Alibaba [SGO 7 – 29 May 2021]

In Episode 7 of Stock Geekout, we geek out on e-commerce heavyweight Alibaba with resident stock geek Thomas Thio.

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podcast Transcript

Reggie: Today in TFC Stock Geekout, we’re going to explore a company that’s broadly diversified in itself. There is a saying that if you own this company, you essentially own the whole exposure of China’s growth. What started as an e-commerce company has grown into a group of various commerce offerings from B2B (Business-to-Business), B2C (Business-to-Consumer), C2C (Customer-to-Customer), supermarket on-demand delivery… essentially all forms of commerce you can think of in the 21st century. They are either a dominant or a prominent player in the space, but that only accounts up two-thirds of their business!

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Honestly, I’m not even sure if we can cover everything today. They are growing in all directions. Joining me today to geek out on this e-commerce giant is Thomas Thio, our in-house stock and tech geek. We explore the giant Alibaba which has been beaten down by the market, potentially over geopolitical situations between China and the US, but their core businesses have been growing steadily. With cloud computing, commerce solutions, international expansion within their belt, their core is very strong. 

While we did what we could, there are a lot of different small little things. I think a lot of people try to talk about this company, and it’s very hard to talk about every single component. We did address Ant Financial. We talk about their growth expansion, their work culture and all these different stuff, but if there are certain aspects that you want us to go deeper, drop your comments in the comment section and we can explore as a follow-up.

For your reference sake, this episode was recorded on the 29th of May, 2021 and released early to our community members. Our discussion today is solely for education and entertainment purposes only. It does not serve as any form of advice or recommendation. Thank you for loving what we do and empowering us financially to do more for you. Let’s geek out!

We are back again today to talk about another big company out there that is extremely popular. I think because this time round, they’ve been sold down for whole two years, man! Coming two years, already lockdown! It’s close to two years and they’ve been consistently sold down over the past two years. Although their business is growing, their fundamentals are amazing. They’re a cash cow! Big cash cows in their business and they have dominant positions similar to that of Google, similar to that of Facebook in their own localized environment, but they’re being sold down.

I think a lot of big players in the game, a lot of value investors, a lot of big name hedge fund owners, they’re all starting to pile in positions on this company. That’s why we’re going to talk a little bit more about this company today together with Thomas. So what is this company we’re going to talk about? 

Thomas: This company is Alibaba. Huge, huge company. I think everyone does recognize it for its e-commerce component, but I think there’s a lot more to it as well. Alibaba… I think it has been talked about in a few other circles, a few other investors, analysts and all that kind of stuff. So I think they talk about different parts about Alibaba and it’s just not enough time to cover the entirety of it. 

Reggie: That’s how big they are!

Thomas: I was looking through one of their annual reports where they tried to map out their organizational structure and their different variable entities and all that. It’s in the hundreds and thousands even. There’s entities upon entities and all that kind of stuff.

Reggie: I know there’s a joke going around: if you buy Alibaba, you don’t need to diversify. It’s already diversified. It’s in every single corner of the tech space of China’s market. So that is wild, yes. 

Thomas: So really end-to-end play here. Basically, Alibaba has had a few things happen to it over these last two years. Other than the trade war, Covid hitting and then there’s also anti-monopoly investigations by China. They were also hit by the… well, Ant Group is kind of related because indirectly they own ~30% of Ant. The IPO was postponed, if not cancelled for the longest time. People have been saying it’s cancelled already, but I think it’s postponed to be optimistic.

Reggie: You mean like Tokyo Olympics? In 2020, we postponed. Dude, it’s going to get cancelled and I think that the whole Ant Financial…. essentially, it’s gonna get cancelled or it’s gonna get so restructured that the original value of Ant Group is very much diminished. I think there’s a lot of discussion about it and we can have a good discussion about it as we go along.

I think Alibaba, everybody knows them as the Taobao, the e-commerce… but could you run us through what is their business like? Because they are actually very complicated. They’ve a lot of inter-companies involved. So what is their set-up like and all those kinds of stuff? 

Thomas: The main bulk of what they do is in what you call core commerce, any transaction that’s done on the internet. Let’s just generalize it as that. Let’s say you’re familiar with Lazada, Taobao, Tmall and alibaba.com, if you happen to visit it. These are the things that we are familiar with because it’s what Alibaba exposes to the rest of the world. 

But there’s also the China portion of that core commerce, which we may not be so familiar with. So these are like other e-commerce websites in China: 1688, Tmall in China, Cainiao [indiscernible] Tmall Global, Freshippo, AliExpress. If you’ve been to China, these are very interesting experiences which you really don’t get anywhere else. You can say they are the first in the world to actually do it. We can talk a little bit more about them later. 

They also have this ele.me: basically they have a Grab (food delivery) equivalent. If you think Grab is going to IPO already… oh, sorry, Grab’s going to go into SPAC. Basically, that whole SPAC equivalent, Alibaba already has it. You can already factor it when you want to do comparables and something. It already factors in whatever evaluation Grab is having. 

These core commerce, you can split it between what is facing the consumer and versus what is facing the B2B side of things… retail and then consumers. The consumer side of things are C2C, consumer to consumer. They sell stuff that they get from somewhere else. It could be resellers, or they make their own products and they sell, something like Carousell, something like Lazada, something like Shopee. But this is all within China.

There is the product supply side where recognized brands put their items onto this platform so that Chinese buyers will be able to buy directly. This is Tmall or Tmall Global. Tmall Global is just facilitating global brands. It’s like the branded version of Lazada, Nike, Adidas, Burberry, (they’re) all there. But they’ll never be on Taobao, for example. 

Why? It’s because there’s price sensitivity. You wouldn’t put the branded items on Taobao. Taobao is where you find all the cheap items. You just want something very simple. Let’s say you want to buy microphone stands, then go to Taobao. Don’t go to Tmall. Tmall is (where) you want to buy the very expensive microphone stand, (or) you want to wear something very fancy, you want your Sennheiser, Bose, all that kind of stuff. So this is the difference. 

There’s the new retail segment. New retail segment is what Alibaba is experimenting. (They are) trying to redefine the whole retail shopping experience. (When) you walk into a shop, (you) can get recommended items that you want to buy. You feel feel the item (give it a try), you can make a purchase and it’s shipped back to your house. So that’s a different kind of experience. You don’t actually carry things out of the market unless you really, really want to do that. 

There’s the local consumer services. This is the Ele (ele.me) service. This is basically your Grab or Deliveroo, but for China. They generalize this as the digitalization of restaurant and service industry. Digitalization in the sense where you connect these independent third-party restaurants into one single app and you facilitate the order and the delivering for them. So it sounds very similar to your Grab and Deliveroo app. But they already had it a long time ago. 

They also have the logistics portion. (The) logisitics portion (of it) is supporting all their commerce portions that we have talked about earlier. This is their Cainiao network… extremely, extremely big network of delivery supporting their own as well as for other e-commerce sites, but primarily their own. They fulfill the orders for cross border as well as international commerce. This is an important part because some of the products is sourced from overseas, like Tmall Global. Some of the products is locally grown or locally built and then they ship it outwards. Yeah, so this directional way of handling the logistics is very important: reverse logistics, outgoing, normal way of logistics, they also handle everything in and out. It’s a very big network. 

