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Alibaba - organisational reshuffle announced

Alibaba has announced plans to turn its existing divisions into six independent businesses.

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Alibaba has announced plans to turn its existing divisions into six independent businesses. Each business will have its own CEO and board of directors. The different units will also be free to raise external funds, including through listing their own shares for the first time in Initial Public Offerings (IPOs), with the exception of Taobao Tmall Business Group.

The six new divisions are: Cloud Intelligence, Taobao Tmall Business, Local Services, Global Digital Business, Cainiao Smart Logistics and Digital Media and Entertainment.

Alibaba shares rose 14.3% following the announcement.

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Our view

News of Alibaba's organisational reshuffle has injected some life into its valuation. But it's important to understand that as things stand, nothing has fundamentally changed about the business.

The plans are more about trying to unlock shareholder value and free itself of the so-called conglomerate discount (when a large business is valued less as the sum of its parts than if they were separate), than it is in response to operational challenges. But there are no guarantees this plan will have the desired effect. The IPO market is very challenging at the moment which could hinder efforts to list separate business units. There's also a chance that potential buyers could make offers for the separate units. This is all important to monitor, but it's still important to understand what's going on under the hood of the overall business.

The Chinese giant is responsible for multiple businesses across e-commerce, digital media and entertainment, logistics and cloud computing, to name just a few.

The biggest segment, by some way, is China Commerce. China Commerce includes Taobao, which is China's largest shopping website, and TMall, which sells higher-end and branded goods. It's this area that suffered from weak demand last quarter. This could remain subdued and will depend on the shape of China's economic recovery.

Alibaba also houses the impressive AliExpress, which connects global consumers to a vast marketplace, where they can buy directly from manufacturers all over the world.

There are challenges. Supply chain and logistics are still tricky, despite some things easing. We're also mindful of stiff competition in the sector and a government tech-crackdown. There's no denying Alibaba's huge scale, but we are in the midst of a lull. The extent and depth of this is hard to map until wider economic conditions are more stable.

The worst of the effects for profits are being offset by cost cutting efforts. This is admirable, but not a permanent solution. Volumes will have to pick up the slack eventually.

And keeping sales on an upwards trajectory well into the future is the responsibility of international markets. The group's responding to the slowdown in its domestic market by doubling down efforts to expand in South Asia, an area with good growth potential.

We'd be remiss not to mention the Cloud business too. It's a small fish for now, and ongoing investment means only a small drop of this is making its way to profit.

A shining positive is Alibaba's cash generation - it has free cash flow of around $11bn pumping round the business each quarter. This gives it enormous flexibility in tough times, as well as the ability to throw money at expansion efforts.

Alibaba's scale and usership base is formidable and it has the foundations to do well. However, there are some very real headwinds blowing.

If international expansion efforts take off at the required speed, Alibaba could unlock enormous growth, but that's a very big 'if'. Sentiment in the short-term is likely to be swayed by movement, if any, in external fundraising efforts from the newly independent business units.

Alibaba key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 29th March 2023