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JUNE 2020 ALIBABA GROUP

"Shares of Chinese company Alibaba entered the new year by continuing a strong growth trend and creating a new all-time high of $ 231.14/share in mid-January.„

MEDIUM-TERM ANALYSIS FOR THE PURCHASE OF ALIBABA GROUP SHARES

Company introduction

  • Alibaba Group has expanded into a global leader in online and mobile commerce since launching its first website in 1999 to help Chinese retailers, exporters, manufacturers and entrepreneurs in general with international sales. Today, the company and its affiliates operate leading wholesale and retail online sales platforms, as well as Internet-based businesses offering advertising and marketing services, electronic payment services, and mobile, computing, networking, and cloud services.

  • Major subsidiaries and affiliates include: Taobao - China's largest mobile trading platform, Tmall - a trading platform for online sales of the highest quality world-renowned companies, AliExpress - a popular global consumer retail platform, Alibaba - a global wholesale platform for retailers from more than 200 countries, Alibaba or, for example, Cainiao, which manages online logistics data on the movement of goods within global logistics companies. The company's strength is generated by extensive innovation, long-term investments focused on building a global brand, a disciplined sales approach focused on overall performance and the growth of global operations in the field of global Internet, mobile and entertainment business activities. Taobao and Tmall platforms accounted for 58% of all digital sales in China in 2018 and performed even better in 2019.
  • Shares of Chinese company Alibaba entered the new year by continuing a strong growth trend and in mid-January by creating a new historical high of 231.14 USD/share. In the following weeks, due to the pandemic, they weakened to $ 169.95 per share, but since short-term fluctuations, they have once again set out on a path of growth.
  • The plans of the Chinese Alibaba Group and its long-term outlook are positive for the growth direction, which includes, for example, efforts to simplify access to Western markets. The created and explicitly monitored expansion strategy of the company speaks for further growth and a possible return to the levels of this year's January highs.

Factors leading to an analysis of the potential growth in Alibaba's share price

  • Alibaba continues to expand the number of global brands that are tied to its data services platforms. Although the company's main commercial segment reported sales growth of 51% in the last quarter of 2018, Alibaba, along with its largest rival, JD.com, faces the risk of a slowdown of the Chinese economy.

  • Thus, diversification into neighboring markets is more than logical. These include media streaming, smart speakers with artificial intelligence and other business activities, including cloud services. Alibaba Cloud = the largest cloud platform in China.
  • Partner program A100. At the beginning of last year, Alibaba began offering a data analysis service. The A100 Partner Program integrates consumers' years of stored purchasing data into other merchant services that become program partners. An example of how this all works is linking Face Detection data to A100 data. The trader can thus know the customer's preferences as soon as he enters their store. Similarly, the interconnected data of brick-and-mortar stores of various global brands with the A100 program can help companies to better identify client needs and habits, launch new products, increase operational efficiency, or generate better targeted advertising.
  • China is the place where face recognition technology (supported by technology giants such as Alibaba, Tencent or Baidu) is experiencing a rapid boom. The ever-expanding range of partners includes, for example, P&G (Procter & Gamble), Nestlé and the Chinese giant Bestore. Although the service does not generate any revenue for Alibaba, as it is offered free of charge, it demonstrates the company's impressive cloud capabilities, which should attract the attention of large global merchants.
  • The A100 program is based on the "Alibaba operating system", which is part of the company's natural, enviable in the eyes of the competition, from a pure e-commerce provider to a global technology company. Its rebirth from e-commerce to digital entertainment and local services to the current state has helped the company strengthen its infrastructure to the point where it can now cover complete sales, logistics, supply chain optimization, payments, marketing and a wide range of support services due to large cloud computing capabilities of the company. Thanks to them, Alibaba is able to process a huge flow of data and offer customers various reports and massive analytical tools.
  • At the end of June 2019, Alibaba launched the English-language Tmall website. The company's goal is to double the number of international brands connected to the Tmall service to 40,000 over the next three years. The way to fill the market gap is to make the platform more attractive and accessible for small and medium-sized global brands. Currently, 20,000 brands from 77 countries and regions are connected to the Tmall platform.
  • Tmall Global was established in 2014. It represents an expansion of the Chinese market covering the Tmall platform. For foreign traders, this is an easier way to participate in the growing global e-commerce market. The Spanish and Japanese language versions will follow in the near future.
  • In 2019, Alibaba completed an IPO on the Hong Kong Stock Exchange. It was by far the largest subscription of shares on the Hong Kong Stock Exchange last year and at the same time the world's largest secondary sale of shares in the last 8 years.
  • Alibaba is a technology giant. It owns the largest commercial and cloud platform in China. It has continued to generate fantastic growth for a long time. Total sales in 2018 recorded a year-on-year increase of 51%. Gross trading volume in the two main markets, Tmall and Taobao, increased by 31% and 19%. Year-on-year, the number of active customers increased by 18.5% to 654 million. These results were supported, among other things, by the company's expansion in markets such as Southeast Asia, Russia and Europe. Last year, management expected revenue growth to $ 72.8 billion, up from at least 33% a year earlier. In 2020, according to the management's outlook, revenues should exceed USD 74.76 billion. In addition, any good news regarding the US-China trade war will massively boost investor interest in the Chinese technology giant, Alibaba.

