Alibaba is now officially position #1 in the Patient Compounder portfolio. As of 10th October 2021, Alibaba is 26% of the portfolio’s cost basis. The next major position is Tesla at 24% of portfolio cost basis.
Other major positions (more than 10% of cost basis are) :
Amazon : 12%
Facebook : 10%
Both Alibaba and Tesla represent 2 big bets on the future. Tesla is a bet on future cash flows from the successful rollout of Full Self Driving, Tesla Energy and Tesla producing 20m cars a year. My reasons for the Tesla position are written here.
Investing in Tesla requires one to understand why Tesla should have the advantage in battery production and Full Self Driving 10 years out. It requires understanding battery manufacturing and neural nets. A lot of the value is baked into the Terminal Value in Year 10. This makes Tesla an incredibly risky position to hold in the short term.
Alibaba on the other hand is a pure value play that also happens to be a big bet on the growth of the Chinese consumer. The CCP is now focused on developing internal consumption. The plan is for chinese GDP to be primarily consumption-driven by 2049.
Investing in Alibaba requires one to believe that the firm will ride this consumption growth. It also requires believing the following numbers :
Alibaba keeps growing free cash flow at 15% a year for 7 years
Dilute shareholders by 1% a year
Generate 18% net income margin
Generate 18% Free Cash Flow margin
P/E ratio in Year 7 is 14x
Price to FCF in Year 7 is 14x
Based on a required rate of return of 12.5%, the fair value of the business is HK$290 - HK$300.
In today’s overvalued markets, finding value in anything growing faster than 20% a year is challenging. Alibaba (and other Chinese big tech consumer firms) are on sale right now.
This is why Alibaba has quickly grown to become the dominant position in the Patient Compounder portfolio. I am still acquiring shares and intend to continue building the position as long as share prices remain below HK$170. The final position size will be 10% of the portfolio cost basis in 2040.
This will mean that I will have to endure a lot of short term pain as the portfolio’s performance suffers due to this overweight. But in 20 years time, it should balance out as it will be 10% or less on a cost basis. If the chinese consumer continues growing and shopping on Alibaba’s assets, the performance should drive returns in excess of 10% a year.
Risks
Alibaba is arguably a risky position if one considers :
US-China relations deteriorate significantly, causing institutional investors to significantly under-weigh their portfolio allocation in China.
Alibaba’s growth decelerates and declines.
Alibaba’s asset allocation is bad causing a decline in ROIC
Alibaba Cloud demands significant CAPEX spend without meaningful long term returns
Alibaba logistics becomes a CAPEX sinkhole without meaningful ROIC
The CCP announces that all VIEs are illegal and foreign ownership of any chinese company is not possible. This will cause a total share collapse and render the investment worthless. I’d imagine that foreign investors like myself be left holding worthless shares in the cayman island entity.
Hence the max 10% allocation of future portfolio cost basis.
Legal Disclaimer : This post is opinion and not investment advice. The author is not a licensed financial advisor and merely some guy writing stuff on the internet. The author is not liable for any investment loss the reader (you) incur from acting on information written by the author.