Alibaba: Don't Sell The Cainiao Logistics Spin-Off

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Shares of Alibaba Group Holding (NYSE:BABA) person been a arguable concern successful the past mates of years owed to an accelerating authorities crackdown driven by Beijing’s regulators arsenic good arsenic a slowing e-Commerce concern that was profoundly affected by the COVID pandemic. Most recently, however, the e-Commerce institution has reported a fig of affirmative quality items that person not resulted successful a large revaluation of the company’s shares, however. These items included a re-acceleration of maturation successful the e-Commerce successful the June 4th and a large reorganization program that I speculated could pb to the spin-off of its Cloud business.

Additionally, Alibaba conscionable announced that it would question a Hong Kong IPO of its logistics arm. Considering that e-Commerce income are acceptable to turn rapidly successful the adjacent 5 years, I judge the prospects for Cainiao are precise favorable arsenic good and investors whitethorn not privation to clasp connected their spin-off shares successful Alibaba’s logistics enterprise!

Previous rating

I rated Alibaba a clasp pursuing the company’s net merchandise for the June quarter, contempt the e-Commerce steadfast seeing a important re-acceleration of its apical enactment maturation successful the halfway e-Commerce business. I besides estimated that the institution could execute $20B (or more) successful yearly escaped currency flow successful the existent fiscal year. The Initial Public Offering of Cainiao Smart Logistics Network could assistance Alibaba accelerate its concern modulation and let investors to seizure upside successful a spin-off investment.

Cainiao logistics IPO and agelong word maturation prospects of the industry

Cainiao Smart Logistics Network is simply a fast-growing logistics endeavor that was founded successful 2013 and has historically been integrated with Alibaba’s halfway e-Commerce operations.

In a filing with the Hong Kong banal exchange, dated September 26, 2023, Alibaba said that it volition prosecute a spin-off and question a abstracted listing of its logistics business. The institution besides confirmed that it volition clasp a bulk (50%+) ownership presumption and truthful proceed to dainty its Cainiao concern arsenic a subsidiary.

Cainiao has grown alongside Alibaba's e-Commerce concern and is the third-largest concern wrong Alibaba based disconnected of revenues, but this conception does not person a batch of attraction from investors.

In my opinion, this is due to the fact that the institution is inactive overly reliant connected its halfway China e-commerce concern (now reported arsenic the Taobao and Tmall Group segment) to make revenues -- which accounted for 46% of Alibaba's apical enactment successful the June quarter. The second-largest concern is Alibaba Cloud, successful presumption of gross contribution, which is the fourth-largest planetary Cloud work supplier with a marketplace stock of astir 4%.

Cainiao Smart Logistics Network achieved 23.16B Chinese Yuan ($3.2B) successful revenues successful the June 4th and had the third-fastest gross maturation complaint astatine 34%, aft Alibaba’s International Digital Commerce Group and Digital Media & Entertainment. According to Alibaba, this maturation was chiefly owed to integrated maturation successful planetary fulfillment solution and home user logistics services.


Source: Alibaba

On an annualized basis, I estimation that Cainiao Smart Logistics Network could execute $13.0-13.5B successful revenues successful FY 2024. Large integrated freight carriers specified arsenic FedEx (FDX), United Parcels Service (UPS) and Landstar System (LSTR) are valued astatine price-to-revenue ratios betwixt 0.7X and 1.4X. On an mean basis, Cainiao, utilizing the mean P/S ratio of different freight carriers, could beryllium worthy $13-14B.

That Alibaba chose to rotation disconnected Cainiao Smart Logistics Network arsenic its archetypal concern came arsenic a astonishment to me, however. I discussed a fewer months agone however I expected Alibaba’s Cloud IPO to beryllium the archetypal abstracted listing and a imaginable catalyst for the battered e-Commerce company.

Cainiao’s agelong word maturation projections are highly favorable considering that e-Commerce income are increasing rapidly and planetary logistics providers similar Cainiao are acceptable to nett from accrued parcel shipment volumes. Alibaba’s logistics limb handled implicit 1.5B e-commerce parcel shipments successful FY 2023 and the institution is already profitable.

According to Insider Intelligence, planetary e-Commerce income are projected to emergence to much than $8T by FY 2028, indicating astir 9% mean yearly maturation implicit the adjacent 5 years. The agelong word maturation prospects for the logistics and freight industries are inextricably linked to the emergence of cross-border commercialized and e-Commerce transaction volumes... which I judge makes Cainiao a agelong word clasp for investors.

 Insider Intelligence

Source: Insider Intelligence

Alibaba remains profoundly undervalued

Shares of Alibaba proceed to commercialized astatine a depressed valuation, based disconnected of net and revenues, and it appears that investors are taking a wait-and-see attack with respect to the firm’s announced reorganization. Shares of Alibaba’s concern commercialized astatine conscionable 8.8X FY 2024 earnings, and analysts proceed to see an EPS recovery successful the years up arsenic the Chinese system recovers. (JD) is besides undervalued with a P/E ratio of 8.5X, portion PDD Holdings (PDD) is not that charismatic anymore from an net position (P/E ratio of 16.5X). Considering that Alibaba has a fig of catalysts -- reacceleration of growth, IPO of Cloud business, spin-off of Cainiao -- I judge the revaluation imaginable is particularly charismatic for Alibaba.

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Risks with Alibaba

I would see it a setback if the spin-off of Cainiao Smart Logistics Network received a acold reception erstwhile it gets listed connected the Hong Kong banal exchange. A consequent slowdown successful apical enactment growth, particularly successful the important Taobao/Tmall segment, could beryllium a antagonistic catalyst for Alibaba’s shares arsenic well. Another hazard evidently is that spin-off shares could underperform, particularly initially, arsenic investors often merchantability unwanted spin-off investments.

Final thoughts

The spin-off of Cainiao Smart Logistics Network comes arsenic a astonishment and indispensable beryllium seen successful the discourse of Alibaba’s broader restructuring and reorganization, which calls for the instauration of stand-alone concern units that volition beryllium tally independently from Alibaba’s halfway concern going forward. While I expected Alibaba to archetypal rotation disconnected and database its Cloud business, I judge the institution is nevertheless pressing guardant aggressively with its restructuring and the logistics limb spin-off should accelerate this transition. The spin-off filing besides shows that Alibaba volition proceed to ain a bulk involvement successful the institution post-listing, astatine slightest initially. Given the favorable maturation prospects of the planetary e-Commerce and logistics industries, I judge investors person each crushed to besides go agelong word holders of Alibaba's fast-growing logistics enterprise!

This nonfiction was written by

I look for high-risk, high-reward situations. Five largest portfolio holdings: Bitcoin, SoFi, Alibaba, PayPal, Western Alliance. Early purchaser of cryptocurrencies. I unrecorded successful Thailand :)

Analyst’s Disclosure: I/we person a beneficial agelong presumption successful the shares of BABA either done banal ownership, options, oregon different derivatives. I wrote this nonfiction myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary concern narration with immoderate institution whose banal is mentioned successful this article.

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