Lastly, we have the international segment. This is Lazada and AliExpress. Let’s say you’re local and you think “Lazada is quite big!” actually, no. In percentage terms, for Alibaba, it’s very, very small. The bulk of it is really coming from the core commerce from China. 

Reggie: Nice! And you see, just to try to run through all their major components in their revenue chain, in their business model, we took a while! There are so many things! But I think broadly speaking, we can further simplify it to the core commerce, the logistics and support functions, which are like (the) Cainiao network or Alibaba Cloud. All these are actually a spin-off from their original business. It’s very Amazon-y, in that sense. It’s kind of like Amazon, they started doing this whole, online e-commerce, and they realized that they are very big data infrastructures and then they spin it out as an additional revenue source.

So a lot of Cainiao, or Ali Cloud is also a similar idea, and there are all these other new acquisitions on the site… Actually, not so new, but all your international acquisitions which is quite a game play within the Alibaba playbook. They always acquire abroad. They don’t really do a lot of acquisition locally, but if they want to expand abroad, they will acquire abroad. 

But they did do some… A little caveat, they did do some acquisition locally. Things like Youku and all those kind of additional stuff, but definitely not like Tencent. Tencent is (an) outright acquisition with a monster. It is buy, buy, buy, and invest, invest, invest. So I think Alibaba is a little bit more strategic about this. They do a lot more acquisition abroad, as a way of expanding rather than the whole internal “buy, buy, buy all your competitors” strategy. 

Thomas: Good point. I missed out Alibaba Cloud. That’s their cloud division. For e-commerce, once you handle these payments processing, you handle the logistics and all that, you’ll find that you just have a growing need for cloud—whether it’s storage and for compute. So it makes sense for Alibaba at their scale to have their own service supporting all their different core commerce functions, and then they realize that “okay, I have the economies of scale, so why not I just push it out as a product as well?”. So that’s what they are doing.

Reggie: Yes, a little bit of clarification here̦. Alibaba as a company, only owns about one-third of Ant Financial as a company. Within Ant Financial, there’s the whole like Alipay, 蚂蚁金服 (Ant Financial Services Group), insurance, investments, all the things that StashAway is trying to build or all your robo-advisors, all they are trying to do is like PayPal plus StashAway, plus Square (Square Inc), plus robo-advisor plus everything, all your broker put together is Ant Financial.

All the leading financial services that people are engaging in, Ant already does it and they have done it for a very long time. In China, you can literally buy the 包 (bun) on the street with Alipay. All these things are put together in Ant Financial and Alibaba as a company only owns one-third. 

So the revenue that is coming in from Ant Financial is actually not directly accounted within their financials. They are not a 51% owner of this company. This is something that you need to know. So don’t be too hyped about “oh no, Ant blah, blah, blah, blah, blah, blah.” It actually only accounts for a very small revenue, depending on… is there dividend being placed out. But the revenue is not directly factored into the FS, the financial statements of the Alibaba group. I think that’s something that people need to get some clarity on. 

Thomas: In the FS, you look at the valuation of that as basically an investment. They own 30% of Ant Financial. That’s the only way that the evaluation can affect Alibaba.

Reggie: Yes, but it does not actually have direct influence to the revenue number or the cashflow, none of those things. This is an accounting practice. We can talk about this in more detail another time, but generally, if a company does not own more than 51% majority stake in any other company, then they will be considered an investment and there’s no direct influence with their financials. If any company owns more than 51%, it’s considered a subsidiary and all their revenue and all that can be factored in together and written down as part of the FS. So that is something that people need to get a bit clarity on. 

Are you concerned about the complexity in the business model before we dive deeper? Not in a sense that the business models are complex but because there are a lot of entities holding, small little parts, and then you as an investor, you’re buying the US ADR (American Depositary Receipt), and all those kind of stuff. Are you concerned about this structure? 

Thomas: I think the structure is something that you should be concerned about because there’s no clarity in what is the actual revenue generated from each of these… either subsidiaries or holding companies or whichever entities under a holding company. So they have holding companies of holding companies. They have variable entities of variable entities and all these are just a black box. What the reports will just say is like “oh, it’s just consolidated into these segments: core commerce and cloud”, then maybe into the individual businesses. But there’s many other relationships in between. Who actually owns what, you don’t really know. So management, insider ownership, it’s a bit difficult to get into. 

That being said, that is the risk. We look at the upside. It’s a Chinese company. It’s like the jewel of China, right? Although yes, anti-monopolistic competition and all that kind of stuff… government won’t just say like “just dismantle Alibaba.” No way, right? Some of the valuation has to be true also because you just compare how much China is growing in terms of e-commerce. Look at JD, look at Pinduoduo, look at all the other similar competitors. If that kind of makes sense that they have a certain market share already, the numbers kind of make sense also. 

Reggie: Fair. I honestly don’t think the numbers are being as manufactured as what people are saying. There are some objective standards to this, and like you said, you look at their competitors. Honestly, if you want to make every competitor flout their numbers and just stage this crazy act for the global community, that’s pretty hard. Your talk about being very concerned about the kind of shared ownership, all the internal ownership, that part is a gray zone. We’re not very sure what’s going on, but the business itself is very interesting and very powerful.

So let’s go into the business models that we have talked about, some of the major business faction. Like I said and like Thomas has said, this company is just too big. We cannot go into every single thing, but we’re going to talk about the interesting stuff and give you a broad overview. If you have any particular business function that you want to find out more, feel free to drop a comment in the comment section, and then we can have an ongoing discussion about that. 

Thomas: So e-commerce… starting out, basically you need buyers and sellers and you are the platform provider, right? It’s a chicken and egg problem.

The number one thing you need to do is before you attract any buyer, you need to go in and sell something. If not, you’re going to go to them and you sa “oh, I have a platform, nothing interesting. Why should I join?” So getting their boots on the ground… call them business development or partnerships, basically they work with a lot of different sellers, maybe C2C or B2B kind of thing. They say “hey, I’ve got a platform. I can promise to bring you this amount of traffic. I can promise to bring you this amount of sales even”. 

Basically, this is a very basic bread and butter thing that e-commerce needs to do. If there’s no attractive products on it, I wouldn’t buy. If there’s no attractive bulk discounts, I wouldn’t buy. So once these people are on board, then it’s really the marketing side of things to attract different kinds of buyers, whether it’s a B2B buyer or it’s the consumer. 

Once they are actually interested, they’ll want to transact, right? You have your payments processing. Your payments processing, in line with… assuming your orders and your flow is okay, your payments processing has to be smooth. You don’t want to have a kind of user experience which is so bad. You need to go and transfer the money to another bank, hold for three days and that kind of stuff. That used to be the old way. And then there’s Alipay that came out with the escrow system. This was like totally revolutionary, no one else did it. Then everyone else started copying. So this was one of the first things worldwide that even PayPal didn’t look at. PayPal only did a fraction of it. Alibaba with its end-to-end value chain from the ordering all the way to the fullfillment, they were able to do this also. 

Then the next thing comes where you need to fulfill these orders. So the logistics, really building out a network to make sure that it’s smooth. People want to be able to be delivered within a certain timeframe and these timeframes need to be met under certain constraints. If it’s within the city, people expect one day delivery, you have to meet one day delivery. If not, other e-commerce, they just pay some other logistic provider. “I’ll provide you within three hours flat.”

