Alibaba IPO
Reading through Alibaba’s S-1 Filing was very interesting, educating and made me realize how big their business is and how complex the Chinese Internet Web is.
You may download the complete form below:
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In this article, I address everything that you need to know about Alibaba’s IPO.
#1 – What is Alibaba?
#2 – What is Alibaba’s Business Model?
To understand Alibaba’s Business Model, we can look at the below chart that depicts the network of entities that Alibaba operates. Also, you will note how the buying and selling of goods are done through Alibaba’s system for Business to Business (B2B) or Business to Customers (B2C) models.
Alibaba’s Business Model
source – Alibaba IPO Prospectus
Chinese consumers buy on Taobao Marketplace, Tmall, and JuhuasuanWhile browsing or searching on Taobao Marketplace, consumers see product listings from both Taobao Marketplace and TmallGlobal consumers buy on AliExpressGlobal wholesalers buy on Alibaba.com
Small sellers in China sell on Taobao Marketplace and AliExpressChinese brands sell on Taobao Marketplace, Tmall, Juhuasuan, and AliExpress and global brands sell on Tmall GlobalSellers source products on 1688.com
Chinese wholesalers and manufacturers supply retail merchants in China on 1688.com and global wholesale buyers on Alibaba.comChinese wholesalers and manufacturers provide directly to global consumers on AliExpressGlobal wholesalers and manufacturers supply global wholesale buyers on Alibaba.com
# 3 – Why this name – Alibaba?
Jack Ma, a founder of Alibaba, wanted a name that would be easy for anyone, even non-Chinese, to say. According to an interview he gave in 2006 with CNN’s Talk Asia program, Ma was in a San Francisco coffee shop when he came up with the name. Below is the excerpt of his interview
One day I was in San Francisco in a coffee shop, and I was thinking Alibaba is a good name. And then a waitress came, and I said do you know about Alibaba? And she said yes. I said what do you know about Alibaba, and she said, “Open Sesame.’ And I said yes, this is the name! Then I went onto the street and found 30 people and asked them, ‘Do you know Alibaba’? People from India, people from Germany, people from Tokyo and China… They all knew about Alibaba. Alibaba — open sesame. Alibaba — 40 thieves. Alibaba is not a thief. Alibaba is a kind, smart business person, and he helped the village. So…easy to spell, and global knowledge. Alibaba opens sesame for small- to medium-sized companies. We also registered the name AliMama, in case someone wants to marry us!
#4 – How does Alibaba compare to big-name Internet companies?
Finding a trustworthy business comparable to Alibaba is impossible! Alibaba is a mix of marketplace, search engine, bank, software company, mobile services company, eLearning, microblogging, video streaming, and much more.
Below is an interesting chart that compares Alibaba’s portfolio with its respective known comparable.
source: qz.com
#5 – Why Alibaba IPO is so important?
Alibaba IPO is a big deal, primarily because of the size of the IPO. As discussed later in the article, my valuation estimates for Alibaba is around $191 billion. Download the Alibaba IPO Valuation Model here
Also, Alibaba’s IPO signifies global changes. With its vast size and network, Alibaba IPO may look at international expansion beyond China and lead to price warsPrice WarsA price war is a competition among the competitors of the business in lowering the price of their products to gain an advantage over their competitors in price and capture a greater market share. It is used as one of the strategies to increase the business firm’s revenue and increase the market share.read more and intensive competition in the US. According to Reuters,
#6 – Will this become the biggest IPO in US history?
The exact size of the Alibaba IPO has been closely guarded. The company has used a $1 billion placeholder for its registration documentation with the SEC. Many expect that the size of the Alibaba IPO could be between $15 billion – $20 billion.
The below chart shows a quick comparison of Alibaba with the Tech IPOs in the US.
#7 – Why going public in the US, not in China or HK?
Alibaba initially approached the Hong Kong Exchange for listing. However, they had to abandon their plans of listing in HK due to its share structure.
- A fundamental governance principle of Hong Kong’s listing rules is restricting dual-class share structures or other schemes that allow controlling shareholders or managers to possess disproportionate voting power.Alibaba wanted to list in Hong Kong; however, Hong Kong Exchanges and Clearing or the Securities and Futures Commission (SFC) rejected Alibaba’s demand that its partners be able to nominate most of the company’s board.Alibaba argued for an exception for its structure, citing its unique business model. Hong Kong Exchange could have granted this exception as the rule book does have a provision; however, they decided against it.The main reason was that there are many Chinese state-owned enterprises listed in Hong Kong Exchange, and if it bends a rule for Alibaba, then it’s going to have to turn the law for all of these state-owned Chinese enterprises.Alibaba then decided to list the company in the US as such dual structures are not prohibited in US exchanges.
#8 – Who are the Investors in Alibaba?
From Alibaba’s registration document, it is learned that SoftBank corp is the biggest investor in Alibaba, with its initial investment of $20 million in 2000. SoftBank is the biggest gainer from its investments in Alibaba.
