Aikya Investment Management Ltd, an investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A return of 21% was recorded by the fund for the Q4 of 2020, below its MSCI Emerging Market benchmark that returned 26.7%. You can view the fund’s top 10 holdings to have a peek at their top bets for 2021.
Aikya Investment Management, in their Q4 2020 Investor Letter said that they noticed the outstanding earnings growth and earnings of Alibaba Group Holding Limited (NYSE: BABA), that made them acquire a position in Alibaba. However, despite the strong earnings, the fund gave a warning about the possible negative outcome of the company. Alibaba Group Holding Limited is a multinational technology company that currently has a $699.7 billion market cap. For the past 3 months, BABA delivered a decent -15.72% return and settled at $258.62 per share at the closing of January 22nd.
Here is what Aikya Investment Management has to say about Alibaba Group Holding Limited in their Investor Letter:
“Our long-term predictions suggest Alibaba can generate $60 billion of free cashflow in 2030. Working in the assumption that Alibaba will be a much more mature business in 2030, we would expect our investment to at least generate a 5% free cash flow yield. This implies Alibaba should be worth $1.2 trillion in 2030, and if we then factor in appropriate adjustments to the share count for share-based compensation then we would expect to earn a 3% return in dollars from today’s share price.
Alibaba has built a dominant franchise with high returns on capital and delivered very strong earnings growth since inception. This has invited a lot of investor interest and resulted in strong share price performance for several years. However, Alibaba fails our stewardship test, which changes our stewardship test, which changes our perspective of the company’s franchise and growth prospects.
Its competitive position has been underpinned by connections and support from the government. If the political winds change, as they appear to be at the time of writing this note, Alibaba’s privileged position may come under threat creating headwinds for the business.
We see the high returns on capital in a more skeptical light because of the opaque accounting; a situation made worse by non-existent oversight at board level, a complex ownership structure, and a culture known to be aggressive. It is also difficult to give Alibaba management the benefit of doubt for their M&A strategy which has diluted returns and enriched those at the top of Alibaba and their friends.
Coming back to the question of purpose; Alibaba’s purpose has drifted from its original intent of helping small Chinese businesses. It now appears to be serving the interests of the government and its original shareholders.
History is littered with examples of great businesses with poor stewardship, where poor stewardship eventually undermines the business. We appreciate that our view on Alibaba is unpopular and we have often been called out for missing out on an “obvious investment”. At Aikya we are focused on protecting downside and sleep better at night knowing that we have not exposed our clients to the risk of permanent capital loss.”
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Last November 2020, we published an article telling that Alibaba Group Holding Limited (NYSE: BABA) was in 166 hedge fund portfolios. Its all time high statistics is 170. BABA delivered a 25.87% return in the past 12 months.
Our calculations showed that Alibaba Group Holding Limited (NYSE: BABA) was the 4th ranked stock in our list of the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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