China's Reopened - Will Alibaba Benefit?

82% of the S&P 500 has reported Q4 2022 earnings so far. Another 10% of the index will report this week, along with China’s Alibaba. Will Charlie Munger’s ‘biggest mistake’ report a positive surprise?

That’s a huge peak to trough drawdown. The stock fell by a little over 81% amid regulatory crackdowns, the removal of stimulative covid policy in the West, and the subsequent implementation of strict Covid controls in China itself.

But that’s all in the past. The question is what lies ahead for Charlie Munger’s ‘biggest mistake’?

“I regard Alibaba as one of the biggest mistakes I ever made. In thinking about Alibaba, I got charmed by their position in the Chinese internet and didn’t stop to realise, they’re still a gawd-damned retailer.”

This wasn’t a Berkshire Hathaway investment with Warren Buffett. By the end of 2021, Munger had bought 600,000 Alibaba shares on behalf of the Daily Journal investment portfolio that he manages. Almost 30% of their holdings were dropped into the Chinese giant.

Munger has since halved that investment to 300,000 and shares in the online retailer have bounced from the lows. But how resilient is the Chinese economy? What’s the outlook for a cyclical stock such as Alibaba in this environment?

The firm will report Q4 earnings on Thursday. Some weakness for the period is to be expected due to the ongoing impact of Covid restrictions so there will likely be a greater focus on the forward guidance.

For all the talk surrounding China’s reopening, the economy was already weakening before the Covid restrictions, mainly due to the crackdown on housing as a vehicle for speculation.

Youth unemployment peaked at almost 20% late last year and this Reuters report sums up the jobs market:

China's job fairs are making a comeback after being forced online by COVID-19 for three years, but subdued wages and less abundant offerings in sectors exposed to weakening external demand point to an uneven and guarded economic recovery.

The same report highlights a Zhaopin survey (one of China’s largest recruitment companies) of 50,000 white collar workers:

47.3% of respondents were worried they may lose their jobs this year, up from 39.8% a year ago.

About 60% cited the "uncertain economic environment" as the main factor affecting their confidence, up from 48.4% in 2022.

Much has been made of the 17.8 trillion yuan of savings accumulated by Chinese households but will they spend them? A stronger economy and greater job security would certainly help incentivise consumption. Perhaps the caution will ease if the economy picks up steam.

Morgan Stanley recently launched a China Best Business Models framework. One of the primary goals is to “identify publicly listed Chinese companies with the best business models and superior ROE/valuation premia in their industry groups, that will help their stocks to outperform peers over the medium to long term”

The analysts include Alibaba in the list of 28 companies, awarding an overweight rating with a price target of $150.

From a technical perspective, it’s hard to rule out a retest of the broken resistance and 200 day moving average zone, but if the Chinese economy accelerates from here, perhaps Alibaba shares will rally too.