ALIBABA INVESTMENT VS FUNDS
Alibaba Holdings Ltd. (BABA) is the largest holding in the Growth Portfolio. They are an enormous Chinese business with over $100bn in revenue, over $19bn in EBITDA and a forecast revenue growth of over 30%.
Alibaba is very much the Chinese Amazon with similar business segments and focus. Amazon is a much larger organisation with +$400bn revenue, but Alibaba has more attractive profit margins. Their valuations, however, are vastly different. Amazon has a P/E ratio of 60.9x, whereas Alibaba’s P/E ratio is smaller at 25.2x. I am bullish on both stocks, but Alibaba is significantly undervalued in comparison.
The valuation difference is due to the risk that comes with investing in Alibaba. Below we look at the Alibaba investment vs funds.
Chinese stocks are currently under pressure from regulators, which is creating risk and holding back the valuations. Firstly, the Chinese are tightening regulations and stepping up their anti-trust laws. This resulted in Alibaba receiving a record $2.8bn fine. Despite the value of this fine, it made up only 4% of Alibaba’s domestic revenue. The more concerning risk is the new U.S. regulation changes. These changes increase auditing standards for international stocks listed on U.S exchanges. Although not specifically aimed at Chinese stocks, I feel it is fair to say they are the primary focus. If any company fails to comply with the auditing standards or are found to be controlled by governments, it can be removed from the stock exchange.
Alibaba is listed on the New York Stock Exchange (NYSE) and the Hong Kong Exchange (HKEX). The stocks I hold for Alibaba are ADS shares listed on the NYSE. If they were to be de-listed, the stock price would fall dramatically. It would also be a very complicated process to sell the shares. Some funds and institutions have started transitioning a proportion of their holdings from the NYSE to the HKEX. I have considered this option myself (via my Interactive Brokers account); however, I do not want this complexity in my portfolio.
My reading around this subject has led me to believe this is unlikely to happen. Firstly, Alibaba seems to be compliant with the audit regulations already. Secondly, they have 3 years to comply, which leaves plenty of time to get things in order. Lastly, many U.S. retail investors (individuals like you and me) hold Alibaba and a lot of pension funds. Therefore, if the U.S. government decided to de-list Alibaba, this would impact Americans (and me!) far more than it would Alibaba. Alibaba would also deny being controlled by the Chinese government, although the government does use several Alibaba technologies, which could cause complications.
Below are some interesting news articles on this topic:
I believe there is potential for solid investment gains to be made from Alibaba. See my model valuations in a previous post –ALIBABA FAIR VALUE CALCULATION. Nonetheless, with Alibaba being such a significant holding in my portfolio, I need to remove some of the risks.
CHINESE GROWTH FUNDS
To maintain exposure to Alibaba while also removing some of the risks, I have been researching funds that hold Alibaba. This will reduce my exposure to Alibaba a little but will open opportunities in other Chinese investments. It will also relieve some of the responsibility from me into the hands of fund managers. The fund managers can balance the holdings between the NYSE and the HKEX far easier than I can.
Using the Hargreaves Lansdown website, I could locate all the funds focusing on either growth stocks or china. Once I had this list of funds, I checked if Alibaba was in the top 10 holdings.
This still left me with a long list of funds. Using a combination of Hargraves Lansdown, SharePad & Morningstar, I ranked each one using some of the following criteria:
- Historical Performance
- Ongoing charges
- Morningstar ratings -risk/return
- Price to Nav
- Net Assets
- Project growth
- Price to forecast PE
- Price to cashflow
I also gave a higher rank to the funds holding JD.com, another Chinese stock I am particularly bullish on.
After reviewing and ranking all the funds, I finally selected Baillie Gifford China – Class B Accumulation.
See below for fund details:
Alibaba remains a significant holding in the Bull Headed Bear Growth Portfolio. However, I will aim to reduce the position over the next few months. Following this research, I have opened a new position in the Baillie Gifford China (Class B – Accumulation) fund with Hargreaves Lansdown. I will continue to increase the position in this fund whilst reducing the Alibaba position.
This change allows maintained exposure to Alibaba while reducing some of the mentioned risks. In addition, increasing my exposure to JD.com and several other high growth stocks in China is also a bonus.
PARTNERS OF CHOICE
All in one investor’s toolbox. Portfolio management, screening, fundamentals & charts.
Professional charting software for basic and advanced technical analysis.
Advanced fundamental analysis with financial modelling & fair value calculations.
Corporate Finance Institute provides online training & certification programs.