After years of tossing "a void", what did Alibaba vote?

At the end of December 23, Alibaba also said in the all-staff letter announcing the change of CEO of Taotian Group, and also said that the group was preparing to establish an asset management company of Alibaba Group. After the "1+6+N" group organizational change, Alibaba Group's positioning as a "1" has also changed to an investment holding company, which shows that after the management of specific businesses is almost completely delegated to the business group/company, the main function of Alibaba Group is to manage the group's assets and funds, through appropriate operations - to put it bluntly, that is, invest/increase holdings of "good assets" and sell/reduce "bad assets" to enhance the quality and value of the Group's asset portfolio, and release this value through listing or sale in the future.

From the recent developments, on the one hand, we see that Ali is vacillating on whether to divest Alibaba Cloud, and the process of Hema independent IPO has also been suspended, and it seems that the road to Alibaba's spin-off subsidiary listing to release value is not smooth; on the other hand, the once popular "rumor that Ali may sell Ele.me" seems to indicate that Ali has more assets on the table than imagined.

We believe that two questions worth exploring are: (1) Is Alibaba Group capable of playing the role of an "investment holder" in the past and in the future to create value for shareholders? (2) What impact will Alibaba have on its performance, cash and valuation if Alibaba sells a large number of other financial investment assets or even some strategic investment assets in the future?

Here's a discussion of both of these issues:

1. The "first half of life" of Ali's war investment:

To judge whether Alibaba Group has good investment management capabilities, the most intuitive reference is the past investment cases and achievements of Alibaba Group. Therefore, in the following, Dolphin Investment Research will divide Alibaba's past investments into three levels, from high to low: consolidated assets - financial/strategic investment assets - angel/venture capital investment assets, and look at which industries/companies Alibaba has mainly invested in in the past in a unified and separate manner.

1. Alibaba's consolidated core investment

Let's first look at the business companies under the "6+N" category of Alibaba's core assets - group holdings, and classify them according to whether their businesses are more of Alibaba's own incubated "sons", or acquired "adopted sons": (1) Taotian Group, Cainiao Group and Zhizhiyun Group, corresponding to the "twins" of domestic e-commerce & logistics in business In terms of the cloud computing business derived from the operation capabilities of the online platform (similar to the case of Amazon from e-commerce to AWS), the businesses under these three major sectors are basically all incubated by Alibaba, in other words, Alibaba's real core competencies lie, while (2) many of the businesses under the category of localized international e-commerce, local life services, big entertainment and "N" are acquisitions, which are attempts to develop diversified businesses outside the main business.

Looking further, what is the direction in which Alibaba's most important consolidated investment is mainly invested? What are the capabilities of Ali Group in terms of strategic strengthening?

(1) In addition to the two cross-border model platforms of Alibaba.com and AliExpress, the international e-commerce sector has acquired three localized overseas e-commerce platforms, which strengthens Alibaba's ability to operate locally overseas.

(2) The local life services are basically all acquired, reflecting the expansion of Alibaba from a national (global) and platform business to a regional and performance-oriented business. After the reorganization, the group's two main businesses, AutoNavi Map and Ele.me, were acquired by Alibaba in 2014 and 2018, respectively. As for Fliggy Tourism, which is oriented to the hospitality business, although it was incubated internally by Alibaba, it has been spun off to the "N" business category that "no one wants".

(3) Alibaba's entire entertainment sector was also almost entirely acquired from acquisitions. On the one hand, it acquired the film and television content production and marketing business composed of Alibaba Pictures (production), Damai.com (entertainment ticketing), and Youku (long video). On the other hand, there is the traffic entrance of the pre-App era - the browser business, including UC and the subsequent incubation of Quark browser.

(4) Among the remaining "N" businesses, the other two investments that have not yet been mentioned and consolidated by Alibaba are Sun Art Retail (the parent company of RT-Mart Supermarket) and Intime Department Store. These two investments reflect Alibaba's expansion from online retail to offline physical retail.

In summary, Alibaba's major investments in the past 10 years have mainly been invested in overseas localized e-commerce platforms, domestic local life platforms, domestic offline retail platforms, film and television entertainment platforms, and browser platforms in the early PC era & mobile era.

2. Equity/financial investment

At the second level, that is, Alibaba's equity investment (generally around 5%-30%) with a considerable proportion of external shareholding but does not seek control. Since Alibaba does not disclose the list of companies and shares invested in detail in the financial report, we have sorted out the list of Alibaba's foreign investments that can be checked (incomplete statistics) as shown in the table below.

After summarizing the statistics, it can be seen that the investment direction of Ali's equity investment is mainly invested in the logistics, finance, entertainment, e-commerce and retail sectors (including several real estate and home furnishing-related companies), as well as several software and AI-related technology companies. According to the above investment list, we can preliminarily summarize such a rule: Alibaba's external equity investment is still around its own business sectors. And this is obviously a little different from the direction and goal of Tencent's foreign investment that Dolphin Jun sorted out earlier in "Talking about the Value of the Other "Half Life" Handed Over by Tencent".

