Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Equity Bottom-Up

Alibaba Group Holding  / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> has had a disastrous year, ever since the IPO of their FinTech arm, <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a>, was pulled last minute in November 2020. Since then, they have faced continued regulatory hurdles, including an RMB18.2bn anti-monopoly fine, which has culminated in a 51% share price drop, since its November 2020 peak, which means that Alibaba is currently trading on only a 14.3x forward PE ratio. Given that this is nearly 4 standard deviations below its 5-year historical average trading range, and that this multiple would imply only a 0.72x PEG ratio, for a company with an extremely strong net cash balance sheet, delivering returns on capital well above its cost of capital, with positive free cash flow generation, and a $15bn share buyback program, indicates that there is a massive disconnect between long-term Buy-side expectations and near-term Sell-side estimates. Looking at the reported group financials over this period it does not seem as though the regulatory impact has been that significant on core operations. The key concern, however, is that Alibaba is losing market share in its core businesses. In this insight, I take a closer look at the broader Chinese retail market, as well as the Chinese digital advertising market (I estimate that Alibaba still generates more than 40% of its Chinese commerce revenue, and roughly 1/3rd of group revenue, from marketing activities), to analyse Alibaba’s relative revenue share loss. Finally, I also revisit current valuation levels and analyse what this implies for its Core Commerce operations.

Alibaba Group (9988 HK) has had a disastrous year, ever since the IPO of their FinTech arm, Ant Financial Services Group (6688 HK), was pulled last minute in November 2020. Since then, they have faced continued regulatory hurdles, including an RMB18.2bn anti-monopoly fine, which has culminated in a 51% share price drop, since its November 2020 peak, which means that Alibaba is currently trading on only a 14.3x forward PE ratio. Given that this is nearly 4 standard deviations below its 5-year historical average trading range, and that this multiple would imply only a 0.72x PEG ratio, for a company with an extremely strong net cash balance sheet, delivering returns on capital well above its cost of capital, with positive free cash flow generation, and a $15bn share buyback program, indicates that there is a massive disconnect between long-term Buy-side expectations and near-term Sell-side estimates. Looking at the reported group financials over this period it does not seem as though the regulatory impact has been that significant on core operations. The key concern, however, is that Alibaba is losing market share in its core businesses. In this insight, I take a closer look at the broader Chinese retail market, as well as the Chinese digital advertising market (I estimate that Alibaba still generates more than 40% of its Chinese commerce revenue, and roughly 1/3rd of group revenue, from marketing activities), to analyse Alibaba’s relative revenue share loss. Finally, I also revisit current valuation levels and analyse what this implies for its Core Commerce operations.

Alibaba: How Much Core Market Share Loss Has Been Priced In?

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

FSN E-Commerce Ventures (Nykaa) / Equity Capital Markets

FSN E-commerce (Nykaa) aims to raise around US$550m, via selling a mix of primary and secondary shares in its Indian IPO. Nykaa is a lifestyle focussed e-commerce platform and consumer brand offering a portfolio of beauty, personal care and fashion products, including its own branded products. As per RedSeer, it was the largest Specialty Beauty and Personal Care Platform in India in terms of value of products sold in FY21.As of March 21, it had 43.7m cumulative downloads across all its mobile applications. Its offline channel comprises 73 physical stores across 38 cities in India. It reported a gross merchandise value (GMV) of INR40,459.8m (around US$550m) in FY21. As of Mar 21, it offered approximately 2.0m SKUs from 3,826 national and international brands across its business verticals. Nykaa’s GMV, revenue and gross profit have more than doubled over FY19-21, even though the company suffered from a drop in orders due to COVID-19 in 4Q20 and 1Q21. Overall, GMV grew by 62.7% in FY20 and 50.7% in FY21. Revenue growth has broadly kept pace with GMV growth while the company has managed to turn a profit in FY21. However, the growth for its largest segment, beauty and personal care, appears to have slowed down in FY21. While its fashion segment is operated as a marketplace and hence, won’t be a big driver of revenue growth till it scales.

