After years of tossing and turning, what did Alibaba throw out?

At the end of December in the 23rd year, in the announcement of the change of CEO of Taotian Group, Alibaba also mentioned that the group is building Alibaba. After the earlier major organizational transformation of the "1+6+N" group, Alibaba's positioning as "1" has also changed to an investment holding company. It can be seen that after the operational rights of specific businesses have been almost completely delegated to business groups/companies, the main function of the BABA-SWR group is to manage the group's assets and funds. In simple terms, it means investing/holding "good assets" and selling/reducing holdings of "bad assets" to improve the quality and value of the group's asset portfolio, and subsequently release this value through listing or sale.

From recent developments, on the one hand, we see that BABA-SWR is uncertain about whether to divest from BABA-SWR Cloud, and the independent IPO process of Hema has also been postponed. It seems that the path of BABA-SWR's spin-off subsidiaries listing to release value is not smooth. On the other hand, the once-rumored "BABA-SWR may sell Ele.me" also seems to indicate that BABA-SWR has more "saleable" assets on the table than imagined.

We believe that there are two questions worth exploring: ① Has the BABA-SWR group been able to fulfill its role as an "investment holding company" in the past and future, creating value for shareholders? ② If BABA-SWR sells a large number of other financial investment assets, and even some strategic investment assets, what impact will it have on BABA-SWR's performance, cash flow, and valuation?

The following is a discussion on these two questions:

I. The "early life" of BABA-SWR's strategic investments:

To judge whether the BABA-SWR group has good investment management capabilities, the most direct reference is Alibaba's past investment cases and achievements. Therefore, in the following text, Dolphin Research will divide Alibaba's past investments into three levels, in descending order of importance: consolidated assets, financial/strategic investment assets, and angel/venture investment assets, to see which industries/companies Alibaba has mainly invested in.

1、Core investments consolidated by BABA-SWR:

Let's first look at the core assets of BABA-SWR, the business companies under the "6+N" category controlled by the group. According to whether the majority of its businesses are self-incubated "biological children" or acquired "adopted children," they can be classified as follows: Taotian Group, Cainiao Group, and Zhonghuiyun Group, corresponding to the domestic e-commerce and logistics "twin brothers" in terms of business, and the cloud computing business derived from the online platform operation capabilities (similar to Amazon's case from e-commerce to AWS). The businesses under these three major sectors are mostly self-incubated by BABA-SWR, which means that they are the true core capabilities of BABA-SWR. On the other hand, many of the businesses in the categories of local international e-commerce, local lifestyle services, big entertainment, and "N" are acquired, which is an attempt to diversify the main business.

Furthermore, what are the main directions of BABA-SWR's consolidated investments? From a strategic perspective, what capabilities does BABA-SWR group strengthen through consolidation? In summary:

① In the international e-commerce sector, in addition to the cross-border model platforms Alibaba.com and AliExpress, three localized overseas e-commerce platforms have been acquired, strengthening BABA-SWR's ability to operate locally overseas.

② The local lifestyle services are mostly acquired, reflecting BABA-SWR's expansion from nationwide (global) and platform-based businesses to regional and contract-based businesses. After the restructuring, the two main businesses under the group, Gaode Maps and Ele.me, were both acquired by BABA-SWR in 2014 and 2018, respectively. As for the travel business, although Fliggy was internally incubated by BABA-SWR, it has been separated into the "N" category that "no one wants".

③ The entire big entertainment sector of BABA-SWR is also almost entirely acquired. On the one hand, it acquired the film and television content production and distribution business composed of Alibaba Pictures, Damai.cn (entertainment ticketing), and Youku (long videos). On the other hand, it acquired the traffic entrance of the pre-app era, the browser business, including UC and the subsequently incubated Quark browser.

④ Among the remaining "N" businesses, two other investments acquired by BABA-SWR are Gaoxin Retail (the parent company of Darunfa Supermarket) and Intime Department Store. These two investments reflect BABA-SWR's expansion from online retail to offline physical retail.