I’ve heard from a friend in China that it’s possible to order his food and get it within 30 minutes. 

Reggie: Crazy, right? 

Thomas: In Singapore, within our small island, minimum wait is 40-45 minutes? Sometimes, the order also lost. I don’t know. Kena (got) delivered to the ocean or something like that. 

Reggie: Yes, yes, and when I was there, actually I had the same experience with Ele.me, which is one of their food delivery platform or even with Taobao, 11.11. When everybody is shopping on 11.11, the power of data… I’m not sure if it’s exactly true, but the data pick up in Alibaba is so crazy that by the time you are scrolling through, they are already adjusting their supply chain, they already can predict how many people wants to buy that particular goods and send to their regional hubs so that once you put your purchase, they can immediately send it out. 

So the next day, or the day after, I can already get my goods unless I’m ordering from some weird corner in China. But no, I was staying in Shenzhen. The big hub was in Guangzhou, so it’s not that difficult for me to get my goods. But it’s still pretty mind-blowing that on 11.11, when so many people are shopping, I get my goods the next day. Not everything, but 50% of the things I purchased came next day so that’s pretty wow. That was a few years ago.

Thomas: And if you think about it, the Singles day or all these shopping events, there’s mass volume of orders. It’s just a sudden spike, right? How do you handle that kind of load? This is not your normal day, suddenly two months worth of orders (are) all coming onto one or two days or in a single night, right? So that kind of scale or the infrastructure that you need, is tremendous. It’s not easy to build. It’s not something you can just outsource to AWS (Amazon Web Services), right? Your bill is going to be super, super high. That’s is why it’s also important for e-commerce companies to look into having their own kind of cloud infrastructure that can support this. 

That being said, they had Alibaba Cloud and then eventually they rolled it out as their own product as well. R&D, very important, not just in terms of their whole e-commerce chain… so we talked about the ordering, the different platforms like Tmall, Taobao and all that kind of stuff, but also on the backend side of things, making sure that these can scale, and moving the business forward, not just in terms of e-commerce… “I can only stay in e-commerce. I can’t do anything else.” 

Another important thing for Alibaba was making sure that they control almost the entire supply chain. So this new retail concept, they are trying to engage with the retail providers themselves and transforming the experience such that they really get the data right from the start, from the retail experience itself. That can actually fine-tune how they sell their stuff online. So this is quite interesting and I don’t see this being done anywhere else yet. Maybe Amazon, but for fresh goods. 

Reggie: Give me a little bit of colour on that offline data collection process… smart retail or new retail. It’s very interesting. There are multi-sensory devices that are being put on shelves. They’re being put on the product and when you go into the store, you log into the store, it’s just like how Honest Bee tried… Honest Bee tried to do that same thing here, you have an app and then you log in to the place. You don’t even need to do to pay to check out.

But the moment you log into the app and walk into the store, they’re already sensing the distance between you and that particular product and how long you’re holding that product. So all of these things are small, little little data points. Where do you walk? What is your movement pattern? So it’s like a heat map, literally an offline heat map that is happening and they’re collecting all this data and they will know at the end what’s going on. And (since) you are on their app, they can push you marketing based on the product. So it’s pretty wild and I think Hema does a crazy job with that. 

Hema is a supermarket. 盒马超市 (Hema) is a supermarket venture that Alibaba is doing. They are the ones that started this whole thing. They experimented this thing in supermarkets. So you don’t need to pay, there’s no checkout, just go in with the app and then you log in, you scan everything and you just walk out. All that seems like just a great experience for you, but it’s also a lot of data being collected for them. I think that’s something people don’t realize. 

Thomas: Yeah, so from a tech standpoint, that’s actually very, very advanced. You talk about (being) a Smart Nation, having the internet of things, all these sensors and all that. Which country has it? Which company has these kinds of things? It’s only Alibaba, only in these Chinese stores. This is like the dream of the data scientists. “Give me all these data, I can get all these insights.” 

But we are a long, long way from that. So Alibaba is quite ahead in this concept. And also, these data points, they come from the demand side of things. Because that’s the consumer, you see the interactions, they are interested in this and all that. That also factors in their whole production process. Let’s say, they also control… say for fashion. Fast fashion, they very easily know what is the kind of trends or certain kind of fashion styles. 

This same data is in real time being fed to the manufacturing site to produce the kind of designs for the next trend… not season, trend. The next trend can be next week or the following week and this is already being sent out to all of their other partners to tell them that “okay, the trend has changed. Do you want to order more?” Immediately, they can really clock up the next trend’s revenues. So this whole integrated supply chain is very, very powerful. 

Reggie: Very powerful, and there’s a lot to talk about when it comes to fashion. Have you ever thought of how a particular fashion trend… let’s say we’re going to wear black, this particular season is black. Where got suddenly so much black cloth sitting around? It does not work that way. There’s a lot of complexity behind the fashion industry about how they push media, how they structure certain things, how a lot of things are already pre-planned. 

You think that your fashion taste has changed or the trend has changed? Actually, they are managing this whole trend. They are building narratives around the trend and they have all the media power behind that. So I think Alibaba does it like even one level above. They have all these partners that they have. They have the supply chain, they can do all this, and they have Youku, they have all of these other platforms that they can use to push a particular idea out to you. 

So I think… sometimes when we talk about tech companies, like all sexy and interesting, and “Woah! They have all these data.” Actually, it’s a little bit scary sometimes when I look at the amount of power and influence they have, all congregated in this. Because last time, you just do online data, that’s already very powerful. But these guys, Alibaba specifically, they have mastered the art or they are leading the art of offline data collection and that is very wild. 

Thomas: Yes. Suddenly you see the celebrity or influencer wearing some blue skirt and then two weeks later, everyone’s buying blue skirts. Why ah?

Reggie: Yes, yes. That is all part of it. So the new retail is very, very powerful in China itself.

Thomas: Yeah. Essentially, I think that’s the major processes of Alibaba. Of course there’s others, but it’s more minute. This is the crux of things. Some of the important metrics to look at… it’s like a big company. So what’s the biggest thing that we should be looking at to really see how Alibaba is performing?

So what you mentioned, having an idea of what the consumer is thinking is pretty important, right? The consumer mindshare, you have also the wallet share, how many people are spending on what? So you can do all these kinds of surveys to get the number of active users on certain kinds of platforms. With these kind of data, you will be able to know where they are voting with their wallet. 

At the end of the day, if the customer buys something, it probably means they are willing to invest some money into it. That really came from a certain thought that they had. Now, if you can influence those thoughts, then you can influence people’s wallets and then you just keep spending more and then you realize that you got nothing saved. 

Reggie: This is all part of it. No, you will save on Ant Financial. 

Thomas: Yeah. 

Reggie: Crazy. These guys are nuts. Yeah. 

Thomas: Okay, then for Alibaba’s core commerce itself, something that we can really dig into is the number of the merchants because we talked about the buyers and sellers part of things. The number of the merchants is the number of sellers on these different platforms. So (let’s say for) Tmall, there are global brands. There’s 250,000 different brands, they’re global brands. Taobao has 10 million, so 10 million different kinds of merchants. 

