Share Valuations

Share Valuations Paper details: Question: How does your range of valuations (as per attached) compare the valuations based on the recent movements of the Alibaba share price? What do the current share price movements tell you about the market’s estimations of Alibaba’s prospects? provide all explanations and calculation as detail as possible. Thanks! 18 | Page b) Study the attached valuation spreadsheet. Input your predicted revenue growth rates and profit margins to come up with your valuation of Alibaba. You could use a range of values and also do a sensitivity analysis. (Note that the results in this section will be expressed in US$) In order to estimate the revenue growth rates of Alibaba for the next ten years, it is necessary to analyze its performance in the past. The company has experienced a significant ex pansion during the last few years; it grew 68% in 2012, 72% in 2013, dropping to 52% in 2014 and to 45% in 2015. Even when the growth rate has not been maintained, it is still higher than the global average (19.34%) and the US average (6.60%). Alibaba Grou p is outperforming similar companies in its sector. Alibaba Group has invested heavily during the last few years in different market sectors, finding opportunities, and therefore increasing its portfolio and its diversity. We believe that the company will obtained the results from these investments and acquisitions within this period. In addition, this group operates mainly in China, country that is currently growing in a higher rate than the average. Moreover, as the company states in its annual report, th ey will probably not pay out dividends during this period, being able to use them to reinvest to improve their current business’s results. Lastly, from the rapid growth that the company has had during the last years and its youth, we can state that Alibaba Group finds itself in its growth stage, which means that it will continue increasing, probably in a higher rate than other companies from his sector. But it also means that it will reach the mature point at some point, where its growth will be more stable . But will this success be sustainable in the future? There could be both internal and external factors that could change during the next ten years and can affect the performance of the company. Regarding internal factors, we believe that Alibaba Group wi ll continue performing exceptionally well during the next ten years, because of the leadership position that they have gained in the market place, because of the ‘ecosystem’ they have created, and because of the revenue from the previous investments and ac quisition that they have done. Some of them required significant capital (Internet TV companies, tracking system for medical products, movie producer and so on), and therefore, we expect a significant revenue from them during this period. We believe they w ill continue investing in opportunities in order to expand their business, but this will probably be done at a lower rate. On the other hand, regarding external factors, we believe that the company performance could be affected by the volatility of the market, as comparable companies have also suffered in the past (Alibaba Group Holding Limited, 2015) . Similarly, the main market where it operates, China, has not reached the expected levels of economy growth during 2015, which could be a significant 19 | Page downt urn in Alibaba’s results if these results do not improve. Moreover, the Trans - Pacific Partnership (TPP) agreement recently signed (2015) by the United States, Canada, Mexico, Japan, and Australia among others, but not including China, will completely chang e the trading patterns over the Pacific. It is still early to say if this will affect the revenue and performance of Alibaba Group, but it will definitely influence their strategy, operations and competitors. These factors, among others, will vary the reve nue growth of the group during the next ten years. However, during the last few years, it has been demonstrated how the company has quickly adjusted to market needs, and we believe this is one of the main competencies that will allow Alibaba Group to conti nue outperforming other companies in the sector. From this analysis, we believe that Alibaba revenue growth rates are going to continue increasing during the next ten years, but at lower rate than in the past. We estimate that the average rate of growth fo r the next four years will be 35%. However, after these four years, we believe that the revenue growth will decrease gradually to reach 15 % by the seventh year, value that will be maintained until the end of the period analyzed. It must be noted that altho ugh these rates are considerably lower than the current growth rate, hey are still higher than the US average values (6.60%). Apart from these values, other inputs included in the valuation spreadsheet are the following: Concept Value Notes* Compounded annual revenue growth rate over next 5 years 35% Revenue this year (2015) 12293m In US$ Operating income this year (2015) 3732m In US$ Effective tax rate 19.80% Marginal Tax rate 22.34% Average industry value (US online retail) Target pre - tax operating margin (EBIT as % of sales in year 10) 30.36% (=Revenue/operating income) Assuming that pre - tax operating margin will not change over the next 10 years Sales to capital ratio 4.78 US average value used Risk free rate 1.80% U.S. Department of Treasury, 2016 Cost of capital 9.65% US average value used In stable growth, company cost of capital 8% * All translations of Renminbi into U.S. dollars were made at RMB6.1990 to US$1.00