Alibaba Group Holding Ltd. recently filed with U.S. exchanges1 for approval to sell shares to the public for the first time, which could amount to one of the largest initial public offering (IPO) in history. Alibaba is an Internet-based e-commerce business, similar to companies like Amazon2 and eBay3, but it is even larger than the combination of the two from a revenue perspective. From a business model perspective, it includes online payments, cloud services, online travel, music and video streaming, e-learning and even financial services.
A lure among investors is Alibaba’s unparalleled access to more than 1.3 billion potential consumers in China and, more importantly, potential access to China’s growing middle class.
SoftBank Corp. Has Benefited from Alibaba
One of the beneficiaries, if there were no further dilution of its stake through the IPO4, of Alibaba’s success is SoftBank Corp., which owns approximately 34.4% of Alibaba. SoftBank5 is the largest holdings in the WisdomTree Japan Hedged Tech, Media and Telecom Fund (DXJT). For current holdings of DXJT click here.
Since the start of “Abenomics”, SoftBank is up about 150%, approximately three times the TOPIX return of 53%.6 Please keep in mind that high double-digit and/or triple-digit returns are highly unusual and cannot be sustained. Investors should also be aware that these returns were achieved primarily during favorable market conditions. There is no question that the Abenomics policies have helped profitability and equity returns of both SoftBank and broad Japanese equities and many investors are optimistic about Alibaba, but without access to it, they have the opportunity to purchase SoftBank to gain exposure to Alibaba.
SoftBank recently announced record earnings for its most recent fiscal year, proudly boasting about generating more than ¥1 trillion of operating profit, a 36% increase year-over-year.7 SoftBank also reported that Alibaba Group’s net income grew four times year-over-year to more than ¥350 billion. Transaction volume for Alibaba also surged to ¥25 trillion, outpacing eBay’s and Amazon’s combined ¥16 trillion. SoftBank stated that Alibaba contributed ¥74.4 billion of the ¥586.1 billion, or approximately 13%, of its reported net income.
Alibaba’s estimated market value ranges from ¥12.5 trillion to ¥20.0 trillion (US$125 billion to US$200 billion) based on analyst estimates, so given SoftBank’s 34.4% ownership, its stake could potentially be valued at between ¥4.3 trillion and ¥6.9 trillion (US$43 billion to US$69 billion). Considering that SoftBank’s market value was ¥9.36 trillion (US$91 billion) at the end of the reporting period8, Alibaba’s value could represent anywhere from 45% to 75% of SoftBank’s market value.9
If the projected valuation range for Alibaba is accurate, I find it very interesting that Alibaba represents such a large percentage of SoftBank’s market value. Alibaba has reported that SoftBank will continue to own more than 30% of its issued and outstanding ordinary shares after the completion of the initial public offering10. But it is also important to consider that even without the Alibaba equity ownership, SoftBank was profitable over the reporting period and has other business ventures and pursuits.
Last year, SoftBank successfully took control of Sprint11 and is pursuing a deal with T-Mobile12. Masayoshi Son13 has attributed the ultra-low financing that is available in Japan as a key factor in helping spur mergers and acquisitions. Given his longer-term outlook and the cheap financing, it is clear that SoftBank desires to continue growing, and he views Alibaba as a strategic partner for its long-term success.