So if these numbers are decreasing, something is wrong. They are probably going to other kinds of platforms. You say like JD, there’s an uptick in these number of merchants. Something’s very wrong. Yeah. Someone’s winning, right? 

Reggie: Yeah. 

Thomas: This is pretty important. If you’re not releasing it, then we have to find some way to go in and get that because this is the crux. If you don’t have the things that people want to buy, there’s no reason for them to stay on the platform. Yeah. So this is the basic of the growth.

Reggie: And I think there’s quite a competition between JD and Tmall. JD is not trying to fight the Taobao business. They’re trying to fight the Tmall business, which is exactly like what you pointed out: the premium brands, because brands don’t want to be associated with Taobao. They’re like cheap shit, right? They want to really go with that full supply chain and support system. There’s a lot of backend support in their infrastructure that people don’t see. As a consumer, we only see the front end, but Tmall is building that whole supply and support. But JD is also doing that, right?

So there’s a little bit of competition between the two of them and there is this whole debate about exclusivity. It’s the (same) idea with the Google store and Apple store, similar things. They are fighting, two of them. There’s a little bit of anti-monopoly thing going on. I’m not sure will that happen? Because some anti-monopoly trust is talking about how Alibaba is making sure all their merchants are exclusive so that they don’t jump onto other platforms. 

Maybe in the past they have some advantage, but if this antitrust plays out then we want to see the numbers. Are merchants still very sticky on Alibaba’s platform or are they jumping? If they’re jumping then that’s a sign that things are not so well, but yes, exactly what you (have) pointed out. I think that’s a good point to know.

Thomas: And also diving deeper into who is the merchant? It’s not just the numbers. If say, Burberry or some other brands are moving over, the specific ones is more important than the number itself. Like, we’ve lost 10 brands over the last month. “Who are those 10 brands? Are those your biggest brands?” So it’s not just these raw numbers. I think Alibaba is actually fighting back with this anti-monopoly thing by the numbers game.

But they’re not revealing who actually left or who they are actually controlling, rather. So they say “it’s miniscule, it’s only 1%. It’s nothing much for our competition also.” But that matters a lot because you’re holding the very, very sizable brands with them. 

Another thing that we can look at is the mobile monthly active users. Basically, everything’s on the mobile app in China, right? You just order stuff through the phone and you want to see whether these users are increasing. So we are looking at the sellers, we are looking at the amount of activity and all that, same as how we looked at Facebook and all that. This is a common number.

We also have the annual active consumers. These are the people that actually (are) more inclined to buy things. There’s a certain way of this is calculated. Basically, on the China retail market places, they must have had a transaction within the month or maybe above a certain amount. How this number is calculated is important and you try to standardize this across all the other e-commerce companies to really see who are really buying. 

You can have tons and tons of active users. But if no one is buying then what’s the point? Yeah. So you compare these two numbers, say your monthly active users throughout all your China core commerce. It was 902 million. Wow, okay. Very big. And then if for other e-commerce, 900 million, only 500 million buy, then it’s not so good. Why? Because Alibaba’s is at 780 million. Okay. That’s like very large percentage, so we can be sure that these users are not dormant. They are actually people that continuously transact and they’re contributing to Alibaba’s P&L, and if you’re an investor, to your stock price. 

Reggie: Fair. So there’s the user core, which for all tech companies, you got to look at MAU, Monthly Active Users, and you gotta look at the average revenue by user and all this kind of thing. These are core matrices that you cannot run away (from). How is Alibaba performing particularly in active users. They are so big already. Are they still growing? 

Thomas: They are still growing. The last reported vs the previous year… no, the previous month, for example, it’s 902 million versus 818 million. So it’s still continuing to grow. Although that growth rate has of course reduced because the number is larger, but still, people are coming on board. 

Reggie: Fair. Does this number account for all their other channels? Is it like Facebook, you use Instagram, you use Facebook, you use WhatsApp. Do they account that separately or is it just generally the number of users on all their platforms? 

Thomas: Number of users across all of the core commerce platforms. So your Taobao, Tmall, Alibaba.com, Cainiao, Ele.me [indiscernible]… there is a whole list so they consolidate across. It’s not so transparent if you want to go down to individual platforms. That one is a bit difficult to get the data. But we can, however see the revenues by categories. That at least helps. 

Certain kinds of platforms, they are very good for certain kinds of categories, so we can kind of know there’s more growth there, like FMCG (Fast-Moving Consumer Goods) or home furnishing is for a certain kind of platform. Say for JD.com, they are fighting very hard on home electronics, that kind of stuff. They are very strong in that but Alibaba has its own platform which is strong in that to fight them back. For example, Tmall Global. 

Another one you can look at is gross merchandise value, also known as GMV. This is the total amount of transacted value in their platform. This number usually is very, very big. But for platform-based kind of companies, this GMV is important because usually they make a percentage off the GMV transacted, so they can charge fees to the merchant, it can be commissions off the product. It could be through… if you’re looking at Ant Financial, definitely the percentage cut that they get or from a credit card and all that kind of stuff. 

GMV is important. If they take just a very small percentage out of that, say 1% of 10 billion or 100 billion that has been transacted, you can forecast revenue from that based on the expected spending.

Reggie: That’s cool. I think a lot of people, when they look at GMV, they don’t realize that the amount of services that these platforms can add is quite insane and they can… if they are very dominant, they can earn a lot of margins on top of that. As long as the fundamental GMV is growing, which is an extension of the user base growing, which is an extension of supplier, sellers growing. They are all kind of interlinked, but then don’t be too mesmerized by this whole chain. At the end, it’s still about the services. 

How much are these companies really making from all these small little things from payments to shipping to marketing and all those things. They do add up, and with the platform, they have many ways to monetize in their view. But yes, I do think like some people, when they just keep cheering the GMV, they also don’t look at their competitors, what their competitors are doing and then you look at yourself because a lot of these services fundamentally are very commoditized.

Whether is it payments, whether is it logistics, whether is it advertising, they are very commodity-based. Not in a sense that everybody can do but in the sense that every big guy can do. But why these sellers stay on this platform? Why are the consumers coming on this platform? So it’s all part of an ecosystem and you cannot look at them from an independent standpoint. They all come together and I think that’s something that people need to recognize. Don’t just pinpoint one metric and say “you see, they’re doing very well” just because of this metric. You want to use that as a whole vision to see the whole thing. 

Thomas: You can look at Alibaba like one of the leaders in e-commerce if you want to compare between Amazon and Alibaba. Alibaba is progressing into a different area. Amazon is progressing in a different area, but in maturity of a e-commerce company, they are there. They have advanced just beyond taking platform fees. They have their own cloud. They have their own delivery network and stuff like that. They’re operating at a different scale. 

So you see if let’s say there’s a startup that wants to compete Alibaba. Siao (crazy)! You know how much infrastructure and investment you need to do to reach to that stage? I think this is also related to moats which we can talk about.

Reggie: Nice. Yeah, that’s good stuff. I think we have a very broad understanding of Alibaba, across how to try to look at platform businesses like that. Let’s go straight into financials. How much are these people actually making and where are they making money from? 

Thomas: I got the numbers from March 2021 versus March 2020, so let’s compare from previous year’s. This recent quarter, it’s $29.1 billion versus $17.7 billion. This is just… 

Reggie: This is revenue, right? 

Thomas: This is revenue. 

