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Alibaba Falling Weak as Competition Rising

Business Strategy and Outlook

Alibaba BABA is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. It is believed a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba. 

Alibaba’s Internet services had annual active consumers of 953 million as of September 2021, versus the 1.2 billion online population in September 2021 per Questmobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD. 

While it is perceived the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, it is also seen AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. 

Financial Strength

Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, it is held the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience initiatives through its current balance sheet and strong cash flow profile. Additionally, it is alleged the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. It is likely for the company to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.

 Bulls Say’s

  • Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD. 
  • Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021. 
  • Alibaba’s core commerce (which includes China marketplace-based businesses and other loss-making businesses) adjusted EBITA margin was 26.2%, higher than JD retail’s 2.3% non-GAAP EBIT margin and PDD’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.

Company Profile 

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%). 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Wynn’s Macao Gaming License to Be Renewed for 10 Years, Supporting Its Regulatory Intangible Asset

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Business Strategy and Outlook

COVID-19 continues to materially affect Wynn’s Macao operations (50% of estimated 2024 EBITDA), which we view as transitory. But the Macao government continues to heavily regulate VIP play, elevating long-term operational risk. Wynn has outsize exposure to the expected long-term shift away from VIP gaming revenue toward nongaming and mass play. Still, we see an attractive long-term growth opportunity in Macao, with Wynn’s high-end iconic brand positioned to participate.

Long term, we see solid visitation and gaming growth for Macao, aided over the next several years as key infrastructure projects to alleviate the region’s congested traffic (Pac On Terminal and Hong Kong Bridge opened in 2018, the light-rail transit at the end of 2019, reclaimed land, and development of Hengqin island) continue to come on line, which should expand constrained carrying capacity, thereby driving higher visitation and spending levels. Our forecast for annual mid-single-digit visitation growth over the next decade is supported by China outbound travel that we expect will average high-single-digit annual growth over the next 10 years. On Jan. 14, the Chinese government announced its intention to renew Wynn’s Macao gaming license (the source of the company’s narrow moat) for 10 years, which along with plans to develop further with its Crystal Pavilion project stands to benefit the company with regard to the region’s growth opportunity. Still, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government. We expect upcoming developments that add attractions and improve Macao’s accessibility will improve the destination’s brand, supporting our constructive long-term view on Macao.

The Las Vegas region (50% of estimated 2024 EBITDA) doesn’t offer the long-term growth potential or regulatory barriers of Macao, so we do not believe it contributes to Wynn’s moat. Still, its Wynn Interactive sports betting and iGaming brand, Boston property Encore (opened June 2019), and Vegas project (convention centre plus room and golf renovations) are set to provide incremental growth.

Financial Strength

Wynn’s financial health is more stressed than that of peers Las Vegas Sands and MGM, but the company has taken steps to lift its liquidity profile, including suspending its dividend, cutting discretionary expenses, tapping credit facilities, and issuing debt. As a result, the company has enough liquidity to operate at near-zero revenue through 2022. Should the pandemic’s impact last longer, we expect the company’s banking partners will continue to work with Wynn, given its intact regulatory intangible advantage (the source of its narrow moat), which drives cash flow generation potential. This view is supported by narrow-moat Wynn Macau surviving through 2014-15 when its debt/EBITDA temporarily rose to around 8 times, above the 4.5-5.0 covenants in those years. Finally, we believe the Chinese government could aid Macao operators if necessary, given that the nation wants the region to become a world destination resort. Wynn entered 2020 with debt/adjusted EBITDA of 5.7 times, but the metric turned negative in 2020 and was elevated in 2021 (estimated at 15.4), as demand for leisure and travel collapsed during the this period due to the COVID-19 outbreak. As demand recovers in the next few years, we expect leverage to reach 9.9 times, 7.7 times, and 6.5 times in 2022, 2023, and 2024, respectively.

Bulls Say’s

  • Wynn is positioned to participate in the long-term growth of Macao (76% of pre-pandemic 2019 EBITDA) and has room share of 9% with the opening of its Cotai Palace property in 2016.The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital.
  • Wynn has a narrow economic moat, thanks to possessing one of only six licenses awarded to operate casinos in China.
  • A focus on the high-end luxury segment of the casino industry allows the company to generate high levels of revenue and EBITDA per gaming position in the industry

Company Profile 

Wynn Resorts operates luxury casinos and resorts. The company was founded in 2002 by Steve Wynn, the former CEO. The company operates four megaresorts: Wynn Macau and Encore in Macao and Wynn Las Vegas and Encore in Las Vegas. Cotai Palace opened in August 2016 in Macao, Encore Boston Harbour in Massachusetts opened June 2019. Additionally, we expect the company to begin construction on a new building next to its existing Macao Palace resort in 2022, which we forecast to open in 2025. The company also operates Wynn Interactive, a digital sports betting and iGaming platform. The company received 76% and 24% of its 2019 pre-pandemic EBITDA from Macao and Las Vegas, respectively

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Iron Ore Price Rise More than Offsets Rio Tinto’s Modest Production Weakness

Business Strategy and Outlook

Rio Tinto is one of the world’s biggest miners, along with BHP Billiton, Brazil’s Vale, and U.K.-based Anglo American. Most revenue comes from operations located in the relatively safe havens of Australia, North America, and Europe, though the company has operations spanning six continents.

Rio Tinto has a large portfolio of long-lived assets with low operating costs. The recent focus has been to run a strong balance sheet, tightly control investments, and return cash to shareholders. The company’s major expansion projects are Amrun bauxite, the Oyu Tolgoi underground mine, and the expansion of the Pilbara iron ore system’s capacity from 330 million tonnes in 2019 to 360 million tonnes. Those projects are expected to be completed in the next few years. Otherwise, the focus is on incremental expansions through productivity and debottlenecking initiatives. These will be small but capital-efficient and should modestly improve unit costs.

Iron Ore Price Rise More than Offsets Rio Tinto’s Modest Production Weakness

Rio Tinto’s fourth-quarter production was overall mildly softer than expected. The company’s share of iron ore Pilbara shipments, the key earnings driver, finished the year at 268 million tonnes, slightly below Morningstar analyst forecast. Shipments were down on 2020’s 273 million tonnes with headwinds from weather, delayed expansions and traditional owner relationships post the Juukan Gorge disaster. COVID-19 also reduced labour availability. The destruction of the caves sees the major Pilbara iron ore miners facing additional scrutiny around traditional owner relationships. This has slowed output and growth somewhat but has not materially impacted the value of Rio Tinto shares, given the supportive iron ore price has more than made up for the lower volumes. Morningstar analysts have raised its fair value estimate for no-moat Rio Tinto to AUD 91 from AUD 89 per share. The increase reflects higher the stronger iron ore futures curve and the softer AUD/USD exchange rate, partly offset by weaker production forecasts.

Financial Strength

Rio Tinto’s balance sheet is strong with net cash of $3.1bn. For FY 2020 the revenue stood at USD Million 44,611 and USD Million 44,661 estimated for FY 2021. The strong balance sheet may allow the company to make targeted investments or acquisitions through the downturn, important flexibility. But it appears management is favouring distributions to shareholders. The progressive dividend policy was canned in 2016, providing important flexibility to increase or reduce dividends as free cash flow allows.

Bulls Say 

  • Rio Tinto is one of the direct beneficiaries of China’s strong appetite for natural resources. 
  • The company’s operations are generally well run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options. 
  • Capital allocation has improved following the missteps of the China boom with management generally preferring to return cash to shareholders than to make material expansions or acquisitions.

Company Profile

Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.