In summary, BABA-SWR's major investments in the past decade have mainly focused on overseas localized e-commerce platforms, domestic local lifestyle platforms, domestic offline retail platforms, film and television entertainment platforms, as well as browser platforms in the PC and early mobile eras, these five major directions.

2、Equity/Financial Investments

At the second level, BABA-SWR holds a significant stake in external companies but does not seek controlling interests in equity investments (generally around 5%-30%). Since BABA-SWR does not disclose the list of invested companies and their shareholdings in the financial reports, we have compiled (incomplete statistics) the list of BABA-SWR's external investments that can be found as shown in the table below. After summarizing and analyzing the data, it can be seen that the equity investments of BABA-SWR are mainly focused on the logistics, finance, entertainment, e-commerce retail sectors (including several real estate and home-related companies), as well as several software and AI-related technology companies. Based on the investment list, we can preliminarily conclude that BABA-SWR's external equity investments are still centered around its major business sectors. This is different from Tencent's external investments, as previously discussed by Dolphin Research in "The Value of Tencent's Other 'Half-Life' Investments Given Away".

In addition to its core business, Tencent also has a large number of investments in areas such as e-commerce, local services, and education that it does not directly engage in. In other words, Tencent focuses more on its core business, and often enters new industries through equity investments rather than direct involvement. On the other hand, BABA-SWR's equity investments seem to be more focused on extending its business scope through equity ties with companies in its industry sectors, or promoting external collaborations. In other words, it is more about expanding and strengthening the existing business and capabilities of the company.

Compared to Tencent, BABA-SWR's strategic intent for equity investments appears to be more focused on expanding and strengthening its existing business and capabilities through equity ties with companies in its industry sectors.

3、In terms of angel/venture capital investments in non-listed companies and startups, BABA-SWR has invested in over 300 cases from 2015 to 2023, according to IT Juzi's statistics. In terms of investment focus, the largest investment efforts are still in the e-commerce retail, local life, entertainment, and logistics sectors, which are closely related to BABA-SWR's core business. In the areas of automotive transportation, enterprise services (possibly related to cloud services), and advanced manufacturing, there are more investments in terms of quantity but the total amount is not very high. It is reasonable to speculate that most of these investments are in smaller startup companies, reflecting the medium to long-term opportunities that BABA-SWR is betting on. From the perspective of investment timing, the peak period is also from 2017 to 2019. However, after 2020, although BABA-SWR still has about 20-50 external investments per year, the investment amount has rapidly declined and remained at a scale of less than 10 billion RMB since 2021.

In other words, Alibaba's external investment has rapidly slowed down since 2021 and entered a state of stagnation. However, considering the timing of the promotion of "corporate anti-monopoly" regulation in China, the weakening performance and stock price of BABA-SWR itself, as well as the macroeconomic headwinds, the slowdown in external investment by major internet giants is also a common situation.

4. Summary: What are the goals behind the above-mentioned investments by BABA-SWR?

Summarizing the above-mentioned cases of external investment at three different levels by BABA-SWR, Dolphin Research believes that the following preliminary but still meaningful inferences can be drawn:

① From the past cases of consolidated investment by BABA-SWR, it can be seen that when BABA-SWR tries to expand its business scope (whether it is vertical expansion within the same industry or horizontal expansion across industries), it often adopts a "heavy asset, heavy operation" model of acquiring controlling stakes in its own downstream operations. After years of expansion, BABA-SWR's own business spans a wide range and covers almost all types of internet businesses in China.

② Non-controlling equity investments at the second level are also mainly focused and concentrated within the sectors operated by BABA-SWR itself, with relatively few diversified expansions beyond the core business scope (partly because BABA-SWR's core business already covers almost everything). In other words, the purpose of investments at this level is still mainly to strengthen the core business.

