Original title:Baba(BABA.US) Hong Kong IPO Focus Ten Questions Source: Gelonghui

Author | Cang Zhitao

Data Support | Pythagorean Big Data

1. Is Ali's valuation expensive?

As of November 14, 2019, Ali's stock price on the NYSE was $182.48 per share, with a market capitalization of US$475.1 billion. Is Ali's valuation really expensive or not?

First, let's take a look at commonly used PE valuations. Ali's latest quarterly revenue increased 40%, and non-GAAP net profit increased 40%. We use non-GAAP net profit for calculation because non-GAAP net profit excludes data such as one-time profit or loss and equity expenses, which better reflects a company's operating conditions. For example, major trading software currently shows that Ali's PE (TTM) is 21.86x, which is much lower than before. This is because Ali received a one-time revenue of 69.2 billion yuan from Ant Financial in the third quarter.

Excluding one-time revenue, Ali's non-GAAP net profit per share for the past 12 months was $6.71, corresponding PE (TTM) = 27x.

What level is this? We can compare it to the tech giants.

Ali's revenue and profit are growing faster than other tech giants, but under PE's valuation, it's about the same as other companies, and even lower than some companies. Seen from this point of view, the current valuation of Ali by the market is not too high.

But valuation is an art. Valuation is only a result; value is extremely difficult to calculate. The most important thing we invest in a company is to look at future development prospects.

2. There are two listings. Which market determines Ali's valuation?

I believe everyone is familiar with second-place listings. Many domestic companies are listed on A-shares and H-shares at the same time. This is the issuance of different types of stocks. The problem with this method is that A shares and H shares cannot be sold across markets, which makes it difficult to calculate the total market value of listed companies with A+H shares.

Judging from Ali's prospectus, Ali plans to issue 500 million common shares in Hong Kong, plus 75 million oversubscribed shares, and plans to raise about 13 billion US dollars. According to some sources, the shares of Hong Kong and the US are interchangeable.

Ali issues ADR (American Depositary Receipts) in the US and common shares in Hong Kong. One ADR equals eight common shares. One important advantage of ADR is that it has higher liquidity than ordinary stocks. Not only are depository documents interchangeable, but they are also interchangeable with other securities.

In fact, we can refer to Tencent. Tencent Holdings (HK:0070), which trades in Hong Kong, also issues ADR in the US under the code (OTCMKTS: TCEHY). The difference is that Tencent's ADR is not listed on the NYSE, but is traded on the OTC OTC market.

In the US OTC market, Tencent's ADR stock price fell 3.47% to 40.73 US dollars yesterday. The market value shown by ADR was 385.2 billion US dollars, atTencent fell 2.32% to HK$319.8, with a market capitalization of HK$3.0548 trillion. At today's exchange rate, it's about US$389.8 billion, which is basically the same.

From this point of view, when Ali is listed in Hong Kong, since ADR and Hong Kong stocks are interchangeable, the market capitalization of the two places should tend to be consistent. Since most of Tencent's shares are traded in Hong Kong, the valuation on the Hong Kong Stock Exchange dominates. However, since most of Alibaba's shares are traded in the US, the stock price on the NYSE may be more indicative.

3. Alibaba's newly issued shares will dilute shares, thereby causing earnings per share to decline. Will PE rise?

Before the split, Ali had 2.6 billion tradable shares; after the spin-off, it currently has 20.8 billion tradable shares. According to information in the prospectus, Ali plans to issue 500 million shares of common stock in Hong Kong, plus 75 million oversubscribed shares. Let's assume that Ali wants to issue an additional 575 million shares of common stock, all of which are in circulation in the market, and only account for 2.76% of Ali's current tradable shares.

It can be said that this ratio is very low, and it has little effect on stock dilution.

4. Ali has gone public twice, and both have surged. Will the situation be the same this time?

Ali has gone public twice in total.

The first time was in November 2007. At that time, Ali had the aura of a B2B concept and registered on the Hong Kong Stock Exchange. The code was 1688.HK. It was a time when technology stocks were popular. On the day of listing, the stock price surged by 193%, the biggest increase in IPOs in the Hong Kong stock market that year. But then stock prices were hit hard because of the financial crisis.

The second time was in September 2014. Alibaba was listed and traded on the NYSE. At the time, the issue price was 68 US dollars, and the stock code was BABA. The stock code was BABA. It surged 38.07% on the first day of listing, with a total market value of 231.4 billion US dollars, making it the second largest Internet company in the world by market capitalization at the time, second only toGoogle。 Currently, Ali's stock price has reached 182 US dollars.

So many people ask, will this happen again?

It can be said that this listing is different from the previous two. Because of the first two listings, Ali showed the public the company's specific business, including financial data, for the first time. The first time was B2B business, and the second time was all of the group's business, so investors were very enthusiastic.

However, this time, Ali has been listed on the NYSE for 5 years, and has published results every quarter. All financial information is open and transparent. If the market were an effective market, Ali's current valuation should reflect the information already published.

Therefore, a sharp rise or fall may be a low-probability event.

5. Do you want to start a new one?

I believe the topic that investors in Hong Kong stocks are most concerned about is whether to launch a new one, and whether it will break out once they win the lottery.

