Stocks: Alibaba's $32 Billion Break Up

BABA may have just set a new trend for China tech names

• Alibaba splits into six, good news for investors

• Easier growth and lower regulation

• Shares are still at low valuations, despite 14% gain

• China's economy is still weaker than expected

Alibaba announced plans to split its $220 billion empire into six business units, a major restructuring that heralds several initial public offerings. Investors say the move will spur a revaluation of the tech empire by allowing individual units to raise funds separately and make swift business decisions amid intensifying competition in China.

This split could be excellent news for investors.

Unlocking a path for investors

Alibaba is a firm that operates across various industries, much like some of its large-cap Chinese tech contemporaries. However, not all of BABA's business units are in the same stage; some are very successful but developing slowly, while others are expanding quickly but not yet profitable.

When all these businesses are lumped together into one entity, some see the company as a jack of all trades - and master of none.

Now investors can focus on the aspects of Alibaba they like while avoiding the areas they don’t like. This will benefit current shareholders and eyes that have avoided this name so far.

Growth investors can focus on the fastest-growing areas of BABA currently. On the other hand, value investors can pick up the profitable but slower growth areas of business.

As well as growth or value, investors can now be selective with having exposure to Chinese e-commerce or cloud computing without having to take on both.

This should help each area of Alibaba to bring in more investors and help share prices higher across the board.

Here’s a breakdown of how Alibaba will be breaking the company down.

1 - Cloud Intelligence Group

2 - Taobao Tmall Business Group

3 - Local Services Group

4 - Global Digital Business Group

5 - Cainiao Smart Logistics

6 - Digital Media and Entertainment Group

This break up will also have easing on burdensome regulations Alibaba has faced. Going forward as six individual companies will mean Alibaba does not pose such a conglomerate risk. Currently, they have a substantial market share and have faced pressure from regulators.

Daiwa Capital Markets analysts John Choi expects the revamp to enable quicker response to market changes and allow greater external fund raising, while also helping to improve employee morale via individual stock option plans. 

Cheap value

With its shares trading below ten times its estimated earnings for the next 12 months, Alibaba’s valuation trails that of major rivals JD.com and PDD Holdings, which both have double-digit multiples. The stock is cheaper than utility firm CLP Holdings and is valued on par with China Telecom Corp.

Although earnings-per-share have been revised up since mid-2022 as investors factored in benefits from China’s reopening, the company’s valuation multiple has received a limited boost.

Investors have been betting on a revival of Alibaba’s rivals, such as PDD, amid fierce competition in China’s e-commerce space. PDD’s US-listed shares have gained 64% over the past year even after a recent pullback, while Alibaba is down more than 25%.  

Alibaba’s shares BABA 0.00%↑ have rose 14.26% yesterday after the announcement. This added $32 billion onto their market capitilisation. This morning, shares are down slightly, -1.84%.

We will be keeping an eye on BABA for a further move. The price was just shy of $100 at its peak yesterday. This will be a big level to break.

Year-to-date highs sit at $121. With a very low valuation currently and a strong catalyst, investors who are looking both long term and short term may be buying up stock over the coming weeks.

The macro economy in China has been weaker than expected since the move away from their zero-Covid policy. This may pose some difficulty to Alibaba’s positive momentum.

We may see other China names follow Alibaba’s footsteps if this latest turn continues to be a smooth one.

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