Reggie: Wah crazy. 

Thomas: It’s insane. Where is it actually coming from? We talked about revenue by segment earlier, right? China commerce, their retail, all your domestic kind of e-commerce platform is 69%. 69% of their revenues actually come from China commerce. That’s what I meant by the bulk of their revenues actually still comes from China. 

Cloud compute, the Ali Cloud and all that only constitute 7%, but it’s growing very fast. It’s 50% year on year growth compared to last year. Their other kinds of services is very small, but they still make up revenue. Things like Youku, Cainiao, international commerce and all that… Lazada, is all 2%-5% each. But totalling up, that is about 23% of your total revenue that you could say is exposed to international. Not bad. It’s not totally China, but you can see that they are also doing something about it, not just stuck in China. 

Reggie: Okay, okay, but I think when it comes to cloud computing, they are one of the biggest guys in China. They have a dominant position in terms of China, being in China itself. Because Chinese cloud market is also controlled. It’s very central. They don’t have foreign players really being in the game. They’re in the process of protecting their ecosystem so that they can grow and grow. 

Alibaba is one of the biggest, but I think Alvin from Dr Wealth did talk about… he’s concerned whether the cloud pick-up will be very high? Because relative to the US, hardware is very cheap here, and labour is very cheap. Relatively, okay… relatively cheap, so people may not want to go on the cloud. A lot of companies may still prefer the earlier days of internet in the US which is literally having your own in-house servers. 

There may be a transition period, so don’t be too mesmerized by the cloud computing numbers. But definitely the cloud revenue is very big and if it follows the trajectory of how Amazon does it… wow, this company is… they’re gonna like double, triple pretty well, just that business alone. So how that will affect the stock price and all, that’s up to you to think about it. I think that is the part… a lot of people are talking about, Ali Cloud as a growth revenue. 

Thomas: I do have some numbers. According to Gartner, it’s the third biggest cloud provider in the world and in China, for the market share wise. So yes, they are the market leader at 40%. Second place, it’s Huawei Cloud at 17%. Tencent is third at 15% and then fourth onwards is everyone else. 40% is quite sizable. Mainly the growth comes from internet retail, public sectors. So it’s mainly to serve their own needs first and then extending them outwards. It’s already 40%. It’s huge. 

Whether or not they can actually grow faster than that is ultimately depending on how much is the up take inside China itself. But I think there may be actually constraints about this. I’m not too sure yet, but my speculation is that it’s because there’s not enough cloud compute resources in China. This is my speculation. A lot of it is actually going towards crypto mining. It’s not being used for more productive economic purposes if you look at it, so the government is doing something about it, but this is just my theory. It’s a working theory. I’m still trying to get more data. 

Reggie: Fair, let’s see how that goes. Continue to stay at the backend to see Thomas’ interesting discovery as he digs deeper. Yes, shameless plug. 

Thomas: It’s all related. We talked about Nvidia, semicon… it also factors into cloud, it all factors into electronics.

Reggie: Yes. It is how much you understand and how that visual image in your head plays out. So, yeah, other than topline revenue, it looks sexy, it’s growing. Quickly run us through all the other parts that you think are important for us to know.

Thomas: Yeah. So expenses, right? Your revenue so great, you sure got expense. It’s $10.8 billion versus $5.2 billion. It almost doubled. The revenue did not of course double, but pretty close. It’s still reasonable that you are still profitable at least. In comparison to say Amazon, any time they stop spending, then they’re profitable. They have to keep reinvesting into the firm. But in this case, Alibaba is already profitable. Yeah. Operating margins are at 3X! You know how insane that is? 

Reggie: 300% operating margins. 

Thomas: Yeah, as in, I think they grew 300%. They grew operating margins at 300%. 

Reggie: Okay. Wow, that’s pretty nuts. Yeah and this comes with scale, right? This comes with the kind of network scale that they have. 

Thomas: Yup, and then cashflow, (if) we look at the net profit side of things. It’s $3 billion versus $300 million. This is what we mean by a few times difference. That translates into the amount of cash that they have just from… after spending everything else. This is the free cash flow, $3 billion. What are you gonna do with that money? Do I reinvest that? Okay, fine. 

Reggie: Better do something. 

Thomas: But if you compare with Amazon, Amazon has already spent the free cash flow somewhere else. This is just free flow so you can redistribute it back to investors in terms of dividends. You can keep it in the bank, you can pay the government some money… 

Reggie: Woah, woah… that one sensitive! 

Thomas: … in terms of taxes and fines. 

Reggie: Ah yes, in terms of taxes… but it’s free cash flow. Post-tax already. We’ll see how it goes. We don’t go there. I do hope that they spend their money. But I’m not… as an investor, I’m not very hard on, say “you must spend. You must spend it”. Because I think some investors, when they look at a lot of these companies that are generating a lot of cash, they will be like “why don’t you spend? If you don’t spend, you let me spend.” 

It’s like Apple, right? Apple, for a every long time, had a lot of cash just sitting around. When you buy Apple, you’re just buying cash for a very long time. But hey, look at where they are. Now, they found the thing that they want to double down on and they have all these resources that they can double down, whether it is the M1 chip, building their hardware infrastructure in a much grander scale and kind of do something different that they believe works. 

So I do hope the Alibaba has that future in mind. They are playing with a few things, but we’ve got to see. Because sometimes when you look at these kind of big companies, the problem is not that there’s no growth in the smallest segments. The growth is amazing in these smaller segments. Just that because they are so small, you don’t end up looking at them. You (won’t) be like, you know, like maybe Hema is growing damn fast, but you don’t have exact data on it because company either does not report… they report in a collective fashion, or the growth is just not as sexy as the core business. But I do hope that they can a little bit more about their innovation, where are they spending money, what is the future and all those kinds of things as they go along. 

Thomas: I think one more thing to be slightly concerned (about) is their high debt. It grew about $5 billion. It’s $36 billion as compared to $31 billion. A bit high, but if you look at it, it’s the whole entire structure behind Alibaba. There’s whole other companies also, so this is your consolidated amount. That being said, it’s not say… it’s a few times above their assets. If you look at sales and all that, it’s still okay. Yeah. But for some, maybe they might see it as too high. 

Taxes are also another thing. So of course your revenue, your profit goes higher, then your taxes will also be higher. It’s $1 billion as compared to $400 million. 

Reggie: Nice, and I think EPS (Earnings Per Share) is going very well also, right?

Thomas: Yup, so from 2019 till now, it was $4.97, earnings per share, then it became $7.9, and now it’s $8.35.

Reggie: I think overall, from an objective view on finances, they are definitely doing very well from a financial standpoint other than the big debt load. But it’s 10X of free cash flow. It’s not too crazy and given such a financial state, they can definitely raise that and kick the can down. It’s not all bad, but definitely something to note within the debt structures to see how they manage this. 

Also, it’s always about reinvesting into the business or investing into some growth channel. That’s the main concern when I look at Alibaba, not so much the big debt. It depends on your investment palate. You’ve really got to understand that part. 

I think financials… there’s only so much that we can really go through because they are a very big and established company already. There’s no real odd thing goings on within the financials or “interesting things” going on in their financials. They are growing very consistently. They are doing what they can and leveraging on the current situation. Whether or not it fits your investment palette, you’ve got to make your own decision, okay?