In addition to its main business, Tencent has also invested heavily in areas such as e-commerce, local services, and education, which it is not directly engaged in. That is to say, in addition to its own main business with "core competitiveness", Tencent often enters other industries through equity investment, rather than directly intervening in the form of independent operation. In other words, Tencent itself is more focused on its main business, while the expansion of new industries is more achieved through equity investment.

In contrast, the strategic intent of Alibaba's equity investment seems to be more like extending its business scope by binding the equity of companies in its own industry sector, or promoting external cooperation. In other words, it is more about the expansion and strengthening of the company's existing business and capabilities.

3. Angel/venture capital

Level 3 - Angel/Venture Capital for Startups/Unlisted Companies. According to the statistics of IT orange, from 2015 to 2023, Alibaba Group has more than 300 total foreign investment cases. Investing upwards, sorted by investment amount from high to low, is also the largest investment in e-commerce retail, local life, entertainment, logistics, and other sectors related to Alibaba's main business.

In the three directions of automobile transportation, enterprise services (which may be related to cloud services) and advanced manufacturing, the number of investments is relatively large but the total amount is not too high. It is common sense to speculate that most of them should be small start-up companies, reflecting the medium- and long-term opportunities that Alibaba is betting on.

From the perspective of investment time rhythm, it is also the peak period from 2017 to 2019. After 2020, although the number of Alibaba's foreign venture capital is still about 20-50 a year, the investment amount will decline rapidly after 2021 and remain at a scale of less than 10 billion yuan.

In other words, since the beginning of 2021, Alibaba's foreign investment has slowed down rapidly and entered a state of basic stagnation. However, combined with the timing of the promotion of "enterprise anti-monopoly" supervision in China, Alibaba's own weakening performance and stock price, as well as macroeconomic headwinds, it is also common for major Internet giants to slow down their foreign investment.

4. Summary: What is the goal behind Alibaba's above-mentioned investment?

Summarizing the above cases of Alibaba's foreign investment at three different levels, Dolphin Investment Research believes that the following preliminary but still have certain reference significance can be summarized:

(1) From the past cases of Alibaba's consolidated investment, it can be seen that in addition to its core e-commerce and two supporting logistics and cloud computing businesses, whenever Alibaba tries to expand its business scope (whether it is vertical expansion in similar industries or horizontal expansion across industries), it often adopts the "heavy assets and heavy operation" model of controlling and acquiring its own operations. And after years of expansion, Alibaba's own business span is very wide, covering almost all types of domestic Internet business.

(2) The second level of non-controlling equity investment is also mainly centered on and concentrated in the sectors operated by Alibaba itself, and there is relatively little diversification beyond the scope of its main business (partly because Alibaba's main business is almost all-encompassing). In other words, the main purpose of investment at this level is still to strengthen the main business.

(3) Even in the third level of angel and venture capital, Alibaba's investment direction is still around the main business, and enterprise services and advanced manufacturing are the only two key investment directions outside the main business.

(4) Alibaba's investment activity period in the three levels was about 2015-2019, especially around 17-18 years, but after 2021, due to the "anti-monopoly" policy, the company's performance & economic risks, and the turn of the capital market, Alibaba's foreign investment has basically stagnated.

5. What is the effect of Alibaba's above-mentioned investment?

We have briefly analyzed the main investment directions of Alibaba's past investments, so should these past investments be said to be successful or failed? Admittedly, there is no simple and clear criterion for judging this issue. After all, for Alibaba, the above-mentioned investment is not for investment returns, but more for business expansion and collaboration, and it is difficult to clearly measure whether the above-mentioned investment and acquisition will make a positive contribution to Alibaba's business.

But for investors, a good outbound investment should thicken rather than erode the company's total market capitalization. Therefore, from the perspective of investors and consequentialism, we simplify the criteria for judging the success of Alibaba's past investments as follows: the stock price performance of listed assets since the acquisition of Alibaba, and the growth of revenue or profit since the acquisition of unlisted assets.

(1) Taking Sun Art Retail and Ali Health as cases of Alibaba's merger acquisition of listed companies, it can be seen that Sun Art Retail's share price has fallen by nearly 9% since it was controlled by Alibaba in 2020. After Alibaba Health was acquired by Alibaba at the end of 2014 (and changed its name), although it once rose nearly 10 times in the 2020-21 epidemic buffalo market, the current stock price is basically the same as the price after being acquired 8 years ago. In other words, after 8 years of development under Alibaba, the market value has almost zero growth.

Although in the current market environment, it is not uncommon for a large number of companies' stock prices to be cut in half or even ankles, it cannot be completely attributed to Alibaba's unfavorable investment and operation. But at least in terms of results, we can say that Alibaba has not been able to pinpoint industries or companies with excellent potential to bring about an increase in market value for shareholders. In the case of the gradual maturity of the domestic online economy and even involution, Sun Art Retail, which invests heavily in offline channels, is obviously a failure from the perspective of the rearview mirror.

