Just one view but thought I’d post for those following BABA
DiDi Global's share price plummeted after the announcement, falling through the floor and closing 22% lower on Friday. The delisting is a huge blow to Chinese companies that sought an overseas stock listing for their ADR shares, and companies like Alibaba are likely to be among the next to delist their ADR shares in the United States to appease the CCP.
Slowing Retail Sales Growth In China May Have An Impact On Alibaba's Ecommerce Sales In The Future
When Alibaba reported third-quarter earnings in November, it was unable to maintain its revenue guidance for the current year due to a slowdown in China's retail spending. As previously stated, Alibaba forecasted 29.5% revenue growth for 2022 in May of this year. Last month's third-quarter earnings report reduced this guidance to a range of 20% to 23%. The issue for Alibaba is that China's growth is slowing faster than expected, which does not bode well for eCommerce sales. If Chinese consumer spending does not recover quickly, Alibaba's sales may increase by less than 20% next year.
Retail is not the only issue confronting the Chinese economy. China's GDP grew at 4.9% between July and September, the slowest rate in more than a year.
Real estate issues are largely to blame for China's slowing economic growth, and they are affecting eCommerce firms. China's retail sales growth has slowed dramatically this year, with sales only increasing by 4.9% in October. This was the Chinese economy's third-lowest growth rate in 2021, posing a significant challenge for companies like Alibaba that rely on online spending to drive sales growth.
Over the last decade, China has seen a massive debt-fueled real estate boom, but it appears that the Chinese economy will pay a price for it. Several real estate companies are reportedly on the verge of bankruptcy. Evergrande, one of the world's most indebted developers, is likely to default. Evergrande, which is in debt to the tune of $310 billion, has the potential to create China's equivalent of the Lehman Brothers. If China's real estate crisis worsens and major developers’ default, the country's economic slowdown could worsen significantly. And with it, Alibaba's growth prospects.
In the event that Alibaba is delisted from U.S. exchanges, investors will most likely be able to exchange their ADR shares for shares listed on the Hong Kong Stock Exchange. Alibaba's ADR shares listed in the United States may still be subject to increased selling pressure, potentially resulting in even larger losses for Alibaba's investors. These losses would be in addition to the billions of dollars in losses inflicted on shareholders over the last year.
We all know that Alibaba no longer trades on fundamentals or growth prospects because U.S. investors are unsure whether they will be able to trade in Alibaba's ADR shares a month from now. With such high risks associated with the Alibaba brand, in my view, it makes little difference that the Chinese online retailer trades for a low sales or earnings multiple. Under normal circumstances, a multiple of ~11.5x for a company with revenue growth rates of 20% to 23% would be a steal. But, given that Alibaba recently reduced its sales forecast and China's economic situation has deteriorated significantly in 2021, I would not be willing to pay even half of Alibaba's earnings multiple.
Following the DiDi Global delisting announcement, Alibaba has become toxic as an investment, and BABA may be dead money until the ADR shares are delisted. But don't be fooled; the delisting risk is just one of many, and the delisting itself has less of an impact on Alibaba's business model than other risks, such as slowing retail sales growth or China's real estate problems. The delisting of DiDi Global is the ultimate red flag that no investor in Chinese ADR shares trading on an American stock exchange should ignore: You own nothing, have no rights, and the CCP can cut the power at any time. The writing is already on the wall; all Alibaba investors need to do now is recognize it.
- DiDi Global has just announced its delisting from U.S. exchanges in response to CCP pressure.
- Alibaba's stock price is plummeting and may continue to fall for some time.
- The increased ADR risk is not the only risk for Alibaba, and it does not bode well for the stock's future.
DiDi Global Will Be Delisted From U.S. Stock Exchanges
DiDi Global, a vehicle-hire company that sparked outrage in the Chinese Communist Party with its IPO on an American stock exchange months ago, is planning to delist its ADR shares. In other words, the CCP's pressure campaign was successful, and the party has had the last laugh. DiDi Global informed the markets on Friday morning, in what can only be described as a stunning company announcement, that it will withdraw from the United States and seek to list its shares on the Hong Kong Stock Exchange instead.DiDi Global's share price plummeted after the announcement, falling through the floor and closing 22% lower on Friday. The delisting is a huge blow to Chinese companies that sought an overseas stock listing for their ADR shares, and companies like Alibaba are likely to be among the next to delist their ADR shares in the United States to appease the CCP.
