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I continue to be long both Softbank and Yahoo. I am more bullish on Alibaba than in the initial write-up where we valued the business at $200 billion. I believe that the visibility on Alibaba's earnings trajectory has improved considerably, as mobile monetization inflected in the most recent quarter. The company's CFO seemed to highlight this point during the roadshow presentation.
On Yahoo, management is working on reducing the tax burden on a monetization of the BABA stake. I agree with your logic. It makes strategic sense for BABA to buy Yahoo and spin-off yahoo and yahoo japan and that would be the ideal from a tax efficiency standpoint.
Mark-to-market on BABA ($91) and yahoo japan (JY 443) and assuming the tax savings are split between BABA and yahoo on the BABA shares owned by YHOO, we think Yahoo stock is worth $48. At the same multiple as FB on Calendar 15 earnings (37x-38x), BABA would be worth $116 and , we can get to $56 on YHOO using a 20% tax rate on the remaining BABA shares. At a 30% tax rate on BABA holdings, we get to $51. Assumptions include: 38% tax rate on yahoo japan and $5 billion value for the core business, which I believe is low.
On Softbank, we apply no discount on yahoo japan and the BABA shares. We think that is appropriate, given that Masa San is not going to incur taxes on these assets for as far as we can see. On this basis, our sum of the parts valuation for the shares is JY 11,550 or $54 per ADR - upside of 37% today and 54% based on our BABA target. Applying 20% tax rates/illiquidity discounts on Yahoo Japan and BABA and using current share price vs. target BABA share price yields 20% and 38% respective upside to Softbank stock.
I hate Sprint standalone but was afraid to short it lest the S/TMUS deal get announced and it soared in my face. Now that's dead, and S is trading off 15% or so afterhours. Feels like the train may have left the station, but considering shorting out the S. Anyone have any thoughts or opinions on this and what other options Softbank might have for Sprint? Sprint is trading where it was a year ago yet the health of the US wireless industry has weakened consdierably.
Not sure really if it's 100% right to call it a conglomerate in the way that Siemens or GE or Philips are given that the holdings are very much focused on tech and telco, but I hear you. I try to reflect that a little by valuing all of the listed stakes plus Alibaba at a 25% discount to market value , so you have a bit of a "margin of safety" for tax slippage, liquidity haircuts and so on.
You are reading the table correctly, yeah. One other thing to bear in mind is that my valuation of the whole of Alibaba is "only" $157bn (which I then apply a 25% discount to on Softbank's piece, as rationalised above), while the value of Alibaba in the grey market is actually $190bn-$200bn (https://www.ig.com/uk/alibaba-ipo-grey-market), so as of right now, there is probably a bit of upside to that 13% you mention, all other things being equal.
darthtrader - Thanks for the post. I'm new to this idea so finding this helpful. Quick question: am I reading your table correctly in saying that the Alibaba stake is undervalued by $10.4bn? If so, if there were a re-rating to full value doesn't that imply Softbank's market cap would only rise by 13% (10.4/81.5=0.13)?
Do you think there should be a conglomerate discount applied?
At the risk of flogging a dead horse, this is beginning to look interesting again to me here. Same (broadly - made some minor adjustments) table as before:
Then the table (which is not totally comparable to the previous ones due to some rejigs that I did - but directionally totally the same):
The closet technical analyst in me is whispering at me to "pile in"...
One way I've been looking to implement something (level not currently right) would be +9984 JP, -4689 JP, - S US, -9433 JP (as a proxy for the fixed and mobile).
It's not that scientific but I was valuing Alibaba "thumb in the air" as follows:
30x P/E is totally subjective, but thinking was that 700 HK P/E ~34x, FB P/E ~40x, AMZN P/E ~90x - okay imperfect comp base but gotta start somewhere. The "inexpensive" P/E (relative to the "peers" at least) reflects the fact that Alibaba's probably a bit further along the road to profitability.
I'm then taking the valuation based on 2015 of $38.8bn for their stake. The 25% discount is again a bit arbitrary, but just trying to reflect the fact that there would potentially be some tax considerations, together with liquitity issues were they to want out.
From there, I then tried to go and figure out what valuation is being implied for the stake by the market - again, lots of assumptions involved, but this is my attempt at it:
I'm valuing the mobile and fixed line at what I think is a very conservative multiple, as I'm using the TTM earnings and then valuing them at KDDI's forward multiple (which probably undervalues them and by implication overstates the implied value of the Alibaba stub).
So I get the estimated stake value to be $38.8bn, implied value $46.5bn, hence "overvaluation" of 20%. That 20% is probably interpreted best with some historical context, so here's the over/undervaluation on this methodology going back to the listing of Sprint:
So it seems to be approaching "stretch" territory.
In terms of then actually trading it, for a notional $1m of Softbank, I was looking at the following hedge ratios:
I don't have anything in it right now - watching and waiting...
Do you have any opinion on advantages/disadvantages of buying the common and being short yen to do so, versus buying the unsponsored ADR in the US and shorting out the yen on the side?
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