The below chart shows the stake and its respective value. (assuming that my estimates of $191 billion valuations hold :-) )
#9 – Alibaba’s 5 Big Numbers to Know from F-1 Filing
# 10 – Alibaba’s Financial Model
After struggling for more than three days to prepare Alibaba’s Financial model, I was able to get a basic model ready (with the limited information provided in the S-1 Filing). I wish there was more information about revenue segments and cost details, yet this model serves as a good heads up for understanding Alibaba Group and Alibaba IPO Valuation.
You may download Alibaba Financial Model here
- March’14 income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more figures include the estimated numbers of Jan’14-March’14 quarterI have only adjusted the Cash and Cash EquivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more and Shareholder’ equity to reflect the estimated numbers. Other BS items are kept as reported in the December quarter.Projected the next eight years of Alibaba’s Financial Statements Analysis (Financial ModelingFinancial ModelingFinancial modeling refers to the use of excel-based models to reflect a company’s projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact.read more – Income Statement, Balance Sheet and Cash Flows)The currency used in the model is RMB (China’s local currency). One can use the currency conversion to derive an appropriate valuation figure. F-1 filing has used 1 US$ = RMB 6.2164.
Below are the findings from the Excel-based Financial Model
Revenues to grow at a CAGR of approx 26% in the next five years and touch US$29 billion by March 2019.
China Commerce will remain the largest contributor to the Revenues.
Net Income close to US$1.2 billion by the end of March 2019.
Cash and Cash Equivalents will balloon to $50 billion in the next five years. How they will deploy this much cash is an important thing to watch out for.
The company has remained EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business’s performance with that of its competitors.read more positive and will generate $1.75 billion EBITDA by March’19.
#11 – Alibaba IPO – To Buy or Not to Buy?
Bloomberg polled 12 analysts to understand Alibaba’s valuations and found that it is closer to $168 billion, while some expect the valuation to cross $250 billion once it starts trading. There is a considerable variation in valuation estimates, so I decided to develop my guidelines on Alibaba valuations. Download Alibaba Valuation Model here
So, how do we value the Alibaba IPO?
- Alibaba is cash flow positive and is a profitable company. The most suitable approach that can be used to value Alibaba is the Discounted Cash Flow valuationDiscounted Cash Flow ValuationDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company’s future performance.read more approach.I am explicitly avoiding the comparable valuationsComparable ValuationsComparable comps are nothing but identifying relative valuations like an expert to find the firm’s fair value. The comparable comp process starts with identifying the comparable companies, then selecting the right valuation tools, and finally preparing a table that can provide easy inferences about the fair valuation of the industry and the company.read more (relative valuations of Alibaba) because it is nearly impossible to pin down a set of companies that are truly comparable to Alibaba.The Discounted Cash Flow (DCF) approach requires forecasting and modeling future financials.
Forecasting Alibaba’s Free Cash Flow (FCFF)
Alibaba will generate $1.2 billion of free cash flows in March’19. As we note below, Alibaba will generate predictable positive Free Cash Flows.
Below is the table that summarizes Alibaba’s DCF Valuation output.
We note the following from the table above –
- Alibaba valuation is $191.5 billion ( + [Cost of Debt * % of Debt * (1-Tax Rate)]” url=”https://www.wallstreetmojo.com/weighted-average-cost-capital-wacc/”]WACC”WACC””The of 9% and perpetuity growth of 3% )Short Term Investments, restricted cashRestricted CashRestricted cash is the portion of cash that has been set aside for a specific purpose. It is usually held in a special account (for example, an escrow account) so it remains separate from the rest of a business’ cash and equivalents.read more and Investment securities taken at Cost (Balance Sheet Amount)Investments in Equity Investees are also valued at Cost (balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more amount). Though the two companies Weibo and AutoNavi, are publicly traded, I have taken them at Cost and NOT at their trading prices.I have also assumed an average Alipay’s valuation payout of $4 billion (floor of $2 billion and $6 billion). Below is the excerpt from the Alibaba’s F-1 Filing
As noted above, the minimum valuation of Alibaba is $123 billion (WACC of 11% and a growth of 6%)
If you are using different assumptions, you may use the above table for your set of valuation guidance.
Learn more on how to perform Sensitivity Analysis in ExcelSensitivity Analysis In ExcelSensitivity analysis in excel helps us study the uncertainty in the output of the model with the changes in the input variables. It primarily does stress testing of our modeled assumptions and leads to value-added insights. In the context of DCF valuation, Sensitivity Analysis in excel is especially useful in finance for modeling share price or valuation sensitivity to assumptions like growth rates or cost of capital.read more.
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What Next?
Anything I missed? What are your views on valuations? Are you investing in Alibaba? Let me know what you think, your feedback by Leaving a Comment.
p.s. – I do not represent any brokerage firm. The above views are my assessment of the Alibaba IPO. I have tried my best to ensure the factual accuracy of the analysis; however, please feel free to provide me with corrective measures if you spot any errors.