Slowing Retail Sales Growth In China May Have An Impact On Alibaba's Ecommerce Sales In The Future
When Alibaba reported third-quarter earnings in November, it was unable to maintain its revenue guidance for the current year due to a slowdown in China's retail spending. As previously stated, Alibaba forecasted 29.5% revenue growth for 2022 in May of this year. Last month's third-quarter earnings report reduced this guidance to a range of 20% to 23%. The issue for Alibaba is that China's growth is slowing faster than expected, which does not bode well for eCommerce sales. If Chinese consumer spending does not recover quickly, Alibaba's sales may increase by less than 20% next year.
Retail is not the only issue confronting the Chinese economy. China's GDP grew at 4.9% between July and September, the slowest rate in more than a year.
Real estate issues are largely to blame for China's slowing economic growth, and they are affecting eCommerce firms. China's retail sales growth has slowed dramatically this year, with sales only increasing by 4.9% in October. This was the Chinese economy's third-lowest growth rate in 2021, posing a significant challenge for companies like Alibaba that rely on online spending to drive sales growth.
Over the last decade, China has seen a massive debt-fueled real estate boom, but it appears that the Chinese economy will pay a price for it. Several real estate companies are reportedly on the verge of bankruptcy. Evergrande, one of the world's most indebted developers, is likely to default. Evergrande, which is in debt to the tune of $310 billion, has the potential to create China's equivalent of the Lehman Brothers. If China's real estate crisis worsens and major developers’ default, the country's economic slowdown could worsen significantly. And with it, Alibaba's growth prospects.
What Will Happen To Alibaba Next?
Although Alibaba is not in an existential crisis, the situation appears dire from my perspective. A regulatory crackdown, an increasingly hostile regulator, the possibility of punitive fines, real estate issues that risk spiraling out of control and weighing down economic growth, and slowing retail sales growth are all problems in addition to the most obvious risk: the delisting of Alibaba's ADR shares. Based on the information we have at the moment, I would estimate the risk of delisting to be around 80%.In the event that Alibaba is delisted from U.S. exchanges, investors will most likely be able to exchange their ADR shares for shares listed on the Hong Kong Stock Exchange. Alibaba's ADR shares listed in the United States may still be subject to increased selling pressure, potentially resulting in even larger losses for Alibaba's investors. These losses would be in addition to the billions of dollars in losses inflicted on shareholders over the last year.
There Is No Price That Is Low Enough To Accept Such High Levels Of ADR Share Risk
On so many fronts, Alibaba's short-term outlook is very negative, and the market has begun to price in the risk of an ADR delisting. DiDi Global increased Alibaba's delisting risk significantly, but in a broader context, slowing retail sales growth and structural problems in China's real estate market pose much larger, more existential threats to Alibaba's business model.We all know that Alibaba no longer trades on fundamentals or growth prospects because U.S. investors are unsure whether they will be able to trade in Alibaba's ADR shares a month from now. With such high risks associated with the Alibaba brand, in my view, it makes little difference that the Chinese online retailer trades for a low sales or earnings multiple. Under normal circumstances, a multiple of ~11.5x for a company with revenue growth rates of 20% to 23% would be a steal. But, given that Alibaba recently reduced its sales forecast and China's economic situation has deteriorated significantly in 2021, I would not be willing to pay even half of Alibaba's earnings multiple.
Following the DiDi Global delisting announcement, Alibaba has become toxic as an investment, and BABA may be dead money until the ADR shares are delisted. But don't be fooled; the delisting risk is just one of many, and the delisting itself has less of an impact on Alibaba's business model than other risks, such as slowing retail sales growth or China's real estate problems. The delisting of DiDi Global is the ultimate red flag that no investor in Chinese ADR shares trading on an American stock exchange should ignore: You own nothing, have no rights, and the CCP can cut the power at any time. The writing is already on the wall; all Alibaba investors need to do now is recognize it.