FSN E-commerce (Nykaa) aims to raise around US$550m, via selling a mix of primary and secondary shares in its Indian IPO. Nykaa is a lifestyle focussed e-commerce platform and consumer brand offering a portfolio of beauty, personal care and fashion products, including its own branded products. As per RedSeer, it was the largest Specialty Beauty and Personal Care Platform in India in terms of value of products sold in FY21.As of March 21, it had 43.7m cumulative downloads across all its mobile applications. Its offline channel comprises 73 physical stores across 38 cities in India. It reported a gross merchandise value (GMV) of INR40,459.8m (around US$550m) in FY21. As of Mar 21, it offered approximately 2.0m SKUs from 3,826 national and international brands across its business verticals. Nykaa’s GMV, revenue and gross profit have more than doubled over FY19-21, even though the company suffered from a drop in orders due to COVID-19 in 4Q20 and 1Q21. Overall, GMV grew by 62.7% in FY20 and 50.7% in FY21. Revenue growth has broadly kept pace with GMV growth while the company has managed to turn a profit in FY21. However, the growth for its largest segment, beauty and personal care, appears to have slowed down in FY21. While its fashion segment is operated as a marketplace and hence, won’t be a big driver of revenue growth till it scales.

FSN E-Commerce (Nykaa) Pre-IPO - Mixed Bag - Fashion Growing, Beauty Slowing

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Cross Asset Strategy

13 months after its introduction, China's "Three Red Lines" (TRL) policy initiative (to reduce leverage, improve debt coverage and increase liquidity) for property companies is beginning to have a serious impact. A key contributory factor is that TSF (total social financing) has increased by a more moderate RMB21.68 trillion in Jan-Aug 2021 than last year (RMB25.97 trillion in Jan-Aug 2020), which still implies 10.3% YoY growth in the stock of TSF (to RMB306.83 trillion, or US$47.5 trillion), which is near the slowest-ever pace since TSF began to be published. The stock of M2, bank credit and TSF in China are at historic highs never reached by any other country, and the growth of all these aggregates continues, albeit at a marginally slower pace.Despite the abundance of liquidity (and the cut in RRR in mid-July), real GDP is growing barely over 5% YoY in 3Q 2021, with retail sales decelerating to 2.5% YoY growth and industrial production to 5.3% YoY growth in August 2021. The latter was largely export-driven (helped by a surge in global trade), as FAI (fixed asset investment) declined 2.1% YoY in May-August 2021. Such an economic deceleration in the year before an important leadership transition (i.e., rubber-stamping of continuity for Xi, change for others around him) will be met by further monetary easing in October 2021. That half of the 10 largest residential-property developers are Guangdong-based (a province traditionally known for both entrepreneurship and rebellion) makes them particularly vulnerable to the political crackdown on capitalists. The focus increasingly will be on cutting the costs of property, healthcare and education, not just tech titans.  However, moral hazard will be tightly managed. Onshore (local currency) bond holders will bear relatively few losses on high-profile names like Evergrande (although there will be credit events for bank loans), while offshore foreign-currency bond holders are likely to feel considerable pain (i.e., the partial end of the "moral hazard play"). The political crackdown on sundry capitalists -- tech titans, others seeking overseas listings, property developers, gaming companies -- will persist, adding more to the China Premium. We would recommend staying Underweight China equities amid the uncertainty generated by this political instability, which will result in a new equilibrium discount on Chinese valuations emerging by early 2022.

