Thread by @frankinvesting

Thread/ $BABA recently announced a 100B RMB contribution to common prosperity in China. The equivalent of $15.5B (USD).

Here is a bit of a deeper look and the impact in may have on Alibaba…

1/ firstly, I want to clarify the wording that was used. The $15B would be “an investment in science and technology to support small and medium-sized companies to enter the global market, increase employment rates and help reduce inequality between urban and rural digital life”

2/ $BABA will spread the money between 10 initiatives over the next 4-5 years. Unlike $TCEHY who did not give a time frame on their contribution, Alibaba have an end date of 2025. Both of the tech giants pledged the same ~$15.5B amount.

3/ At first glance such a large $ amount seems concerning. Although after considering it a bit more I think it’s impact will be minimal. It’s equal to ~30% of cash on the balance sheet or ~50% of net cash..

4/ Assuming the cash balance grows even half the rate it has in the past it’s about ~25% of FY25 net cash position. Not to mention this is worded as an investment. There is a possibility of a return on this $15B. Even if it’s a low ROI.

5/ Even if it is structured more like a donation with no ROI, it will be directed towards future customers that will enter the $BABA ecosystem. At the bare minimum it is a positive for the Alibaba brand image.

6/ The contribution on an annual basis is approx. $3B which is ~11% of FY21 free cash flow. If FCF grows at 15% that $3B in FY25 is just 6%. It’s certainly not insignificant, but the average tech company stock based comp dilutes more. $BABA will be buying back shares instead.

7/ Overall, this could be what it takes to calm the tension between China big tech and the CCP. Perhaps we see an improvement in market sentiment going forward.