Wednesday, 12 August 2015

Alibaba - China crisis but flaunt the cash flow

My last write-up on Alibaba concluded that:

'My view would be that building this sort of a client base predominately in the world's fastest growing large economy is clearly structurally very interesting.  Just under 40% ebitda growth for a just over x40 earnings rating...peg ratio advocates could certainly make that work.  

So not a stock for everyone maybe but I can still make it work and want to add further over time/on weakness. The US$80 level the share bounced from today is one such level, US$70 (or 5% free cash flow yield using the FY15A free cash generation) is another.  

Alibaba: i like the structural growth and cash flow and the management evolution announced today also sounds sensible. I am looking for opportunities to augment my holding'. 

So what has happened over the last three months?  Well after a push back to the US$90s the share has drifted down...and today is languishing at a new post IPO low: 

Now part of this is linked with the malaise surrounding the Chinese market and more recently the Chinese economy.  Indeed the correlation between Alibaba and the last 3 month move of the Shanghai Composite is quite striking: 

In terms of the results growth may not have hit everybody's hopes but just under 30% revenue growth is not too shabby although margin falls ("Consolidation of acquired businesses...Investment in new business initiatives") did constraint year-on-year ebitda growth to 'just' 23%. 

The growth of mobile as hinted to in some of the statistics above but the improving monetisation (a theme I noted on the most recent superlative Google results earlier in the results season - link here) continued apace.  Note importantly that now a majority of the Chinese Commerce Retail Revenue is now generated by mobile.  

Of course - again thematically playing out in the aforementioned Google results - is the importance of a rise in free cash flow.  This necessarily is a bit lumpy but getting on for RMB10bn given all the ongoing investment/expansion by the company struck me as reasonable.  With traditionally the better cash flow quarters to come it is not implausible that the company will generate nicely above a 4% free cash flow yield.  The US$70/share and 5% free cash flow level I noted last quarter may be a slightly tough stretch however.  Nevertheless accretion should be anticipated from the newly announced 2%+ of market cap equivalent buyback.
Other noteworthy aspects were the nice quantification of the strategic investment portfolio worth a cool 18% equivalent of today's market cap...

...and more tactically negatively the reality of the end of the lock-up of a mere 1.5bn+ of shares.  Does anyone dare sell?

Putting it all together the current Chinese sentiment malaise and lower margins took the edge of otherwise strong results (mobile monetisation, portfolio interests, cash flow).  However - as I concluded in May - the current share price in the lower US$70s interests me.  The company may not be quite generating the fabled 5% free cash flow yield at this level but (especially adjusting for portfolio interests and obviously expansionary capex) it is close enough.  

In short, on a day of considerable China related fear, it is more a day to be buying Alibaba shares.  My view is that I doubt whether many of the locked up shares will be sold - and any Yahoo shareholder dumping overhang may provide another opportunity to augment.  

One final point, as noted by Fast FT, Alibaba's great peer Tencent also reported today.  It would be remiss to ignore their thoughts too.  An update report on them will be published later. 

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