Share Valuations

Share ValuationsPaper 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|Pageb) Study the attached valuation spreadsheet. Input your predicted revenue growth rates and profitmargins to come up with your valuation of Alibaba. You could use a range of values and also do asensitivityanalysis.(Note that the results in this section will be expressed inUS$)In order to estimate the revenue growth rates of Alibaba for the next ten years, it is necessary toanalyze its performance in the past. The company has experienced a significant expansion during thelast few years; it grew 68% in 2012, 72% in 2013, dropping to 52% in 2014 and to 45% in 2015. Evenwhen the growth rate has not been maintained, it is still higher than the global average (19.34%) andthe US average (6.60%). Alibaba Group is outperforming similar companies in its sector.Alibaba Group has invested heavily during the last few years in different market sectors, findingopportunities, and therefore increasing its portfolio and its diversity. We believe that the companywillobtained the results from these investments and acquisitions within this period. In addition, thisgroup 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, they will probably not pay out dividends duringthis period, being able to use them to reinvest to improve their current business’s results. Lastly, fromthe rapid growth that the company has had during the last years and its youth, we can state thatAlibabaGroup finds itself in its growth stage, which means that it will continue increasing, probably ina higher rate than other companies from his sector. But it also means that it will reach the maturepoint 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 factorsthat could change during the next ten years and can affect the performance of the company. Regardinginternal factors, we believe that Alibaba Group will continue performing exceptionally well during thenext ten years, because of the leadership position that they have gained in the market place, becauseof the ‘ecosystem’ they have created, and because of the revenue from the previous investments andacquisition 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 asignificant revenue from them during this period. We believe they will continue investing inopportunities 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 beaffected by the volatility of themarket, as comparable companies have also suffered in thepast(Alibaba Group Holding Limited, 2015). Similarly, the main market where it operates, China, hasnot reached the expected levels of economy growth during 2015, which could be a significant19|Pagedownturn 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 Australiaamong others, but not including China, will completely change the trading patterns over the Pacific. Itis still early to say if this will affect the revenue and performance of Alibaba Group, but it will definitelyinfluence their strategy, operations and competitors.These factors, among others, will vary the revenue growth of the group during the next ten years.However, during the last few years, it has been demonstrated how the company has quickly adjustedto market needs, and we believe this is one of the main competencies that will allow Alibaba Groupto continue outperforming other companies in the sector.From this analysis, we believe that Alibaba revenue growth rates are going to continue increasingduring the next ten years, but at lower rate than in the past. We estimate that the average rate ofgrowth forthenextfouryears will be 35%.However,after thesefouryears, we believe that therevenue growthwill decreasegraduallytoreach 15%by the seventh year, value that will bemaintained until the end of the period analyzed.It must be noted that although these rates areconsiderably lower than thecurrentgrowth 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:ConceptValueNotes*Compoundedannual revenue growthrate over next 5 years35%Revenue this year (2015)12293mIn US$Operating income this year (2015)3732mIn US$Effective tax rate19.80%Marginal Tax rate22.34%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 marginwill not change over the next 10 yearsSales to capital ratio4.78US average value usedRisk free rate1.80%U.S.Department of Treasury, 2016Cost of capital9.65%US average value usedIn stable growth, company cost of capital8%*All translations of Renminbi into U.S. dollars were made at RMB6.1990 to US$1.00


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