Splitting Alibaba, who is most likely to be the first to go public independently?

If there is a possibility of independent listing, Cloud Intelligence Group will be the biggest attraction.

On the evening of March 28, Alibaba announced the largest organizational restructuring in history, with Alibaba U.S. stocks up 14.26% on March 28 and 1.54% on March 29.

In terms of Hong Kong stocks, Alibaba's share price also soared on March 29, rising 12.23% to close at HK$94.55, with a turnover of more than HK$10 billion. Ali Health (0241. HK) and Alibaba Pictures (1060.HK) also rose 5.17% and 5.15% respectively, boosted by the news.

In the announcement, Alibaba said the move was to "drive more agile businesses, shorten decision-making chains, enable us to respond faster to market changes, and further unlock the value of Alibaba Group's businesses by seizing opportunities in their respective markets and industries."

The more important statement in the announcement is that except for Taobao Tmall Business Group, which will continue to be wholly owned by Alibaba Group in the future, each business group will have the possibility of independently raising funds and seeking a separate listing.

Of course, Alibaba did not specify in the announcement which business sectors are most promising to go public and where it will choose to list. According to media reports, Daniel Zhang said eight words in response to this question on the company's intranet: mature one, listed one.

Citi analyst Alicia Yap believes that Alibaba's adjustment is earlier than the market expects, it will take some time for each business unit to raise a separate capital or go public, and whether the holding group will retain its stake in the business unit is unknown, but investors will reassess the value of each business unit.

"This is very positive for shareholders," Thomas Hayes, chairman of Great Hill Capital, which holds shares in Alibaba, told Barron's, "which will allow the 'sum of parts' valuation to be achieved more quickly, because in the event of an IPO or spin-off to shareholders, the faster-growing business units will eventually be given higher valuations by the market." ”

Considering the listing access requirements of various exchanges, Daniel Zhang's statement is to some extent a relatively clear statement. Based on Alibaba's adjusted six major business groups and past financial reports (Note: Alibaba's fiscal year ended March 31), perhaps we can find out who will be the first to go public independently.

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1. Cloud Intelligence Group

Cloud Intelligence Group includes cloud, AI, DingTalk and other businesses, corresponding to Alibaba's cloud business unit, and after the restructuring, Alibaba Group Chairman and CEO Daniel Zhang will concurrently serve as CEO.

On the revenue side, cloud business is Alibaba's fastest growing and most sustainable division, and its share of total revenue is also increasing year by year, and fiscal 2022 is the second highest proportion of Alibaba's revenue.

In terms of profit, from fiscal 2018 to fiscal 2021, the loss of Alibaba's cloud business continued to increase; On a positive note, cloud losses narrowed significantly in fiscal 2022.

This is also a signal that the market needs to see, because since fiscal 2022, the cloud business is replacing e-commerce as Alibaba's core growth point. This also means to a certain extent that if there is a possibility of independent listing, Cloud Intelligence Group will be the biggest attraction.

The latest earnings announcement reveals Alibaba's ambitions in the cloud business. In 2022, with the establishment of data centers in Saudi Arabia, Germany, Thailand, South Korea, and Japan, Alibaba Cloud has provided computing services in 28 regions and 86 availability zones around the world.

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2. Local Life Group

Local Life Group, with Yu Yongfu as CEO, was previously Alibaba's local life services division, covering AutoNavi and Ele.me and other businesses.

Previously, as part of Alibaba's "core business", revenue and operating profit of local life services were not disclosed separately in the financial report. However, if we look at fiscal 2020 as a starting point, it is not difficult to find that although local life services have revenue growth that is not inferior to that of cloud business, it is accompanied by a loss scale similar to that of revenue.

In this regard, Alibaba gave optimistic guidance: the improvement of Ele.me's business efficiency will continue to narrow the loss of the local life service business, while the stability of the epidemic and the recovery of travel demand will allow AutoNavi demand and Fliggy's outbound travel business to recover.

In fact, local life groups have always faced fierce battles in their respective segments - Ele.me vs Meituan (and maybe Douyin and WeChat in the future), AutoNavi vs Baidu Map, Fliggy vs Ctrip... On the one hand, this will be a protracted battle for Local Life Group, on the other hand, many of its competitors are listed companies, which also means that this part of the business is not completely out of the possibility of successful listing.

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3. International digital business group

The international digital business group, Alibaba's international business business, will be helmed by Jiang Fan in the future, and its businesses include Lazada, AliExpress, Trendyol, Daraz, Alibaba.com and so on.