③ Even in the third level of angel and venture capital investments, BABA-SWR's investment direction still revolves around the core business, with enterprise services and advanced manufacturing being the only two key investment directions outside the core business.

④ The active period of BABA-SWR's investments at all three levels was approximately from 2015 to 2019, with a peak around 2017-2018. However, since 2021, due to the "anti-monopoly" policy, company performance and economic risks, as well as the shift in the capital market, BABA-SWR's external investment has basically stagnated.

5. How effective are the above-mentioned investments by BABA-SWR?

Above, we have briefly analyzed the main targets of BABA-SWR's past investments. So, are these investments considered successful or unsuccessful? Indeed, there is no simple and clear criterion for judging this question. After all, for BABA-SWR, the above-mentioned investments are not primarily for investment returns, but more for business expansion and collaboration. It is difficult to measure whether these investment acquisitions have made a positive contribution to BABA-SWR's business in a clear manner. However, for investors, a good outbound investment should increase the total market value of the company rather than erode it. Therefore, from the perspective of investors and results-oriented analysis, we simplify the criteria for judging the success of BABA-SWR's past investments as follows: for listed assets, we look at the stock price performance since the acquisition by BABA-SWR; for non-listed assets, we look at the revenue or profit growth since the acquisition.

① Taking Gaoxin Retail and BABA-SWR Health as examples of BABA-SWR's consolidated acquisitions of listed companies, we can see that Gaoxin Retail has experienced a nearly 90% decline in stock price since being acquired by BABA-SWR in 2020. BABA-SWR Health, on the other hand, was acquired by BABA-SWR at the end of 2014 (and renamed), and although it once rose nearly 10 times during the COVID-19 bull market in 2020-2021, the current stock price is basically the same as it was 8 years ago after the acquisition. In other words, after 8 years of development under BABA-SWR, the market value has almost remained unchanged.

Although in the current market environment, it is not uncommon for the stock prices of many companies to plummet, even to ankle-cut levels, this cannot be solely attributed to BABA-SWR's unfavorable investment and operations. However, at least from the results, we can say that BABA-SWR has not been able to accurately identify industries or companies with excellent potential and increase the market value for shareholders. In the context of the gradual maturity and even internal competition of the domestic online economy, Gaoxin Retail's heavy investment in offline channels can be seen as a failure in hindsight.

② As for the Local Services and Big Entertainment sectors, which are almost entirely composed of acquisition businesses (but not listed), we can see that the Local Services sector has achieved nearly a three-fold increase in revenue from FY2019 to FY2023, showing good performance. However, the Big Entertainment sector has only achieved a total revenue growth of less than 30% during the same period, which is clearly not a good result. However, the common feature of both sectors is that although they were acquired, they have not yet achieved positive profitability at the adj.EBITA level even after being operated by BABA-SWR for at least 4-5 years, which is clearly not a good performance either.

In summary, in the business areas beyond the core capabilities of e-commerce, logistics (plus cloud computing), BABA-SWR, despite years of investment and operation, has not significantly increased the company's market value or profitability.

II. The "Second Half" of BABA‘s’ Investment life

After reviewing the previous content, it can be seen that BABA-SWR has personally managed diversified businesses in the past, and has further strengthened the investment logic of these self-operated businesses through equity investments. However, so far, this has not brought much additional market value and profit contribution to the company (but the value of business synergy cannot be easily denied, at least it is difficult for investors to judge).

But the past cannot be pursued, and even if BABA-SWR's past investments were mostly unsuccessful, the current market valuation of BABA-SWR Group does not reflect the valuation of this business and the value of equity investments.

And to some extent, BABA-SWR Group's transformation into a holding company, led by Dai Shan to establish an asset management company, and the independent operation, independent financing, or listing of its business groups/companies, is also a solution to the problem of the company's previous wide range of self-operated businesses.

