Alibaba Inventory: Finest To Keep On The Sidelines Till Beijing Is Carried out (NYSE:BABA)
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We last reported on Alibaba (BABA) in November, as we encouraged readers to stay away until we have clarity on its regulatory stance. Two months later, the stock is still roughly where it is (+/- 3%) and there is still no clarity on Beijing’s guidance.
Still, Alibaba held an investor day in December to encourage investors to focus on its long-term growth story while management discussed new areas of growth.
BABA stock is undeniably cheap as it trades at just 12.7x NTM EBITDA (3-year moving average: 19x). But we know stocks are cheap for a reason. In the case of Alibaba, we believe that Beijing’s stock will likely continue to underperform the market until Beijing is finally done with BABA.
Beijing, when are you done?
Your guess is as good as ours. Since our last article, the Chinese government has continued to surprise us. So for now, we think we can say with certainty that Beijing isn’t done yet.
On Jan. 5, Nikkei/Caixin reported that the rules for using algorithms in making recommendations would go into effect on March 1. Such restrictions prevent companies from using these price discrimination algorithms. Although the draft rule has been in effect since August, it continues to demonstrate Beijing’s concerted efforts to further rein in its internet businesses.
Shortly thereafter, Caixin reported that China’s “new technical standards to unify digital payment barcodes have laid the groundwork for breaking down the walls between different payment platforms.” In particular, it also stressed that there is still a big question mark over how Beijing intends to enforce interoperability between payment platforms. As a result, investors have no idea to what extent Beijing intends to tear down the walled gardens between its main payment platforms. Caixin emphasized (edited):
The new specifications for payment barcode integration, created by the People’s Bank of China, establish a set of unified technical requirements for payment service providers, including quick-response codes. If strictly enforced, the standards are likely to have a significant impact on the booming multitrillion-dollar mobile payments market, rocking the Alipay and WeChat Pay (OTCPK:TCEHY) duopoly. (Caixin)
It also came shortly after the central bank launched its digital yuan app for pilot testing as China moves ahead with its digital yuan project. It’s pretty clear that unless China can “lure” its consumers into considering abandoning their WeChat Pay or Alipay, it will be very difficult to get them onto the central bank’s platform. However, if China can enforce interoperability between WeChat Pay and Alipay, it could significantly reduce consumers’ incentive to stick with either platform. Consequently, it could also encourage consumers to switch to the central bank’s digital yuan platform as the payment duopoly of Tencent and Alibaba is dissolved. Of course, that’s just our guess. But the lack of clarity about Beijing’s intention is troubling.
It’s made worse by COVID, the real estate market and the flagging economy
China telegraphed its plans to focus on stabilizing the economy in 2022 after a turbulent year that severely impacted its property market and stock markets. Consequently, it has also significantly affected consumer sentiment as China’s real estate market accounts for around 15-20% of its GDP. This, coupled with the supply chain disruptions and China’s tough COVID policy, has continued to hamper its economic recovery. Despite GDP growth of 8% in 2021, economists expect China to target just 5% growth this year as it continues to face headwinds. While the housing market could bottom out in H1’22, we shouldn’t expect the good old days to come back. Caixin reported that the message from China’s Central Economic Work Conference (CEWC) was clear. It reported (edited):
The CEWC called for stepping up the construction of social housing, accelerating the development of the long-term rental market, supporting the housing market by better meeting the demand for decent housing from homebuyers, and the healthy development and “a virtuous cycle” of the real estate sector to promote . The meeting also reiterated the government’s position that housing is for living, not speculation. (Caixin)
Though economists believe China is aiming for a “soft landing” for its real estate market, it is not striving to return it to its prime. Dealing with the enormous regulatory uncertainty is already challenging enough for investors. Now investors also have to deal with significant structural shifts in demand and consumer sentiment. We have no idea what Beijing thinks of a soft landing at this point. As long as consumer sentiment remains weak, it will affect their ability and willingness to spend. Given Alibaba’s significant reliance on its discretionary spending trading operations, this is another notable headwind to contend with.
Then, Caixin reported that China released “a five-year digital economy development plan with specific goals and tasks, aiming to increase the contribution of the core industries of the digital economy to 10% of GDP by 2025.” We were initially encouraged by the plan’s goals and thought Beijing might be finished brandishing its regulatory baton. However, if we read on, Beijing seems to know exactly what we were looking for, and China is determined to make that clear, as reported by Caixin (edited):
The plan also emphasizes fair competition, curbing monopoly, protecting privacy, preventing disorderly capital expansion, and improving regulation to “ensure the safety outcome.” (Caixin)
So we’re back to zero. We have no idea what these ambiguous statements mean and what else Beijing has in mind. We don’t think China is out to shut out foreign investors; that is clear. However, we believe Beijing has more important plans that may take precedence at the moment. Until we know exactly what these plans are and how they will implement them, it is better to be extra cautious.
BABA stock momentum is extremely weak
In addition, the momentum of Alibaba stock is now extremely weak. We presented his weekly chart above. Price Development and Momentum Investors should be aware that a weekly chart is suitable for analyzing the long-term trend direction of BABA stock. In particular, BABA has an undisputed downward trend. Its 20-week moving average (thin red line) has consistently defied any attempt by BABA to resume its uptrend since 2020. Until this long-term downtrend bias is lifted, BABA could get stuck in this vicious cycle.
Next, BABA’s last line of defense, the 200-week moving average (thick red line), was broken, also on July 21. 200 week is a critical long-term support level that has consistently supported BABA stock for the past three years. So when it breaks convincingly, as in the case of BABA stock, the market’s message is clear. Despite Charlie Munger’s positioning, this will not be enough to reverse BABA’s downside momentum.
Still, there’s little doubt that BABA’s stock is cheap. It’s a quality company that really shouldn’t trade on reviews like this. However, we believe it is better to remain on the sidelines until China’s intentions regarding its internet stocks are clear.
We therefore reiterate our neutral rating on BABA stock for the time being.