Zooming in on BABA (Part 2)

Segment Analysis: A Cash Cow + Bunch of Ventures

In this follow-up to last week’s Part 1, we shall be doing a proper financial deep-dive into BABA’s fundamentals + segment analysis of the past 10 years (FY15-24) — in order to identify its recent sources of underperformance, as well as how they relates to their valuation. Here’s what we’ll be covering:

A FINANCIAL MAP OF BABA (Part 2)

1. Weird Capital Structure

2. A Tale of Related Party Transactions, JVs & Land Use Rights

3. Identifying BABA’s Sources of Underperformance through P&L Analysis

4. Detailed Segment Analysis (Deep-Dive!)

5. Amazon:Demystified

6. 📊 Download BABA 3-statement model (FY15-24)


Don't forget to check out Part 1... if you're on desktop, click the left bar for Table of Contents! ⬅️

BABA’s major acquisitions since FY15

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Weird Capital Structure

As noted in Part 1, BABA does regularly issues shares as part of recurring SBC expense; however it also immediately amortizes the related employee compensation cost. Hence, actual share count growth has historically been negligible. There was a 1:8 share split on July 2019, but its dilution impact has been immaterial (<1% CAGR). One notable recent change was that their ADRs issued dividends for the first time in FY24 — amounting to a dividend yield of roughly 1%.

As one might imagine, there isn’t a lot to discuss about the health of BABA’s balance sheet or cash flows — given that they’re one of the largest companies in the world. They’ve been consistently in a Net Cash position as well as a negative CCC position for most of the past decade, thus going concern risk is negligible. Their leverage ratios are demonstrated in the chart above.

However, one thing that does stand out amidst BABA’s balance sheet is their unusual capital structure. As the chart above shows, their Invested Capital has averaged at around 70% of Total Equity in recent years — implying high levels of Net Cash.

The chart below demonstrates how this becomes even more distorted if we add their Investments + Net Cash (grey). Net Cash + Investments has reached 75% of Total Equity in FY24. This implies that they might not be “investments” in the typical sense of the word, and perhaps more akin to recurring business CAPEX:

The last piece of the puzzle before we move on to the actual analysis is their Fixed Assets. As we can see above, Intangible Fixed Assets (orange) actually make up a far larger proportion of their capital investments than Tangible Fixed Assets (blue). This implies that BABA has mostly been relying on acquisitions to grow its capital base. It also jives with most of their investments being Joint Venture business arrangements in nature, as we saw in Part 1.

Putting all of this together, what are the biggest sources of BABA’s invested capital structure?

What’s startling in basically the Eastern equivalent of Amazon is how little in tangible assets they actually invest in. It’d be perfectly natural to assume that their PPE balance would be high — given how capital-intensive e-commerce logistics actually is.

However, as we can see above, PPE (orange) actually has the smallest balance amongst BABA’s fixed assets — it’s even smaller than their Intangible Assets (grey).

Perhaps even more surprising, Equity Securities and other Investments balance (blue) is almost as high as their Intangible Assets (grey)! As you can imagine, these reflect the high frequency of Joint Venture arrangements which forms part of BABA’s business model.

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A Tale of Related Party Transactions, JVs & Land Use Rights

This observation of BABA’s reliance on JV arrangements has led some quarters to allege that BABA abuses Related Party Transactions (RPT) to generate abnormal profits. But is this really the case? In this section, we’re going to explore just how notorious they really are — and identify who the likely culprits involved might be.