I think the big thing that people want to find out is management. Alibaba is a very interesting company that (was) started by Jack Ma, but Jack Ma is no longer very active within this management. Some might even say that “hey, the state is controlling this company from its management structure.” So let’s talk a little bit about the management and see what’s going on here.

Thomas: Sure. Jack Ma… he’s no longer the CEO. He also stepped down, but it was replaced by this person called Daniel Zhang. He’s now chairman, CEO. He was a director in Alibaba since 2014 and he was the COO of Alibaba, 2013-2015. Basically, he’s been Alibaba for the longest time, just in different positions. 2007, he was the CFO of Taobao marketplace, then the GM of Tmall… basically jumping around where he’s needed. 

Way before Alibaba, he was the CFO of Shanda Interactive. Basically, they do online games development. This was also listed on NASDAQ. He’s on the board of Sun Art and Weibo. Sun Art is basically the new retail angle that Alibaba is going towards. That’s Daniel Zhang. Pretty strong CFO and CEO experience. He has been in the company for the longest time. 

We also have Joseph Tsai. He was part of the founding team since 1999. Private equity investor background, Sweden’s Wallenberg family… basically it’s a family office. it’s quite big. He was also a general counsel of a management buyout firm. He’s a tax group of Sullivan and Cromwell and he has a JD from Yale Law School. So a lot of background… part of the founding team, quite strong. It’s not like some random person that just… “oh, let’s start Alibaba.” It’s someone with some background. 

The CFO currently is Maggie Wu, CFO since 2007. We talk about Daniel Zhang being CFO of Taobao marketplace in 2007. Maggie Wu is CFO since 2007. So there’s a lot of these different kinds of roles that’s being played by different people. Actually, this kind of structure is more common than one would think for e-commerce companies. I’m not sure why, but it just seems to be a pattern. There are some duplicate roles, there are some extra roles within (the) company because at that time, it’s needed. Then after that, they are rotated somewhere else. 

For Maggie, she’s also the head of strategic investments since July 2019. Previously, she was an audit partner at KPMG in Beijing, so quite “somewhere”. So she’s able to contribute in that way. And we have Michael Evans. Michael Evans is the Director and President. He was the vice chairman of Goldman Sachs from 2008 to 2013. Suddenly very random… Alibaba is a Chinese company. They have some kind of international presence in this aspect of the management. 

(He was in) Goldman Sachs for quite some time. He was the global head of growth markets on 2011 to 2013. He’s (on the) board of Barrick Gold corporation. Barrick Gold is one of the biggest gold mining companies in the US. For all the gold speculators out there, you would know. 

We have Judy Tong. Judy Tong is the Chief People Officer. She joined in 2000, almost one of the founding team members, just one year shy. (She was) previously vice-president, senior vice president in construction, real estate, procurement companies.

Reggie: It does not sound like these guys are randomly plucked from anywhere. In that sense, when we look at the management, should we put faith in these guys? Because they do sound like they know their stuff. It’s not like how some of the English media will put it up to say, “Ah, it’s like random people running the company.”

Thomas: No way. They might be random, if they just started out in 1999. E-commerce, no one knows what e-commerce was about. The internet bubble (was) just about to burst, then maybe in 2000 you start your company. It would be like “what are you guys doing? Siao (Crazy)!”. 

But they stuck through. They were there 21 years. So totally not random, even the people they bring on board are people that can contribute. Of course, they do have a CTO, so that’s very important. It’s also like a tech company. It’s not just some platform.

Li Cheng was the founding engineer of Alipay from 2005 to 2007. There was a previous CTO. Now he’s the president for the Alibaba cloud intelligence. His name is Jeff Zhang. He was the CTO from 2016 to 2019 then it was handed over to Li Cheng. He had various management positions in Taobao, B2C development team, Alibaba’s China operations, Tmall and other kind of stuff.

Okay, so why is this important? These rotations mean that the person has stayed throughout different points in the company’s growth. At certain inflection point, they focus on Tmall. At certain inflection point, they focus on Taobao. But you have the same person who understands the entire end-to-end technology infrastructure. You don’t have people going in and out. If you look at some startups, that happens. There are startups out there who rotate the CTO five times and then (they’ll) keep raising rounds to rebuild that infrastructure. This doesn’t happen, so quite stable… people that know what they’re doing and it’s all related experiences.

So far, there is no government person inside management. Usually for Chinese companies, (if) they want control, they will send a government representative to be on the board or something or maybe inside the management team also to influence some direction. This isn’t happening, so I don’t think the claim that government has a lot of influence on them is true. Alibaba is still conforming to what the government is wanting them to do… maybe ill timed that Jack Ma said something. But Jack Ma has no actual influence over what the management team is doing. Basically, they are still executing the best thing that they can and following the government as much as they can without the regulation. 

Reggie: Those are very political. I meant, there are a lot of political elements in what has happened with Ant Financial and the whole listing and all those kind of stuff. Some people are saying “it’s nothing to do with Jack Ma, it’s just part of their pursuit to clean up the whole tech.” They kind of reel in the tech guys so that they can have a little bit more control over the financials of the country. 

Just nice, Jack Ma said that and just nice, they use it as a political tool. There must always be a story, there must always be a reason why they are doing it and yeah, it’s all that jazz and whatnot. But overall, from your view, you would grade the management team as a pretty good management team?

So quite “up there”. [People] you would trust with the management of company in future years. You want to look at the things that they have done before, but you also want to look at other things that they promise and whether they achieve it. So far, yes and they have actually exceeded on, on several quarters. 

Nice. That’s good, finding comfort in a strong management team of one of the biggest company of China, if not the biggest company of China. When we look at Alibaba in such totality, it’s so big, they’re doing so many things, I’m sure that they have a lot of moats that give them that kind of advantage to continue to double down on. 

Other than moats like infrastructure, other than moats like having that kind of economies of scale. What are some other things that when you look at Alibaba, you will say “Oh these guys, they have a particular moat in something”?

Thomas: I think it’s the market share. Look at their core business, core commerce. Let’s say you dominate 55% of the market, whichever e-commerce platform you look into it. That’s pretty sizeable because you have a lot of data. You have a lot of consumers that’s on board your platform. You can sell anything else, any other service. You also look at cloud, they dominate 40% of the growing market. We’re not sure what’s the speed of that growth, but (it’s still) a growing market. That in itself is a pretty big moat, which people… when they look at the number, they say “okay, you want to compete Alibaba. Are you sure? You really want to go into e-commerce now?” 

Maybe 20 years ago, sure, when everything was starting out. But now in this position, it’s a very big sunken cost that you need to do just to match up. The closest competitor for core commerce is JD. JD versus the rest of all the other platforms of Alibaba is very small. Alibaba is going to make money in other areas. “I don’t care. You fight me that way? Okay, one platform just fight you back.” JD in itself is just e-commerce. Alibaba is e-commerce plus cloud plus payments plus more and more. 

So you look at the totality of things, this is a pretty big moat. Other kinds of moats is perhaps the branding of each of these different platforms. Because you have this market share, you know that you will have a certain probability of success to succeed. Not say if you are any kind of seller, you put up your own clothing brand, you’ll make money. But the chances are higher because more eyeballs are there and more people are on that platform and they’re waiting to find something of value and because you plug in with the rest of the ecosystem… let’s say you know the data points from the consumer’s demand, you know how to advise manufacturing to change according to these trends. You also have the influence on how people are going to perceive new trends or maybe you influence with your own trend. You have all these pool of influencers. You have this pool of very big marketing campaigns. This is a very sizable advantage. 

