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Alibaba To Finally Consolidate Logistics Affiliate

Earlier this week, Alibaba announced that it would invest US$807 million into Cainiao, its logistics network affiliate, to raise its ownership stake to 51 per cent from 47 per cent currently.

This is big news for two reasons: firstly, it addresses some of the Securities and Exchange Commission (SEC’s) concerns around Alibaba’s consolidation practices and the transparency of its financial statements; and secondly, it signifies just how important logistics are to the company that it is willing to consolidate over US$300 million of annual losses onto its balance sheet in exchange for greater control over China’s largest logistics network.

Cainiao is the logistics network established in 2013 by Alibaba in partnership with China’s largest logistics companies. The Cainiao platform allocates orders placed on Taobao and Tmall to the logistics companies, who then interface directly with first-mile and last-mile delivery services to provide same-day or next-day package delivery across China. This model allows Alibaba to control the logistics data across the entire network, while also remaining asset light (and highly profitable) compared to peers such as JD.com and Amazon.

The value of the Cainiao platform, and the data generated, cannot be understated – China Post estimates that industry parcel volume will rise to 70 billion per year by 2020, up from 13 billion in 2016. Our recent conversations with the largest Chinese logistics companies suggest that as much as 70 per cent of their parcel volume originates from Alibaba, and that only Cainiao (i.e. Alibaba) knows what the parcels contain. In theory, as Cainiao improves the efficiency of these logistics companies, it should lead to a reduction in shipping costs charged to merchants, and thus result in Alibaba capturing a higher percentage of the value of the logistics chain, without actually having to engage in this fiercely competitive and capital intensive business.

Having just said that, Alibaba also announced its intention to invest a further RMB 100 billion over the next five years to strengthen its global logistics network, with the ultimate goal of fulfilling orders in China within 24 hours, and within 72 hours anywhere in the world. While it is not clear what areas the investments will be in, it is likely that Alibaba will need to invest in physical infrastructure, especially if it plans on expanding the Cainiao network globally. The transaction is expected to close in October, so we do not expect too many additional details (or consolidation) until the December quarter.

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The Montgomery Global funds own shares in Alibaba (NYSE: BABA)

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Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com.

Roger's step-by-step guide to valuing the best stocks and buying them for less than they're worth, Value.able, is available exclusively at rogermontgomery.com. Skaffold is an online stock-picking application that rates ASX-listed stocks from A1 to C5. Watch a demo of Skaffold at www.skaffold.com.



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