Alibaba set to break long down trend
Mis à jour
For various reasons, the Chinese tech giant Alibaba has been in a downtrend since October 2020. The company has had many headwinds, most of them related to the regulatory environment in China. Most of those issues now seem to be resolving, and I think BABA will be one of the better performers in the coming year.
The China Credit Impulse
A major leading indicator for China stocks is Bloomberg's "China Credit Impulse" index. As the following chart from MacroMicro shows, the credit impulse's last peak more or less coincided with the last peak in Alibaba in October 2020:
As you can also see from the chart, the credit impulse now seems to have bottomed and is improving, a bullish sign for China stocks and for Alibaba in particular.
Whereas the US and most other developed nations have been raising interest rates, China is actually in a rate-cutting cycle. Key policy rates in China have only been cut by about 15 basis points, so I don't want to make it sound like they're cutting rates drastically, but they're certainly not raising them, and there's no sign yet that they intend to do so. That makes China potentially a safe haven from rising rates in the US and other developed markets.
countryeconomy.com/key-rates/china
US Delisting Risk
For the last couple years, the US has been making noise about delisting China ADRs (the depository shares that China companies use to trade on US exchanges. The SEC has been demanding that Chinese companies comply with US accounting regulations, and the Chinese government has been making it impossible for these companies to do so.
At the same time, China enacted a crackdown on big tech companies. The crackdown included steep penalties imposed on Alibaba, including a $2.8 billion fine for monopolistic behavior. The Chinese government also disappeared Alibaba's founder, Jack Ma, for three months.
This is "the big one" for Alibaba, but the problem recently seems to be headed toward a resolution. Jack Ma eventually reappeared in Hong Kong and has dutifully been doing as he's told, including restructuring Ant Group and selling off media companies to address the Chinese government's monopoly concerns. Last week, the Chinese government signaled through state media that the tech crackdown should be over soon, and that the Chinese regulatory commission will support companies in complying with US accounting requirements so that ADRs can remain listed in the US:
cnbc.com/2022/03/16/chinese-stocks-trading-in-the-us-rocket-higher-after-china-signals-support-for-the-shares.html
While this isn't yet a done deal, it looks really promising and could lead to a large rally in China stocks if and when it gets across the finish line.
Zero Tolerance Covid Policy
China has had a policy of zero tolerance for Covid, which means the whole country goes into lockdown every time a Covid outbreak happens. This one is not as big a deal for Alibaba, because it's an ecommerce company and thus potentially a beneficiary from people staying home. But I suspect that if China ended this zero tolerance policy, the entire China stock market would rally, including Alibaba. There have, indeed, been rumors that China may end the policy, as reported by the LA Times:
latimes.com/world-nation/story/2022-03-18/china-weighs-exit-zero-tolerance-covid-policy
China has a pretty high vaccination rate overall, but they've used the somewhat less effective Sinovac vaccine, and the elderly population surprisingly has been less willing to get vaccinated than younger people, so death rates in the current outbreak have been pretty high. This may make it difficult to end the zero tolerance policy, but they have to end it sometime, so we'll see.
Alibaba Valuation and Buybacks
Alibaba's got something like an 8% free cash flow yield, which makes it a pretty incredible value for a big tech stock. EV/EBITDA is about 10x, which is mid-range for China's consumer discretionary sector and way below US tech firms of comparable size. The valuation makes BABA hard to resist. They could flush half their capital down the toilet and still be a better value than a lot of US tech.
And the signs are that they plan to deploy their capital well rather than poorly. Yesterday Alibaba announced that it will increase its buyback program from $15 billion to $25 billion, which means it will opportunistically take advantage of low share prices to efficiently return capital to shareholders. That's called good capital allocation, and it's one of the things I look for in an investment. It's a really good sign for Alibaba here.
Technicals
As you can see from the chart, Alibaba has been in a long downtrend. It looks ready to attempt a breakout from that downtrend, however. I'm adding on any pullback to the 112-116 range and looking for a test of that downtrend line probably within a couple weeks.
The China Credit Impulse
A major leading indicator for China stocks is Bloomberg's "China Credit Impulse" index. As the following chart from MacroMicro shows, the credit impulse's last peak more or less coincided with the last peak in Alibaba in October 2020:
As you can also see from the chart, the credit impulse now seems to have bottomed and is improving, a bullish sign for China stocks and for Alibaba in particular.