The revenue and growth rate of the international commercial business are quite stable, but two trends that cannot be ignored are the continued expansion of its operating losses and its importance in Alibaba's revenue is being replaced by the cloud business.

In recent years, there have been many successful cases in China's cross-border e-commerce journey. Before Shein completed overseas expansion in a low-key manner, there was Pinduoduo's overseas version of Temu with a high-profile frenzy. In contrast, Alibaba's international business does not make a big splash.

For example, Lazada, which focuses on the Southeast Asian market, has been suppressed by Shopee, and as of December 31, 2022, Lazada has not achieved profitability per order. For Trendyol in the South Asian market and Daraz in the Turkish market, Alibaba plays more of an investor role.

AliExpress is expected to be a bright spot for international digital business groups. By partnering with Cainiao to strengthen its cross-border delivery capabilities, AliExpress has significantly improved its cross-border delivery delivery time in key countries. The message released here is that Alibaba cannot bypass the most critical and basic requirement of logistics, and the success or failure of Alibaba's cross-border e-commerce depends on the construction of localized logistics and the dredging of cross-border logistics.

There are also challenges that may not be important but must be mentioned, such as geopolitical conflicts, transaction data privacy, overseas VAT policy changes, etc.

4. Cainiao Group

Cainiao Group continues to have Wan Lin as CEO. As of the fourth quarter of 2022, the revenue of Cainiao's business increased by 17% year-on-year to RMB23.023 billion.

From the perspective of revenue, Cainiao's growth is not weaker than that of cloud business, but its biggest challenge may come from the outside: in addition to SF Holding and JD Logistics, the revenue scale of "three links and one delivery" and Cainiao is similar, which is enough to see that the competition in the domestic express industry is not over.

At the same time, with many peer companies as a reference, Cainiao Group's independent listing and valuation have a more specific imagination.

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5. Grand Cultural and Entertainment Group

The Grand Entertainment Group, led by Fan Luyuan, is Alibaba's digital media and entertainment business, including Youku, Alibaba Pictures and other businesses. Among them, Alibaba Pictures has been listed on the Hong Kong stock market, with a market value of HK$13.7 billion on March 29.

This is Alibaba's slowest business unit with relative revenue growth, and it is also a relatively weak sector with a relatively weak presence within Alibaba. In the quarterly results announcement ending December 2022, the digital media and entertainment business was the least spaced, with only one sentence: "In the December quarter, Youku's average daily paying user size increased by 2% year-on-year", conveying a small amount of valuable information.

However, since the consolidation of fiscal 2019, the losses of the digital media and entertainment business have been narrowing, which has also led some market views to expect the business.

6. Taobao Tmall Business Group

Taobao Tmall Business Group was placed last because it has already been determined to remain within Alibaba Group, so the question behind this is whether it can support Alibaba's current valuation level after the five businesses are separated.

A case study is JD.com-SW(9618.HK). In June and December 2020, Dada Group (DADA.O) and JD Health (6618.HK) listed on NASDAQ and Hong Kong, respectively, and in 2021, JD Logistics (2618.HK) also completed its IPO in Hong Kong.

However, affected by the overall market conditions, the impact of these three listings on JD.com's stock price is different. On the first two occasions, JD.com's stock price rose with it, and when it was JD.com's turn, it fell, but the decline was not large, only 0.14%.

As of the close of U.S. stocks on March 28, Alibaba's market value reached US$260.5 billion, and the market value of Hong Kong stocks returned to HK$2 trillion on March 29. The adjustment of the organizational structure is a good thing for Alibaba's stock price. After three months of rebound, Alibaba's U.S. stocks and Hong Kong stocks both started a correction at the end of January, falling 28.57% and 27.45% respectively from their highs as of March 27.

Thomas Hayes believes that Alibaba's approach will also help it better cope with changes in the regulatory environment, because "six small departments" are less likely to be the first birds of the gun than "one behemoth".

Jim Osman, founder of The Edge Research, which focuses on spin-offs and transactions, said Alibaba "sends a positive signal to other big tech companies that they can also explore and consider splitting their own segments to create value."

He told Barron's: "If the spin-off is successful, Alibaba will be a model for value creation for conglomerates." ”

Alibaba's official website shows that it will hold a communication meeting on March 30 on the new organization and governance structure.

Text | Barron's Chinese Writer Lin Yidan

Edit | Peng Ren