The potential is huge for Alibaba Group Holding Ltd. to unlock its value through the historical reorganization, given its cheap valuation that currently prices the Chinese e-commerce leader below peers.
(Bloomberg) — The potential is huge for Alibaba Group Holding Ltd. to unlock its value through the historical reorganization, given its cheap valuation that currently prices the Chinese e-commerce leader below peers.
With its Hong Kong shares trading below 10 times of its estimated earnings for the next 12 months, Alibaba’s valuation trails that of major rivals JD.com Inc. and PDD Holdings Inc., which have double-digit multiples. The stock is even cheaper than utility firm CLP Holdings Ltd. and is valued on par with China Telecom Corp.
The company announced plans to split its $220 billion empire into six business units, a major restructuring that heralds several initial public offerings. Investors say the move will spur a revaluation of the tech empire by allowing individual units to raise funds separately and make swift business decisions amid intensifying competition in China.
“We believe it will lead investors to reassess the valuation methodology of Alibaba,” Citigroup Inc. analysts including Alicia Yap wrote in a note, adding that the move to unlock the underlying value of each business came as an earlier-than-expected surprise.
Here are three charts that show the upside potential for Alibaba:
Investors have been giving utility-like valuations to Alibaba shares, reflecting concerns that the company’s high-growth era is over. The reorganization could be deemed as a way to change such perception. Daiwa Capital Markets analysts including John Choi expects the revamp to enable quicker response to market changes, allow greater external fund raising, while also helping to improve employee morale via individual stock option plans.
The valuation of Alibaba has more than halved since November 2020, when China’s shocking decision to halt Ant Group Co.’s initial public offering marked the beginning of a years-long crackdown on the sector. Although earnings-per-share have been revised up since mid-2022 as investors factored in benefits from China’s reopening, the company’s valuation multiple has received limited boost.
Investors have been betting on a revival of Alibaba’s rivals such as PDD amid fierce competition in China’s e-commerce space. PDD’s US-listed shares have gained 64% over the past year even after a recent pullback, while Alibaba is down more than 25%.
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