Warning of potential risks for Alibaba Group

  • Alibaba is benefiting from its new retail strategy, which is gaining momentum in the market. However, growing competition from domestic and foreign e-commerce companies poses risks. Increasing investment and macroeconomic flows in China can also be included.
  • Certain risks are related to strict Chinese law. Under Chinese law, foreigners cannot own shares in any Chinese Internet company, which means that a foreign investor cannot be a real shareholder in Alibaba. Foreign investors buying Alibaba shares on the New York Stock Exchange are thus actually buying shares in the holding company Alibaba Group Holding Ltd registered in the Cayman Islands. They therefore have no voting rights in the company or in respect of its assets, including Taobao and Tmall. The result of the investment is a share in Alibaba's profits without any ownership rights, which nevertheless plays little or no role for speculators.
  • In the last twelve months, Alibaba's management has completed a number of acquisitions. While these expand the company's key capabilities and support its expansion in China and internationally, integration risks remain. Acquisitions of companies, although they should help expand the range of services and customer base in the long run, pass on additional costs to Alibaba, which are likely to increase its overall costs in the near future.
  • Trade wars are the main counterpart for Alibaba, as they disrupt profit margins and affect the overall economy.
  • As Alibaba continues to expand into the United States, it will have to work hard to move closer and match the already well-established eBay and Amazon players, who are very successful. PayPal's and eBay's mobile payment system is very popular with consumers in the United States. PayPal is increasingly spreading its wings in the offline segment as well, presenting new features with almost machine regularity. Its payment volumes record highly consistent double-digit year-on-year growth, both in the domestic and international markets. For these and several other reasons, building new strategic partnerships and establishing Alibaba's services in the United States that will allow it to replicate its competitors' successes will take some time.
Graph Alibaba Group, source: Barchart.com

Hypothetical example - CFD on Alibaba Group shares

  • Amount invested CZK 1 million… USD 42,556 (converted at the CNB exchange rate of 6/16/20)

  • CFD stock contract type

  • Leverage 1:5

  • Margin 20% of the CFD stock

  • Share price 222.62 USD (as of 6/16/20)

  • CFDs … value … USD 222.62 … 20% margin … USD 44.52

  • Target Price 1 … 233 USD

  • Target Price 2 … >233 USD

  • Support level 1… approx. 212.30

  • Support level 2… approx. 199.00

 

  • With a full 100% investment, up to 955 units could be purchased at a margin of $ 44.52. However, under the unwritten rule of investors, the maximum amount invested should never exceed 50% of the investor's free funds.
  • In the case of the purchase of 1 CFD share on Alibaba, the movement of the price to TP1 at the level of 233 USD/CFD share offers a potential of 10.38 USD.
  • If 50% of available funds were invested and 477 CFD shares were purchased, a price movement of $ 10.38 would increase the potential appreciation of the analysis to approximately $ 4,951.26.
  • However, in the event of a negative development and a decrease in the share CFD price to a support level of 212.30 USD/CFD share, the same trade would mean a loss for the investor amounting to almost 11.60% of the investor's total funds.

Please note that with regard to the size of the trading account and the size of the market, it is essential to adjust the size of the leverage and adjust the degree of selected risk accordingly. Trading CFD contracts and Forex is high risk and improperly set risk management can result in the loss of much or all of the investor's funds.

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