13 months after its introduction, China's "Three Red Lines" (TRL) policy initiative (to reduce leverage, improve debt coverage and increase liquidity) for property companies is beginning to have a serious impact. A key contributory factor is that TSF (total social financing) has increased by a more moderate RMB21.68 trillion in Jan-Aug 2021 than last year (RMB25.97 trillion in Jan-Aug 2020), which still implies 10.3% YoY growth in the stock of TSF (to RMB306.83 trillion, or US$47.5 trillion), which is near the slowest-ever pace since TSF began to be published. The stock of M2, bank credit and TSF in China are at historic highs never reached by any other country, and the growth of all these aggregates continues, albeit at a marginally slower pace.Despite the abundance of liquidity (and the cut in RRR in mid-July), real GDP is growing barely over 5% YoY in 3Q 2021, with retail sales decelerating to 2.5% YoY growth and industrial production to 5.3% YoY growth in August 2021. The latter was largely export-driven (helped by a surge in global trade), as FAI (fixed asset investment) declined 2.1% YoY in May-August 2021. Such an economic deceleration in the year before an important leadership transition (i.e., rubber-stamping of continuity for Xi, change for others around him) will be met by further monetary easing in October 2021. That half of the 10 largest residential-property developers are Guangdong-based (a province traditionally known for both entrepreneurship and rebellion) makes them particularly vulnerable to the political crackdown on capitalists. The focus increasingly will be on cutting the costs of property, healthcare and education, not just tech titans.  However, moral hazard will be tightly managed. Onshore (local currency) bond holders will bear relatively few losses on high-profile names like Evergrande (although there will be credit events for bank loans), while offshore foreign-currency bond holders are likely to feel considerable pain (i.e., the partial end of the "moral hazard play"). The political crackdown on sundry capitalists -- tech titans, others seeking overseas listings, property developers, gaming companies -- will persist, adding more to the China Premium. We would recommend staying Underweight China equities amid the uncertainty generated by this political instability, which will result in a new equilibrium discount on Chinese valuations emerging by early 2022.  

APAC IPOs & Placements, Aequitas Research

Clarence Chu

APAC IPOs & Placements

Shui on Xintiandi / Equity Capital Markets

Shui on Xintiandi is looking to raise up to US$500m in its upcoming Hong Kong IPO. The deal will be run by Morgan Stanley and UBS.Shui on Xintiandi is a leading investor and manager of commercial properties in the PRC. As per Knight Frank, it is one of the largest private commercial property owners and operators in Shanghai by total gross floor area (GFA). As of Jun 2021, the firm had a portfolio of 13 commercial properties which occupied 2m sqm of GFA, and had a combined valuation of RMB53.1bn. Its properties are spread across Shanghai, Wuhan, Nanjing, Foshan and Chongqing, where Shanghai properties accounted for 52.7% and 71.9% of total GFA and valuation, respectively.

Shui on Xintiandi is looking to raise up to US$500m in its upcoming Hong Kong IPO. The deal will be run by Morgan Stanley and UBS.Shui on Xintiandi is a leading investor and manager of commercial properties in the PRC. As per Knight Frank, it is one of the largest private commercial property owners and operators in Shanghai by total gross floor area (GFA). As of Jun 2021, the firm had a portfolio of 13 commercial properties which occupied 2m sqm of GFA, and had a combined valuation of RMB53.1bn. Its properties are spread across Shanghai, Wuhan, Nanjing, Foshan and Chongqing, where Shanghai properties accounted for 52.7% and 71.9% of total GFA and valuation, respectively.

ANE, an express freight network operator in China for less-than-truckload (LTL) market, aims to raise around US$500m in its Hong Kong IPO. The company is backed by a host of financial investors including Centurium, Carlyle, CDH, CPE, NWS, Ping An, Goldman Sachs and Yili.As per iResearch, ANE’s network was the largest in China in terms of total freight volume over 2017-20 with a market share of 17.2% in 2020.By Dec 2020, it had collaborated with approximately 26,400 freight partners and agents to serve 3.6m shippers across approximately 96% of the counties and townships in China. Both the freight partners and freight agents operate under its brand and are required to adhere to its service guidelines and policies. ANE’s overall volume and top line growth has been decent. However, not all of its offerings have been growing, while some of its revenue growth was driven by accounting changes. We covered various aspects of the deal in our earlier note <a href="https://www.smartkarma.com/insights/ane-logistics-pre-ipo-margins-expanding-but-appears-to-be-falling-behind" target="_blank" rel="noopener">ANE Logistics Pre-IPO - Margins expanding but appears to be falling behind</a>. In this note we will talk about the updated financials from the PHIP.

