Andrew Burton
Thesis
Alibaba Group Holding Limited (NYSE:BABA) has seen its stock surge nearly 40% since we upgraded it to Strong Buy after the market sold off after Chinese President Xi Jinping secured his third presidential term.
We then followed up with our pre-earnings take that investors should continue capitalizing on its consolidation, as China’s COVID refinements could be a critical driver toward Alibaba’s recovery in 2023. With well-battered valuations, we were confident that it represented an asymmetrical reward/risk profile skewed to the upside for investors who could manage their fear well.
Moreover, the recent protests have likely spurred policymakers to reconsider accelerating their refinement of China’s zero COVID policy. As a result, we now have a more convincing backdrop suggesting that China is likely moving into a potential easing phase.
Coupled with the increasing stimulus and support for China’s embattled property market, 2023 could be a massive year for Chinese equity investors as it emerges from its self-inflicted economic malaise. As China’s preeminent e-commerce platform leader, Alibaba is well-positioned to ride the progressive easing of COVID restrictions through 2023.
Notwithstanding, we must caution investors about expecting a quick nationwide exit from its COVID restrictions. Given the vast scale of China’s 1.4B population, we expect the central government’s mandate to be followed closely by the local state authorities. Hence, progressive easing is more likely than not; therefore, a return to 5% GDP growth could be fraught with significant hurdles.
Hence, we believe there could be plenty of opportunities for adding exposure/profit taking as Alibaba emerges from its worse selloff from its October 2020 highs since its IPO.
Given the sharp mean-reversion rally from its October lows, we postulate that a near-term consolidation is looking increasingly likely. It also reached our price target of $90, ahead of our expectations, suggesting it’s appropriate for us to be patient now. Investors who leveraged their October lows can also consider cutting exposure to take some risks off the table.
Revising from Strong Buy to Hold for now.
‘Dynamic COVID Zero’ Could Be A Thing Of The Past From Here
China has been cautious in its zero COVID approaches, even as the world reopened. Particularly, it relied on a “battle-tested” dynamic COVID zero strategy. President Xi Jinping also doubled down and reiterated his belief in China’s strategy at its recent 20th CPC National Congress. He emphasized: “We have put people first and put lives first, and upheld ‘dynamic COVID Zero’ without wavering.”
However, all that could be set to change, at least for now. Bloomberg reported that China’s outgoing Vice Premier and zero COVID health czar Sun Chunlan conspicuously omitted the parlance in a recent meeting with health regulators and experts. Instead, she articulated that the “fight against the pandemic is at a new stage, and it comes with new tasks.”
Therefore, we postulate it could mark the start of a potential departure from its highly rigorous approach, setting China on the path toward progressive easing moving forward.
Other market strategists also caught on to Sun’s commentary, as advisory firm Teneo Holdings LLC highlighted:
Sun’s comments look very significant as she was the tip of the spear when it came to the central government forcing local authorities to faithfully implement the Covid Zero policies. As a vice premier and former Politburo member, she chooses her words carefully, so her failure to mention ‘dynamic Covid zero’ can’t be accidental. – Bloomberg
Despite posting record daily COVID caseloads that surpassed April’s lockdown mayhem, China has moved to allow selected “low-risk” patients for home quarantine, moving away from its centralized quarantine strategy. Therefore, we believe China is moving expeditiously toward progressive easing as it prepares its population for a new phase in its fight against COVID.
As such, Bloomberg Economics also moved forward its forecasts for China to fully reopen by “mid-2023,” from its previous projections of “beyond 2023“. It accentuated:
Our view is that by the end of the first half of next year, the economy will be free of any material Covid curbs. An acceleration — either by design or not — is more likely than a deceleration. – Bloomberg
Alibaba is Poised To Benefit From The Recovery
We believe management’s action in deploying its stock repurchase war chest in 2022 highlighted the company’s confidence in the intrinsic value of BABA.
Accordingly, Alibaba had repurchased $18B of its $25B authorization as of CQ3’22. In CQ3, management highlighted that it repurchased $2.1B worth of stock for an average cost of $86.4.
Moreover, despite still having a balance of $7B from its current authorization, management was confident enough to upsize it by another $15B (through 2025). As such, Alibaba reloaded its war chest to a massive $22B to fight off the bears.
Management also telegraphed its confidence in the potential easing of COVID restrictions, as CEO Daniel Zhang accentuated:
We have taken note of the latest adjustment in China’s COVID-related policies and proactive commentary from relevant government regulators about promoting the digital economy and high-quality development of platform businesses. We believe that COVID will ultimately pass, and our society, our economy, and our lives will eventually return to normal. Consumption is an important engine of economic growth. But for consumers to spend, they need to have confidence and they need to have stable expectations, including stable expectations regarding their own future income. So [for] the controls to end, that would, I believe, result in a big boost to that kind of confidence, resulting in higher consumer spending and also further stimulating the economy. (Alibaba FQ2’23 earnings call)
Coupled with the increasingly clear message from Beijing, we think it’s time for Alibaba bears to move to the side from here.
Is BABA Stock A Buy, Sell, Or Hold?
With the sharp recovery from its October lows, we believe the near-term upside on its easing optimism has been reflected.
Hence, we expect a healthy consolidation, allowing investors to assess the robustness of a potential pullback before adding more exposure.
Revising from Strong Buy to Hold for now.
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