17 September 2014 10:58:08
ALIBABA IPO (English)
This post discusses my opinion about the consistency of Alibaba Group Holding Limited estimated value after the IPO at 68$ per share with the annual growth rate of the free cash flows which may be inferred from the evaluation itself, based on the method applied.
In a DCF model, with RMB 26,937 M (ttm at 30 June 2014) of Free Cash Flow (net cash provided by operating activities less acquisitions of: land use rights and construction in progress; other property, equipment and intangible assets) as a starting point and the following estimated data:
- Ordinary shares outstanding immediately after the IPO: 2,465,005,966;
- WACC: 12.3% (based on CAPM with an adjusted beta of 1.39);
- Annual growth rate of the Free Cash Flows beyond 10 years: 2.8%;
- Operating leases converted into debt: RMB 381 M;
- Stock options value: RMB 4,603 M;
- Net proceeds from IPO: RMB 51,408 M (123,076,931 ADSs times 68$);
- Main adjustments on non-operating assets. Latent appreciation on the equity interest of approximately 38% in CITIC 21 completed in April 2014 (purchase price of HK$932 million against a market value of around HK$18,700 million at 16 sept 2014): RMB 14,096 M; Alipay estimated value (perpetuity on 37.5% of consolidated pre-tax income based on an estimated net profit figure for 2013): RMB 47,806 M,
it is possible to infer from the total estimated value of the Company after the IPO, equal to RMB 1,027.9 B ($167.3 B), an annual FCFs growth rate up to a 10 years horizon of 18.2%.
This growth rate is, in DIAWONDS®’ Opinion, sustainable if compared with Active Buyers growth rate that the Company is experimenting and forecasts by leading market sources about future development of the Online Shopping in China and perspective Internet use among Chinese population. Therefore the IPO may be considered interesting at a price of 68$ per share. However, whatever the case, it would be worth devoting some effort to a deeper understanding of the specific corporate governance peculiarity of the group (a Cayman Islands holding company conducting business in China through subsidiaries and variable interest entities).