In addition, BABA-SWR may consider selling Ele.me, and even if it is false, it reveals the possibility that, in addition to e-commerce, it may also include Cainiao Logistics and cloud services. BABA-SWR will never give up its controlling rights, but all other businesses and investments (even if consolidated) cannot exclude the possibility of being split or sold.

Although the market currently does not value some investments, if BABA-SWR distributes the returns from equity investments through dividends, or directly distributes the shares of independent listed subsidiaries to BABA-SWR Group's shareholders, it is still a real return to shareholders.

So, what is the total value of equity assets currently held by BABA-SWR? According to BABA-SWR's different confirmation methods in the financial report, it can be divided into securities and other investment assets, and equity method accounted investments (including goodwill).

First, let's look at the first category, securities and other investments (mainly including equity and some bond investments). These assets are recorded at fair value by the company (applicable to listed assets), or their value is estimated by the company. And with market changes, they are frequently revalued, and gains and losses are directly included in the current period's profit.

Therefore, it can be said that the book value can more accurately reflect the asset value under the securities investment account. As of the third quarter of the 23rd natural year (non-fiscal year) report, the total value of securities investment assets currently held by BABA-SWR is approximately RMB 281.7 billion, of which the value of listed and unlisted equity investments is about RMB 220 billion.

According to the detailed composition disclosed in the 2023 fiscal year, it can be seen that the easily liquidated value of listed company equity and bond investments accounts for about 65% of the total value. Based on this proportion, assuming that the listed company equity held by BABA-SWR has fallen by an average of 20% since the third quarter financial report (bond investments remain unchanged), then the current easily liquidated securities value of BABA-SWR is approximately RMB 158 billion, accounting for about 12.3% of the company's current market value (excluding net cash held by the company). This could have a certain (but not significant) boosting effect on the company's market value if released. Of course, the premise for the release of value mentioned above is that if the company sells these assets, it will return them to shareholders in the form of dividends or buybacks. If they continue to remain on the company's books, investors are likely to continue to ignore them.

From the perspective of which invested companies are more likely to be sold, leading to possible pressure on the stock prices of these companies, Dolphin Research believes that, honestly speaking, apart from maintaining a certain degree of control over domestic express delivery performance, it is highly likely that BABA-SWR will not completely sell all of its shares in express delivery companies. However, it cannot be ruled out that other assets may be sold by BABA-SWR to raise funds. But if we sort the companies in terms of the total value of BABA-SWR's holdings, the following companies are more likely to be sold by BABA-SWR to recoup funds.

In addition, BABA-SWR currently has approximately RMB 200 billion in non-controlling equity investments recorded under the equity method, which represents the value of companies in which BABA-SWR has a significant influence but does not have controlling interests. This value is calculated by multiplying the proportion of BABA-SWR's holdings. And BABA-SWR enjoys this every year.

Furthermore, BABA-SWR also has over RMB 260 billion in goodwill on its books (accounting for 14.7% of BABA-SWR's total assets). This substantial book value reflects the difference between the actual price paid by BABA-SWR when it invested in companies with controlling or significant influence and the actual net assets of those companies.

Since BABA-SWR has not disclosed the specific composition of the above equity method assets (although it should mainly consist of Ant Group), it is difficult for us to accurately determine the actual value of these assets.

However, considering that domestic assets have generally experienced significant declines since 2021, based on past experience, BABA-SWR recognized asset impairments of RMB 6.2 billion and RMB 8.3 billion in the fiscal years 2022 and 2023, respectively, indicating significant impairment pressure. If BABA-SWR does indeed realize these assets through sales or other means in the future, it is highly likely that a considerable impairment loss will be recognized on the books. This portion of the profit and loss will directly impact operating profit and make the company's financial report look unfavorable.

However, for institutional investors, this impairment does not result in actual cash outflows and will still be valued based on the profits from actual business operations. Therefore, it will not have a negative impact on the valuation of BABA-SWR.