(2) As for the two sectors of Local Life and Dawen Entertainment, which are almost entirely composed of acquired businesses (but not listed), it can be seen that the revenue of the local life segment has increased nearly 3 times from fiscal year 2019 to 2023, and it is still performing well. However, the total revenue growth of the entertainment sector in the same period did not exceed 30%, which is obviously a bad result. However, the common feature of the two is that although they were acquired, they have not yet realized ADJ after being operated by Alibaba for at least 4-5 years. Positive earnings at the EBITA level are obviously not good either.

In general, Alibaba's business outside the core competence of e-commerce & logistics (plus cloud computing), although after years of investment and operation, has not been able to bring significant thickening to the company's market value or profitability.

2. The "second half of life" of Alibaba Group's transformation investment holding

After the above combing, it can be seen that Alibaba has personally operated diversified businesses in the past, and further strengthened the investment logic of the depth and breadth of these proprietary businesses through equity investment, which has not brought much additional market value and profit contribution to the company so far (but the value of business synergy may not be easily denied, at least it is difficult for investors to judge).

However, the past cannot be traced, not to mention that even if most of Alibaba's past investments were indeed unsuccessful, the market's current valuation of Alibaba Group does not reflect the valuation of this business and the value of equity investment.

And to a certain extent, Alibaba Group's transformation into a holding company, led by Dai Shan to form an asset management company, and its business groups/companies operate independently, independently raise funds or go public, to a certain extent, to solve the problem of too extensive self-operated business in the past.

In addition, the rumor that Alibaba may consider selling Ele.me, even if it is false, reveals that except for e-commerce, which may also include Cainiao Logistics and cloud services, Alibaba will never give up its controlling stake, all other businesses and investments (even if they are consolidated) cannot be ruled out the possibility of being split or sold.

Although the market has not valued part of the investment at present, if Alibaba distributes the proceeds from the sale of equity investment in the form of dividends, or directly distributes the shares of its independent listed subsidiaries to the shareholders of Alibaba Group, it will still be a real shareholder return.

So what is the total value of equity assets held by Ali at present? According to the different ways in which Alibaba recognizes in its financial reports, it is divided into two categories: securities and other investment assets, and investments (plus goodwill) accounted for by the equity method.

(1) Let's look at the first category, securities and other investments (mainly including equity and some bond investments), which are recorded by the company at fair value (applicable to listed assets) or the value of the company's simple calculation. And with the changes in the market, the revaluation is carried out more frequently, and the profit and loss are directly included in the current profit.

Therefore, it can be said that the book value can more accurately reflect the value of assets under the securities investment account, and as of the report of the third quarter of 23 of the natural year (non-fiscal year), the total value of securities investment assets held by Alibaba is 281.7 billion yuan, of which the value of listed + unlisted equity investment is about 220 billion.

According to the detailed composition disclosed in FY2023, we can see that the equity value of listed companies and bond investments that are easily realizable account for about 65% of the total value. According to this proportion, assuming that the equity of listed companies held by Ali has fallen by an average of 20% since the third quarter financial report (the bond investment remains unchanged), then the current value of Ali's easily realized securities is about 158 billion, accounting for about 12.3% of the company's current total market value (excluding the net cash held by the company), if it can be released, the company's market value can have a certain (but not much) boost.

Of course, the premise of the above-mentioned value release is that if the company sells these assets, it will return them to shareholders in the form of dividends or repurchases, and if they continue to remain in the company's accounts, investors will most likely continue to ignore them.

And from the perspective of which portfolio companies are more likely to be sold off, resulting in the potential pressure on the stock prices of portfolio companies. To be honest, Dolphin Investment Research believes that in addition to maintaining a certain degree of control over the performance of domestic express delivery, Ali will most likely not completely sell all the shares of the express company it holds, and all other assets cannot rule out the possibility of this. However, if the total value of Alibaba's holdings is sorted from high to low, the following companies are more likely to be sold by Ali to recoup funds.

(2) In addition, Alibaba currently has about 200 billion non-controlling equity investments recorded in the equity method on its current accounts, and this part of the value is recorded by the company's significant investment in the book net assets of the company that does not hold the company, multiplied by the proportion of Alibaba's shareholding. And although Ali enjoys it every year.

In addition, Ali has more than 260 billion goodwill on its books (accounting for 14.7% of Alibaba's total assets). This considerable book value reflects the difference between the actual price paid by Alibaba when it first invested in the holding or significant influence companies and the actual net assets of those companies.

Since Alibaba did not disclose in detail the specific composition of the above-mentioned equity-based assets (although they should be mainly composed of Ant Group), it is difficult for us to accurately determine the actual value of these assets.

However, considering that domestic assets have generally fallen sharply since 2021, from past experience, Ali confirmed asset impairment of 6.2 billion and 8.3 billion yuan in fiscal years 2022 and 2023 respectively, which shows that there is a lot of impairment pressure. If Ali really realizes these assets through sales and other means, it will most likely lead to the recognition of a considerable impairment loss on the books. This part of the profit and loss will directly affect the operating profit, making the company's financial report look ugly.

However, for institutional investors, this part of the impairment will still be valued based on the actual profit from business operations because it does not actually cause cash expenditure. Therefore, it will not have any negative impact on Alibaba's valuation.