If you launch a new business for a short-term surge, not because the company has excellent fundamentals and potential for future growth, then this is nothing more than a speculator's behavior.

Short-term fluctuations are difficult to predict, or cannot be predicted, so if you are speculating, then I can't answer your question.

As a true investor, I am more concerned about the fundamentals of the company and the company's future development prospects. Ali can be said to be one of the best Internet companies in China at present. Although it is very large, it is still full of momentum for growth. Alibaba has many businesses, and we need to focus on two “flywheels” — 2C business and 2B business.

As for To C's e-commerce business, Ali has maintained strong growth. This year, the total turnover of the Tmall Shuang11 global carnival reached RMB 268.4 billion, up 25.7% from the turnover of RMB 213.5 billion on the same day in 2018. The e-commerce market remains stable.

The To B business has huge potential. China spent 407 billion US dollars on IT in 2018, the US 1.164 trillion yuan, the penetration rate of domestic public clouds 10%, and the penetration rate of US public clouds 22%. There is still a lot of room for growth in market size. Domestically, Alibaba Cloud's market share increased 0.3 percentage points to 43% compared to the second half of 2018, according to IDC data. Currently, this part of the business is still unprofitable because the domestic public cloud market is still immature.

We can refer to the US cloud market,AmazonswithMicrosoftBecause of the explosion of cloud computing profits, investors are looking for it. Amazon Q3 AWS operating profit is 25%.

Investing in a company depends not only on finance, but also on corporate culture. Ali's culture is arguably perfect for this era of rapid iteration.

Ali basically adjusts its organizational structure every year. Ali's rotation system can be said to keep everyone active in new things. At the same time, it also enhances management's leadership and trains future leaders.

From the perspective of long-term investment, there is no need to hesitate to launch a new one this time.

6. Ali is listed for the second time. Can Daxin have meat to eat?

Is it possible to have meat to eat, does this mean that there is room for arbitrage.

It was previously rumored that Ali plans to inquire about a 4% discount on the current US stock price, but some institutional investors are not satisfied with this discount and hope the discount will be at least 8%-10%. There is also news that Ali will not give a discount to the market in terms of pricing.

If the price is actually discounted, is there an arbitrage situation? Assuming that Hong Kong stocks are issued at a discount, Hong Kong and US stocks are interchangeable. Hong Kong dollars and US dollars are linked. After Hong Kong traders buy new shares at low prices, they can exchange them for US ADR and sell them at a higher price. But these are all ideal situations.

According to the latest news, Alibaba received full subscription on the first day of international placement. According to sources in the investment community, there is a strong response to international placements, so it is likely that there will be no discounts, and the pricing of international placements is likely to be higher than that of public offerings.

However, the final situation needs to depend on the issue price of Hong Kong stocks and the trading price of US stocks.

7. How much should Ali account for in your Internet portfolio?

If you like China Securities and want to form a China Securities Stock Exchange or China Internet investment portfolio, then how much weight should Alibaba have?

In fact, there are some passive index ETFs in China that track overseas Chinese securities, such as China Securities Internet (513050). As of September 30, 2019, China Securities Connect's share of Alibaba was 31.37%, and Tencent's share was 29.07%.Baidu, Meituan,Jingdong,NetEase,PinduoduoThey were 6.29%, 6.21%, 4.30%, 3.61%, and 2.63%, respectively.

Given Ali's current outlook and excellent business growth rate, a 35% configuration is also a good choice.

8. When Ali returns to Hong Kong, is it expected to become Hong Kong's new “shareholder”?

When Ali returns to the Hong Kong stock market, it will become the company with the highest market capitalization listed on the Hong Kong Stock Exchange. Previously, Tencent had the highest market capitalization.

From the perspective of market value, once Ali is listed in Hong Kong, it will immediately become the “stock king” of Hong Kong.

9. Why is Alibaba returning to the Hong Kong stock market? Is it short of money?

First, Ali is definitely not short of money. Although Ali started the “buy buy buy” model and has acquired many companies in a row, financial reports still show that he is “not bad at money.” In the latest FY2020 semi-annual report as of September 30, it can be seen that Alibaba still has 234.1 billion yuan in cash on account. Moreover, operating cash flow is also very healthy. There is a net inflow of operating cash flow of hundreds of billions of dollars every year, all of which are contributions from China's billion-dollar “choppers.”

10. Alibaba is listed on the Hong Kong stock market. What are the Hong Kong Alibaba concept stocks, and what kind of impact will they have

There are 11 Alibaba concept stocks listed on the Hong Kong stock market, covering various industries from healthcare to hypermarkets. Among them, Alibaba directly controls Alibaba Health, Alibaba Pictures, and AsiaBrocadeTechnology Holdings, and the rest mainly cooperate through shareholding and business cooperation.

We believe that Alibaba's listing in Hong Kong is a short-term event that will have no impact on the operations and performance of Alibaba Concept. However, it is not ruled out that short-term events will stimulate the rise in related stocks.

For reference, the sharp rise in Alibaba Health in May 2018 also led to a sharp rise in Alibaba Pictures and Yabo Technology Holdings, which are also Alibaba concept stocks. However, their stock prices declined markedly the next day. Therefore, investors should be wary of risks in the face of emotional hype.