Alibaba Group Holding Ltd. announces restructuring by splitting into six independent companies - each with its own CEO and board of directors. This is in response to anti-monopoly actions by the Chinese authorities. These have led to a record fine of 18.2 billion yuan for the tech giant. Could this decision trigger a return of the bull market in China?
A few words about Alibaba Group
The mission of Alibaba Group, an international technology and commerce company, is to make it easier to do business around the world. It enables smaller businesses to transform the way they market and sell and improve their efficiency. Alibaba Group provides technology infrastructure and marketing reach to help sellers, brands, retailers and other businesses harness the power of new technologies. Alibaba's businesses include China commerce, global e-commerce, cloud computing, local services, logistics and entertainment. These segments the company now wants to turn into separate, independent businesses.
Currently, the main business model is to promote products created by other companies (e.g. manufacturers) and provide them to customers. Alibaba has a multi-sided business model, which gives it a significant advantage in the domestic market. The largest share of revenue is generated by Chinese e-commerce. In 2022, retail sales in China accounted for 67% of the company's revenue. International retail sales amounted to 42.67 billion yuan of annual revenue. The group's monetisation model is largely based on online marketing services, including P2P marketing services, display marketing and promoted sales, as well as transaction commissions and shop fees.
Company split revives China market
Yesterday's (28.03) announcement by CEO Jack Ma of a demerger - dictated by increasing potential and unlocking investment opportunities from Western capital - may have pushed the Hang Seng index up 2%.
Source: Conotoxia MT5, HK50, Daily
Financial situation of the company
The company's revenue, due to its size and market share in China, seems to reflect the development situation there quite well. The report for Q4 2022 showed a decrease in the company's revenue volume of 5.6%. However, it seems that the most important financial problem at the moment is the company's declining margins. Over the past two years, margins have fallen from 25% to the current 4.6%. The company's biggest advantage, although to some extent also a disadvantage, is its low-capital business model and being a monopolist in the Chinese market. Alibaba itself is not in the business of manufacturing and offering products to retail customers. It is therefore dependent on the broader retailer situation. Nevertheless, it seems that we could see a recovery in the Chinese market and revenue growth in the upcoming Q1 report.
What does Wall Street think of Alibaba Group's share price?
The company's shares rose 14.2% in Tuesday's session following the split announcement. According to Market Screener, the company has 44 recommendations, the vast majority of which are buy recommendations. The average target price is set at US$146.17, 48% higher than the last closing price. The highest target price is at USD 219.92 and the lowest is USD 99.36.
Source: Conotoxia MT5, Alibaba, Daily
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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