It’s just like… let’s say Instagram versus TikTok. Now TikTok is a big thing. All the eyeballs are there. Same thing. All the marketers go to… I must have Facebook. I must have TikTok. Anything else is secondary, but these two first. Deprioritize everything else. Same thing for Alibaba. If you’re in China, why aren’t you on Tmall? Why aren’t you on Taobao? What’s wrong with you?

This is mindshare in that kind of aspect for the seller as well as for the buyer. Let’s say you put it into a local context, between Lazada and Shopee, for example. Why are you shopping on Lazada instead of Shopee? Why are you shopping on Shopee instead of Lazada? Vice versa. Whoever wins is up to you. But it’s never a conversation where it’s versus the fifth player or sixth player. I don’t want to name names. 

Reggie: Zalora? 

Thomas: I don’t want to name names. The position changes every time. But you wouldn’t be like this, you shop from some weird e-commerce company that just started out as compared to buying from Lazada or Shopee. Why would we do that? So that kind of mindshare, it’s the same thing. 

Along with that comes with that kind of economies of scale which you mentioned: the infrastructure and all these, these are all the supporting stuff. Your payments, logistics, cloud storage and compute… after you get all your data, you have a very strong AI model to reinforce the entire chain. Then people are just basically coming onto your platform because of all these more and more advantages of coming on board. Yeah, so very strong moat. 

Reggie: We macam (like) selling their company already. It’s like “everything is good, this company is good then everything is good!” But I get what you’re saying. It is not one of those business that you could just come in and they fundamentally changed the way businesses operate in China and around the world also, especially in Southeast Asia. As the extension of how Alibaba did it, a lot of people started copying and they improve to localize the way people shop.

Exactly like what you said, in the past, people would set up their own shop. Now it’s like “why are you not on Shopee?” In the past, people also set up their own online commerce in China and then there was like 微信, WeChat commerce. Now, it’s just Tmall and JD and… it’s no longer… you don’t set out your infrastructure anymore. You don’t set out your own shopfront interface anymore. You just use them and then you just sell your product, just focus on selling your product. 

It fundamentally changed the way things work. But I think like what a lot of people recognize… so tech is moving very fast. What is happening now may not be what is going to happen to the future, right? There’s always a premium added to tech companies when it comes to the innovation and the progress. I want to see a lot more interesting things coming out of Alibaba and all that kind of thing because I think they have been spending a lot of time doing that backend infrastructure, whether it’s with Cainiao , whether is it with Ali Cloud and all that kind of stuff, which is great. Those are important. Those are the core stuff, but I do want to see more fire power in Hema, more fire power in Ele.me and try to see how they can continue to innovate maybe with digital games or with different things… fighting Tencent and do all this kind of stuff and it’s a little bit of competition ongoing in the Chinese market. 

But you know, it’s kind of sad that Alibaba is so synonymous with China, right? Why is such a big company is not going further abroad? I think with that, we’ve come to the part where we want to go into the headwinds, tailwinds and what are the growth opportunities? We do that for every single episode and I want to hear especially the headwinds… discuss. Because I think it cannot all be like “Oh, very good. Very good. Everything very good.” Walk us through some of these major macro trends, headwinds, tailwinds, and opportunities or potential risks that you see with Alibaba. 

Thomas: Sure. I think headwinds… the biggest one will be the relationship between US and China. I think this is the big one everyone sees in the news, right? At the end of the day, the darlings of either US or China are going to take the first hit either through the trade war policies… it could be some government intervention, like you suddenly cannot transport these goods across my borders or I increase the transaction fee somehow. Alibaba is going to get affected. 

So, they will try to position themselves as an international company. But at the crux of it, it’s still Chinese. Can’t escape that. This one does affect (them), because basically, it’s at the whim of the politics. Politics change, then the fundamentals of Alibaba might change according to that. But so far, it’s still okay based off its local growth, based off its attempt to go international, it’s still okay. 

The second point in mind is Covid. of course, Covid is going to slow down a few things. It’s going to speed up other things, but it’s a mixed bag for Alibaba. Certain countries will have more stringent policies and you will not be able to see how that is actually affecting each of the individual platforms because of the complexity of Alibaba itself. But definitely Covid is affecting any business in some way. It’s just which part of the value chain are you owning? Alibaba owning the entire value chain in most occasions, definitely going to get affected. 

The other kinds of headwinds, I think is also internally produced. If you read on Glassdoor… don’t take it from me, just read from Glassdoor, Alibaba, or any of the companies that Alibaba owns. The culture is not that great and you hear a lot of stories where actually there’s this kind of top down culture. I’ve heard stories about it, like real life excerpts, so it may lean towards true. So that is actually… that might be affecting why their international expansion is a bit slow based off the way that they run the companies, even for the international. 

Put into comparison… say, for Tencent. It’s opposite. Although they acquired the company outright, they let the companies run the show. “You know the market well enough, I trust you. Go and run the thing. You need help from me, just ask.” It’s that kind of relationship. Is it that way with Alibaba? No, “I pay you money. You listen. I don’t care whether you know the market on the ground, I know better because I’ve been a company longer than you have” Like “oh, wow okay…” How do you respond to that?

Reggie: 996 work culture. 

Thomas: Tencent also has the 996 culture. It’s just implemented in a different way. But it’s more like… management to management. Let’s say you are the CEO of your startup and then suddenly you’re sharing the company with Alibaba or Tencent. Which kind of investor would you rather report to? Someone that just trusts you, let you do your job, knows that you are the expert in the field, just execute, or someone that just micromanages every single thing? Anything that is important, you need to fly to China to report. What the heck? 

Some people may have certain preference but most of the time people would rather opt to do their own thing. I know my market, I know my locals better. Just let me go execute. So there’s this very big difference between say Alibaba and Tencent culture. 

Reggie: Yes. Yes. But I just want to put it out. These are not documented, right? These are like anecdotal things that we are seeing. People, some of our friends commenting on some of these things and Glassdoor reviews and some… all these things are very anecdotal. There’s no report saying…. But anecdotes and stereotypes, there’s a reason why they exist, in some point in time it becomes, some sort of reality. So that’s how it is and definitely see that as a problem when it comes to scaling beyond the Chinese market. But yeah, good point that you brought up that.

Thomas: Related to international expansion, they may face certain kind of restrictions because of either the trade war or implied from it. As part of the trade war and negotiations, they could just say… US says “I want to ship less corn to you” and China’s like “Why? We always need that amount of corn.” Then China says “you better do it or I block any investment right from your Chinese companies into my market.” Then China is like “What the heck? Yeah. Then there goes Alibaba, your opportunity to invest into US, it’s just gone. You just cannot do anything. 

Same thing for India is this blanket… you can’t enter. Same thing for… say Bytedance, you can’t enter. End up someone produces the local equivalent of it then your market share is gone. These kinds of things can be triggered through politics, not directly from the trade war itself, but I can just pull out at any moment because you’re such a big company, right? You are just the focal point. 

