Alibaba break-up will unlock value, cut risk

Alibaba's (9988) plan to split into six major businesses could unlock value - given its existing cheap valuation - and ease regulatory pressure on the Chinese e-commerce giant.

The historical reorganization would improve the businesses except for the China e-commerce unit and help Alibaba's stock price to rebound, according to Goldman Sachs, which raised the target price within 12 months to HK$133 apiece, 40.7 percent higher than the closing price of HK$94.55 yesterday.

With its Hong Kong shares trading at only 10 times of its estimated earnings for the next 12 months, Alibaba's valuation trails that of major rival JD.com (9618), which has double-digit multiples. The stock is even cheaper than utility firm CLP (0002) and is valued on par with China Telecom (0728), reflecting concerns that the company's high-growth era is over.

Now, the 24-year-old tech giant's plan to split its US$220 billion (HK$1.71 trillion) empire into six businesses is a major restructuring that could herald several initial public offerings.

Chief executive Danial Zhang Yong said the revamp could enable the units to respond more quickly to the market amid intense competition.

Taobao Live general manager Doyle Cheng Daofang said the split means the livestreaming unit could obtain resources "more freely" amid a competitive market.

Jefferies believes the split will stimulate the units to develop their own businesses and release value, as they will need to be responsible for their own performance.

Except for the China e-commerce unit, every business recorded an operating loss for the nine months ended December 2022. And the China e-commerce unit, which accounted for 68 percent of total revenue, reported a 1 percent dip over the same period amid fierce competition with JD.com and Pinduoduo.

The break-up is likely to reduce regulatory risks for the tech giant, said Castor Pang Wai-sun, executive committee member of the Hong Kong Institute of Financial Analysts and Professional Commentators.

Under China's tech crackdown, a mega IPO of its fintech arm Ant was scrapped in 2020 and Alibaba was fined 18 billion yuan (HK$20.51 billion) under an anti-monopoly investigation in 2021.

Pang also says Alibaba's break-up plans could be emulated by other Chinese tech giants to reduce regulatory uncertainties.