders Yahoo and SoftBank) and the Ant Financial organisation.
I think BABA is left with a stake in an amazing appreciating asset. Free access to payment transaction settlements from Alipay (or at cost), the original cash payments to AliBaba and the opportunity to take a substantial economic ownership stake of 37.5% of equity or profit share from Ant Financial in perpetuity at the point of an IPO or liquidity event. I’m not convinced Alipay could have grown the way it has under direct embedded control of AliBaba in the same way as Paypal was able to grow value under eBay.
I understand that regulatory landscapes are prone to change - sometimes suddenly and don’t offer the transparency that I might be used to or prefer to see. This produces uncertainty and risk - and whilst China is not where we would want it to be I don’t consider the US a paragon of fortitude in this respect and certainly under Trump we are seeing unconventional and uncertain policy directions.
As a Brit living in Singapore - I consider that I am taking a risk whether it is in the UK, US, Singapore or HK/China although clearly the risk reward situations vary. Whilst my highest RoI plays I have ever experienced were with ARM holdings (exiting with 10, 20 and 40 baggers) in the UK and with CEVA in the US (currently a 7 bagger), after that my next 3 highest RoI performers have all come from China investments (CTRP, TAL and NTES). I expect BABA to catch and overtake my other China investment returns and be one of the cornerstones of my future wealth. Amazon and Alibaba (and Shopify) look to have a business model that will grow, prosper and strengthen for decades ahead. I believe i can get into BABA with greater runway and higher potential returns than Amazon at this point of time - yes perhaps with more risk.
FWIW - If you want to see the hard details on Alipay - it is disclosed in the 2016 financial statements…
The key details are on page 121 of the report.
2014 Restructuring of Our Relationship with Ant Financial Services and Alipay
On August 12, 2014, we entered into a share and asset purchase agreement, or the 2014 SAPA, and entered into or amended certain ancillary agreements including an amendment and restatement of the Alipay IPLA. Pursuant to these agreements, we restructured our relationships with Ant Financial Services and Alipay, its wholly- owned subsidiary, and terminated the 2011 framework agreement.
Pursuant to the 2014 SAPA, we sold the SME loan business and related services to Ant Financial Services for an aggregate cash consideration of RMB3,219 million. In calendar years 2015 to 2017, we will receive an annual fee equal to 2.5% of the average daily book balance of the SME loans. In calendar years 2018 to 2021, we will receive an annual fee equal to the amount paid for the calendar year 2017, or collectively the SME annual fee.
In connection with the 2014 SAPA, we also entered into an amended intellectual property license agreement with Alipay, or amended Alipay IPLA, pursuant to which we license certain intellectual property and provide certain software technology services to Alipay and the SME loan business. Under the amended Alipay IPLA, we receive royalty streams and a service fee, or collectively the profit share payments, paid at least annually, amounting to the sum of an expense reimbursement plus 37.5% of the consolidated pre-tax income of Ant Financial Services, subject to certain adjustments.
Pursuant to the terms of the 2014 SAPA, in the event of an initial public offering of Ant Financial Services or Alipay at an implied equity value exceeding US$25 billion which results in gross proceeds of at least US$2.0 billion (a ‘‘Qualified IPO’’), if our total ownership of equity interests in Ant Financial Services has not reached 33%, we would be entitled at our election to either receive a one-time payment equal to 37.5% of the equity value of Ant Financial Services as determined immediately prior to such Qualified IPO. There is no cap on the maximum value of such liquidity event payment. If we acquire equity interests in Ant Financial Services in an aggregate amount less than 33%, the percentage of Ant Financial Services’ equity value used to calculate such liquidity event payment will be reduced proportionately.
In lieu of receiving such liquidity event payment, we may elect to continue to receive the profit share payment in perpetuity, subject to the receipt of regulatory approvals. In connection with a Qualified IPO and if we so elect, Ant Financial Services must use its commercially reasonable efforts to obtain the required approvals for continued payments under the amended Alipay IPLA. If such approvals are not obtained, Ant Financial Services will pay the liquidity event payment as described above to us.
The 2014 SAPA provides for future potential equity issuances to us by Ant Financial Services. In the event that Ant Financial Services applies for and receives certain PRC regulatory approvals in the future, Ant Financial Services will issue and we will purchase newly issued equity interests in Ant Financial Services up to a 33% equity interest, or such lesser equity interest as may be permitted by the regulatory approvals. If the liquidity event payment described above has not become payable upon a Qualified IPO of Ant Financial Services, our right to acquire equity interests up to the full 33% equity interest will continue after such Qualified IPO. However, the maximum equity interest that we are entitled to acquire will be reduced in proportion to any dilutive equity issuances by Ant Financial Services in and following such Qualified IPO. If we acquire an equity interest in Ant Financial Services pursuant to this arrangement which is below 33%, the liquidity event payment amount and the
profit sharing arrangement under the Alipay IPLA will be proportionately reduced based on the amount of equity interests acquired by us.
For additional details of the new and amended agreements, see ‘‘Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Agreements and Transactions Related to Ant Financial Services and its Subsidiaries.’’