Reggie: I think that’s important to note, especially when understanding big companies. These are not like one of the big… it’s like THE big company, right? One of the few very, very big companies and they are extremely susceptible to politics, extremely susceptible to these kinds of growth trends internationally. That is something that I think a lot of people need to understand because for companies that are in the T, the trillions or in the hundreds of billions of dollars, you want them to multiply. You want their capitalization to double, to triple. 

They really have to go into new markets. They really have to go abroad and all these international things then start to become a problem for these companies compared to just understanding smaller companies that are like mid cap, 10, 20, 30 billion. They’re just trying to grow their market segment. They’re trying to optimize their product. They’re trying to expand their market share. They’re still well within the cozy space of just growing and not being that concerned about legislation or being that concerned about politics. 

But when you look at these kinds of companies, which are like huge: Microsoft, Facebook, Google, Alibaba, Tencent, all these big guys, they are all very… they have a whole legal department just handling all these things. it’s a war zone when they are doing international geopolitical stuff. So I think there’s something to note, not in a sense that it will directly impact the companies in terms of their core processes or in terms of their core business, but it will definitely impact their expansion plan and it will create a lot of sore points for them if they want to keep growing. 

That’s just international geopolitics. There’s also your domestic decisions. Take for example, all Chinese companies must store your data inside China. Meaning all your data centers has to be in China. For Alibaba Cloud, they want to offer this service internationally. So when they go to customers and say “oh yeah, we have this feature. We are beating AWS. We’re beating GCP (Google Cloud Platform), Azure. Whatever they can do, we also can do” and then the final question: where is your data going to be stored? “Oh, China.” “Cannot. No way.” 

So that might also be why it’s so slow. These domestic decisions from… let’s say Chinese government, may also impact international decisions. Let’s say for EU, the data needs to be stored in a certain format. It must be able to be retrieved and also deleted anytime. For China, it’s no, we are going to want to hold onto every single record. That’s not going to happen. So EU completely just blocked. You can’t enter that market unless you do something about it. Unless maybe your data centre is there. 

For… let’s say Chinese government, there may be some kind of new law which says that if you are a Chinese company, you must follow the practices of what we say. I don’t care about Europe. I don’t care about US. Follow. That’s it. Your expansion plans are gone. How much you want to bill your product, how much you want to go out there and serve the market is going to be influenced by your local government basically. 

Fair. Yeah. That’s a good point. It’s good to know. So would Alibaba have any room for growth? Is there growth opportunities other than where they are already at? 

Thomas: Have, Southeast Asia. They’re expanding quite heavily into Southeast Asia via Singapore. It’s basically… You jumpstart from there as a base and then go to the rest of Southeast Asia. But for reception, I think I’m not too sure yet. There are no clear numbers over what’s the reception like for Alibaba Cloud in the rest of Southeast Asia.

This ties with the South China Sea aggression and to the rest of their neighbours. Even though… say, for the vaccines, simple one: Vietnam, for example, just doesn’t want to take the Sinovac although it’s really been offered to them at a pretty good price. 

Reggie: Vietnam has some long gone history with China. Very bad blood there, so it’s all part of it. 

Thomas: Same thing for the cloud, why should I use China’s cloud? We can just grow our own local one? I don’t care how long it takes. But no, we’re not going to support them. So these kinds of data, where do you get them? It’s very qualitative. So really go to the ground. If you’ve got the opportunity, go visit Thailand, go visit Vietnam, go talk to the locals. “Alibaba Cloud? Don’t want!”. That’s it. 

At the moment, they really get turned off. “I don’t care how many features you have, I don’t care your price point. It is just because it’s a Chinese company. I don’t support.” Same thing. The whole market is blocked off. This is still an unknown. 

Reggie: Hmm okay, this is interesting. Are there any last things that we should know about Alibaba? Are they innovating on something? Are they creating something interesting? Any big growth opportunities other than what they are really very good at? I think, and we’re not going to do valuations. But in today’s valuation, if you see them as a value play then pricing is okay in today’s price. I think that they’re fine, but it’s not a buy call sell call. This is not a recommendation, okay? It’s just for entertainment, education purposes only. 

But I think a lot of people are talking about Alibaba from a sense of what they already have, all these businesses they already have and given today’s price, I think it’s okay. It’s up to you to make a decision. What is the future then? Are we seeing big moves from Alibaba? Because it seems like the one hour that we discussed, we’re not really hearing like a big future with Alibaba. Are there any things that spot your eyes when you are looking at this company?

Thomas: I think the biggest move that Alibaba is trying to make is new manufacturing. So we talk about new retail and that’s on the consumer side of things, they play with all these kind of things and you have the data points, right? But also on a manufacturing side, you get these data and you find these trends very quickly and produce the next set of trendy clothes, for example… trendy goods. 

So they are working with Sun Xi technologies to actually bring this model to factories and really that’s the end of the chain. You have the manufacturing, you have the retail side, you are the platform in between to deliver. So that’s like the last…. that’s checkmate! 

Reggie: You can go farming, farming is next! But it’s all part of it. 

Thomas: It’s just the production. They own the production, they own the demand, they own the supplies,. It’s just crazy. This is a very big thing that they want to implement starting from fashion, but that’s not stopping them from producing other kinds of goods. So actually, farming is possible. You can grow crops in a certain way, but I’m not sure whether do they have the capability…. as in the minds to do it. They are more of e-commerce. This integrated supply chain is very good for the entire ecosystem. It’s not just for retail only. It’s for the entire… All their platforms will benefit from this. So that’s the big thing that they’re trying to push.

Another one which is more long-term is autonomous driving. They have an R&D arm, very small one. They’re working with AliOS, they have a company called Amap.com… basically their location services as well as the operating system for the devices, but also having some kind of AI associated to it. 

This is very good for delivery like Cainiao. You don’t need to have drivers anymore. You don’t need to have bicycles driving going around and delivering stuff when you have robots. This is ridiculous. This is a trend that you can see on the horizon. A bit far away, but it is coming.

So that’s the danger, right? Taxi drivers, they don’t have these kinds of opportunities anymore because it’s going to go into robots. Say for Grab, even for Uber, they have always wanted to have the fleet first and make sure that people use the platform and then just swap out the cars after that for autonomous cars. I think that that’s something that everyone should know. It’s there. 

Once the technology or the capability for autonomous driving is hit… let’s say you take that Tesla as an example, it’s also possible for other companies to just follow. It’s just a matter of time. Yeah. So a very big change in terms of society, very good thing for Alibaba, maybe not so good thing for the country. 

Reggie: Yeah. Okay. I think we’ve done a decent coverage of the whole company, understanding Alibaba from multiple angles from its core commerce to its whole supply chain, additional value-add services they have spun off… their international expansion and also talk a little bit about Ant Financial and understanding how Ant Financial play into this whole ecosystem and recognizing that they are only investment, not a subsidiary of Alibaba. Overall, it’s your own investment decision. But I would say that from Alibaba’s perspective, they are very big. Whether or not they can double or triple, there’s a very big question mark also from an investor’s viewpoint.

But yeah, I would say that they are a very, very solid company from a fundamental viewpoint. So do your own study. If any questions just drop in the comments section and we can discuss as we go along. Okay. Thank you guys. See ya! Have fun. Take care. Woo! Nice.

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