Behemoth Alibaba Group Holding Limited (NYSE:BABA) fell 11% last Friday after the Securities and Exchange Commission added the company to its list of potential delisting candidates, causing investors to panic. Charlie Munger, on the other hand, does not appear to be concerned about the company’s delisting risk. According to a recent 13-F holdings report, Charlie Munger’s Daily Journal Corporation (DJCO) hasn’t sold a single share since its last report. The delisting concerns are greatly and carelessly overblown, and Alibaba represents excellent value in the selloff!
New threats from the SEC
Last Friday, the Securities and Exchange Commission added Alibaba to its list of prospective delisting candidates, putting pressure on the company’s stock. Under the Holding Foreign Companies Accountable Act, U.S. stock exchanges have the authority to delist shares of (foreign) issuers if the Public Company Accounting Oversight Board cannot inspect the audit documents of a company based in a foreign jurisdiction. Foreign corporations, predominantly Chinese firms with ADS listings on a U.S. stock exchange, could be delisted by the SEC if they fail to submit to a PCAOB audit for three years.
The SEC had previously not specifically identified Alibaba, but it is now on the SEC’s list of potential delisting candidates. However, this does not imply that delisting is imminent. It simply means that the SEC has selected the company as one of several firms that may be delisted in the future if certain disclosure and transparency requirements are not met.
Why is there no reason to worry about a delisting
Alibaba is attempting to obtain a dual primary listing on the New York Stock Exchange and the Hong Kong Stock Exchange. The company aims to finish the Hong Kong primary listing process by the end of the year. At this point, it will have moved from a secondary to primary status. A primary listing in Hong Kong entails more severe reporting requirements. Still, it also entitles the company to participate in Hong Kong’s “Stock Connect Program,” which allows Mainland Chinese investors to purchase Alibaba’s Hong Kong shares through their Mainland stock exchanges.
So, even if the United States is compelled to delist, U.S. investors can easily purchase and sell their shares on the Hong Kong stock exchange. The participation in the Stock Connect Program may signal increased investor demand for the company’s’s shares from Mainland Chinese investors.
Charlie Munger isn’t worried about a delisting
Charlie Munger, Chairman of The Daily Journal Corporation, is unconcerned about the likelihood of Alibaba’s ADS being delisted from the U.S. stock market. According to the business’s most recent 13-F holding report, the corporation hasn’t sold a share since the last report and still owns 300,000 shares of Alibaba, valued at $27.8 million. The portfolio’s five holdings remained the same: Bank of America (NYSE:BAC), POSCO Holdings (KRX:005490), U.S. Bancorp (NYSE:USB), and Wells Fargo (NYSE:USB). The company holding accounted for around 20% of The Daily Journal Corporation’s portfolio, ranking third after Bank of America and Wells Fargo.
What is Alibaba expected to report?
Alibaba will likely disclose earnings for the fiscal first quarter of 23 before the market opens on August 4. The projected trend is very unfavorable. In the last 90 days, there have been 7 EPS downward adjustments and only two positive revisions, indicating that sales growth and EPS estimates for the upcoming earnings release are quite low. Because China had widespread COVID-19 lockdowns in the second quarter, which is the company’s FQ1’23, investors should brace themselves for a quarter with low single-digit, if not negative, revenue growth.
Massively discounted e-Commerce growth
Alibaba’s top-line growth is slowing, and expectations are turning negative. In the worst-case scenario, China’s COVID-19 restrictions might have resulted in negative revenue growth for Alibaba in the fourth quarter. However, as China’s COVID-19 limitations soften, a resurgence could be predicted in the next quarters. Despite these problems, the company is anticipated to rebound with a 13% increase in revenue in the fiscal year 2024.
Alibaba’s growth potential was heavily underestimated on Friday, and because the stock has yet to rebound, Alibaba shares trade at a P/S ratio of 1.6 X and a P/E ratio of 10.6 X.
If Alibaba misses FQ1’23 profits and revenues on August 4, shares may fall in value. Because I expect results to improve in the second half of the year as COVID-19 lockdowns ease, I would be a buyer of any significant decline after earnings.
Risks with Alibaba
Alibaba has numerous dangers, but delisting its ADS is not one of them. The e-Commerce giant will most certainly announce a slowing in top-line growth in its domestic e-Commerce sector, putting margins under even more pressure. This may result in a lower value factor for Alibaba’s shares in the short term. Still, any selloff would almost certainly present an attractive purchasing opportunity. What would make me reconsider Alibaba is if the business suffered a significant drop in its free cash flow expectations and discontinued its share buybacks.
Final thoughts
Charlie Munger appears unconcerned about the delisting of Alibaba’s ADS. The renewed delisting debate is clouding investors’ perceptions – even if shares are delisted, investors may easily swap their shares and buy/sell Alibaba shares in Hong Kong.
Although a departure from the U.S. market may have a short-term impact on Alibaba’s valuation, a much bigger worry for the business is the impending earnings release, which may show a significant (temporary) slowdown in sales growth and increasing pressure on profit margins. Alibaba’s shares are excessively cheap given the company’s massive account base and potential in the e-Commerce business, and I feel they offer a highly appealing risk profile below $100!
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