ANE, an express freight network operator in China for less-than-truckload (LTL) market, aims to raise around US$500m in its Hong Kong IPO. The company is backed by a host of financial investors including Centurium, Carlyle, CDH, CPE, NWS, Ping An, Goldman Sachs and Yili.As per iResearch, ANE’s network was the largest in China in terms of total freight volume over 2017-20 with a market share of 17.2% in 2020.By Dec 2020, it had collaborated with approximately 26,400 freight partners and agents to serve 3.6m shippers across approximately 96% of the counties and townships in China. Both the freight partners and freight agents operate under its brand and are required to adhere to its service guidelines and policies. ANE’s overall volume and top line growth has been decent. However, not all of its offerings have been growing, while some of its revenue growth was driven by accounting changes. We covered various aspects of the deal in our earlier note ANE Logistics Pre-IPO - Margins expanding but appears to be falling behind. In this note we will talk about the updated financials from the PHIP.

ANE Logistics Pre-IPO - PHIP Updates - Underlying Growth Is Far from Clear

China

Alibaba Group Holding Limited provides online sales services. The Company provides internet infrastructure, electronic commerce, online financial, and internet content services through its subsidiaries. Alibaba Group Holding offers its products and services worldwide.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Alibaba Group Holding (9988 HK)

FSN E-Commerce (Nykaa) Pre-IPO - Mixed Bag - Fashion Growing, Beauty Slowing

FSN E-commerce (Nykaa) aims to raise around US$550m, via selling a mix of primary and secondary shares in its Indian IPO.

Sumeet Singh

China: The End of the Moral Hazard Play?

Moral hazard will be managed, not ended. Offshore bonds, local loans will bear pain. Property, health, education costs must fall. We recommend...

Prasenjit K. Basu

Shui on Xintiandi Pre-IPO Tearsheet

Shui on Xintiandi is looking to raise up to US$500m in its upcoming Hong Kong IPO. The deal will be run by Morgan Stanley and UBS.

Clarence Chu

ANE Logistics Pre-IPO - PHIP Updates - Underlying Growth Is Far from Clear

ANE, an express freight network operator in China for less-than-truckload (LTL) market, aims to raise around US$500m in its Hong Kong IPO.

Sumeet Singh

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Alibaba: How Much Core Market Share Loss Has Been Priced In?

In this insight, I analyse Chinese retail sales and digital advertising market share changes and what is implied by Alibaba’s current valuation...

Wium Malan, CFA

FSN E-Commerce (Nykaa) Pre-IPO - Mixed Bag - Fashion Growing, Beauty Slowing

FSN E-commerce (Nykaa) aims to raise around US$550m, via selling a mix of primary and secondary shares in its Indian IPO.

Sumeet Singh

China: The End of the Moral Hazard Play?

Moral hazard will be managed, not ended. Offshore bonds, local loans will bear pain. Property, health, education costs must fall. We recommend...

Prasenjit K. Basu

Shui on Xintiandi Pre-IPO Tearsheet

Shui on Xintiandi is looking to raise up to US$500m in its upcoming Hong Kong IPO. The deal will be run by Morgan Stanley and UBS.

Clarence Chu

ANE Logistics Pre-IPO - PHIP Updates - Underlying Growth Is Far from Clear

ANE, an express freight network operator in China for less-than-truckload (LTL) market, aims to raise around US$500m in its Hong Kong IPO.

Sumeet Singh