Investors often lament missing out on opportunities that were “too good to be true” in hindsight. Those daring few who took the plunge now boast enviable double and triple-digit returns. Today, Alibaba Group represents just such an opening.
There are significant tailwinds favoring bullish sentiment on China equities for reasons that will soon become clear. Any other market would see massive capital inflows, yet fear surrounds China due to nebulous “geopolitical risks” – a fancy term meaning “unfamiliar territory makes us anxious.” Sometimes such expressions are best ignored. Profit is profit whether earned in America or on the moon.
Alibaba’s leadership steadfastly supported shareholders this past quarter. 2023 outlooks appear more optimistic than ever before. Investor legend Jim Rogers, George Soros’ former partner, states he is “optimistic about [the] Chinese stock market recovery.” Who better to spearhead a revival than technology juggernaut Alibaba?
Market Forces Driving Opportunity
The CSI 300 index tracking China’s broader stock market languishes at a 5-year low. Contrast this with rallies in other emerging economies like Brazil flirting with 52-week highs. Observe the trend live by charting Brazil’s iShares MSCI ETF (EWZ) versus the iShares MSCI China ETF (MCHI) mired at 2011 levels! Amid global angst, only soaring US indices reach historic peaks.
One constant across financial markets is the debt cycle driving business outlooks and stock valuations. When a nation’s bond yields significantly trail stock dividend yields, expect funds to rotate from bonds into equities.
Currently China’s ETF dividend yield is 3.7% annualized versus a 2.5% coupon on 10-year government bonds. Note the MCHI omits some higher-yielding CSI 300 stocks inaccessible to US investors, some paying over 6%.
With stocks now outpacing bonds, the macro view suggests Chinese shares are underpriced. Don’t take this analysis lightly – investors like Ray Dalio allocated to China in November 2023.
Fear still rules sentiment, suppressing confidence to buy this market. Yet analysts and insiders have such faith a near 62% upside could materialize from today’s prices.
2023’s New Reality
In brief, here are the key takeaways from Alibaba’s latest earnings report. Topline revenue grew 5.1% as gross margins inched up to 40%. Not everyone processed this favorably.
Shareholders dumped the stock up to 5% this Wednesday morning on an alarming 77% net income plunge. The reality is underlying net income wasn’t terrible.
Management reported asset impairments and equity investment writedowns – paper losses afflicting all in this 2011 low market. Bankers call these “non-core” items excluded when calculating true operating earnings power.
Stripping out non-core items reveals Alibaba grew operating income 5.4%, outpacing 5.1% revenue growth showcasing rising efficiencies year-over-year. The selloff now appears unjustified.
