Alibaba – The empire breaks up

State oversight is the driver.

• Shareholder value has little to do with Alibaba’s decision to reorganize and much more to do with providing the state with better visibility and control over the large range of its activities.
• Following on from the National People’s Congress, Alastair Newton and I have observed a range of reforms and changes being announced that have a single, uniform effect.
• These changes will almost universally result in the consolidation of power away from the regions of China towards the central government and the Politburo.
• At the 5-year meeting of the CCP Congress in October 2022, President Xi was confirmed for a 3^rd 5-year term and the Standing Committee of the Politburo was reshuffled such that the reformers were removed and replaced with Xi loyalists.
• The practical upshot of this is that as time passes, more power is concentrated in President Xi, making him effectively the ruler of China.
• This means that in China loyalty and subservience to the party are now of paramount importance and private enterprise operates with the permission of the state which can be withdrawn at any time.
• This is a very different environment from the one that Alibaba enjoyed during its glory years, and it now has to adapt to ensure that it can still operate to its full capacity.
• This is what I suspect is the main reason for this reorganization as it has already been approved by regulators and will now go into effect.
• This reorganization involves splitting the company into 6 separate companies each with its own CEO which will be owned by the holding company that Alibaba will now become.
• Each of these owned companies will be able to publicly list or raise funds separately making this very similar to what Google did when it reorganized into Alphabet.
• As 6 independent companies, each company will be subject to potentially selling the state golden shares and/or having representatives from the CCP sitting on their boards.
• Instead of having visibility on just one company, the state will now be able to see each of the six divisions individually and be able to influence their activities independently.
• This will also reduce the perceived monopolistic power of Alibaba and any further potential that it or its executives might have to challenge the authority and good standing of the state and its entities.
• This all began with Jack Ma’s ill-advised criticisms of the financial regulator and the state-owned banks in public and it looks like the real reason for his visit to China was to close the deal for this re-organization.
• Hopefully, this is the end of the turmoil and now the recovery can begin.
• On a sum-of-the-parts analysis, it is easy to get to HKD140 per share but I suspect that Alibaba’s return to the good books of the state and an economic bounce could push it much higher.
• I am growing less confident about the timing of the economic recovery given President Xi’s slowness to order an economic stimulus, but a recovery will need to come at some point.
• This puts Alibaba in a good position to enjoy a substantial recovery in value which I am confident will occur over time.
• Hence, I remain comfortable with my position in Alibaba and can afford to be patient.