Whereas the US and most other developed nations have been raising interest rates, China is actually in a rate-cutting cycle. Key policy rates in China have only been cut by about 15 basis points, so I don't want to make it sound like they're cutting rates drastically, but they're certainly not raising them, and there's no sign yet that they intend to do so. That makes China potentially a safe haven from rising rates in the US and other developed markets.
countryeconomy.com/key-rates/china
US Delisting Risk
For the last couple years, the US has been making noise about delisting China ADRs (the depository shares that China companies use to trade on US exchanges. The SEC has been demanding that Chinese companies comply with US accounting regulations, and the Chinese government has been making it impossible for these companies to do so.
At the same time, China enacted a crackdown on big tech companies. The crackdown included steep penalties imposed on Alibaba, including a $2.8 billion fine for monopolistic behavior. The Chinese government also disappeared Alibaba's founder, Jack Ma, for three months.
This is "the big one" for Alibaba, but the problem recently seems to be headed toward a resolution. Jack Ma eventually reappeared in Hong Kong and has dutifully been doing as he's told, including restructuring Ant Group and selling off media companies to address the Chinese government's monopoly concerns. Last week, the Chinese government signaled through state media that the tech crackdown should be over soon, and that the Chinese regulatory commission will support companies in complying with US accounting requirements so that ADRs can remain listed in the US:
cnbc.com/2022/03/16/chinese-stocks-trading-in-the-us-rocket-higher-after-china-signals-support-for-the-shares.html
While this isn't yet a done deal, it looks really promising and could lead to a large rally in China stocks if and when it gets across the finish line.
Zero Tolerance Covid Policy
China has had a policy of zero tolerance for Covid, which means the whole country goes into lockdown every time a Covid outbreak happens. This one is not as big a deal for Alibaba, because it's an ecommerce company and thus potentially a beneficiary from people staying home. But I suspect that if China ended this zero tolerance policy, the entire China stock market would rally, including Alibaba. There have, indeed, been rumors that China may end the policy, as reported by the LA Times:
latimes.com/world-nation/story/2022-03-18/china-weighs-exit-zero-tolerance-covid-policy
China has a pretty high vaccination rate overall, but they've used the somewhat less effective Sinovac vaccine, and the elderly population surprisingly has been less willing to get vaccinated than younger people, so death rates in the current outbreak have been pretty high. This may make it difficult to end the zero tolerance policy, but they have to end it sometime, so we'll see.
Alibaba Valuation and Buybacks
Alibaba's got something like an 8% free cash flow yield, which makes it a pretty incredible value for a big tech stock. EV/EBITDA is about 10x, which is mid-range for China's consumer discretionary sector and way below US tech firms of comparable size. The valuation makes BABA hard to resist. They could flush half their capital down the toilet and still be a better value than a lot of US tech.
And the signs are that they plan to deploy their capital well rather than poorly. Yesterday Alibaba announced that it will increase its buyback program from $15 billion to $25 billion, which means it will opportunistically take advantage of low share prices to efficiently return capital to shareholders. That's called good capital allocation, and it's one of the things I look for in an investment. It's a really good sign for Alibaba here.
Technicals
As you can see from the chart, Alibaba has been in a long downtrend. It looks ready to attempt a breakout from that downtrend, however. I'm adding on any pullback to the 112-116 range and looking for a test of that downtrend line probably within a couple weeks.
Note
Looks like there's a significant new risk this morning: the G7 is threatening China with sanctions if China helps Russia avoid sanctions. That... would be bad for China investors, suffice to say. Gonna look at either reducing the size of my China bets or buying a hedge this morning.Note
I went with protecting myself via a put option hedge. I think that the overall price pressure for China stocks will be upward, but there's a real possibility of a sudden, sharp sell-off on a sanctions event. That's the perfect scenario for a put hedge.Note
I think it's probably time to take profit on the hedges here and just go long. China cut the reverse repo rate yesterday, and there's some possibility of a surprise loan rate cut tomorrow.Note
Am staying long because I'm in it for the long haul, but a key piece of my China bull thesis has been absolutely destroyed in recent weeks. Far from backing off of the zero-Covid policy as rumor suggested he might, Xi has doubled and tripled down on that policy. The human suffering he is causing in Shanghai is staggering. Honestly hard to even think about the investment implications when you see the human toll of this policy, with people screaming out their windows that they have no food.There was also no cut to the lending rate. Rising rates on the international scene are making it impossible for China to cut rates. The Bloomberg China credit impulse is still pointed upward, and China property market leading indicators are also up a bit, but I fear we actually could see these indicators roll over in the coming months.
Note
Bloody day for most China stocks because Beijing lockdowns may be imminent.Note
With China Covid cases falling sharply, I added a little long China exposure here.Note
Closed my China longs today because of brinksmanship over Taiwan. A Pacific war appears to be a real risk right now.
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