The Chinese Internet is really undervalued.

*This article was originally published on the hatched commercial and financial account "Knowing Danger"

I believe everyone has seen the sharp decline in Hong Kong stocks and US stocks this Monday, and it can be said that "blood flows into a river".

Turning on the phone at that time, it is probably the scene like this

For a time, all kinds of jokes flew together, and companies headed by China Internet became everyone's laughing stock:

"The goose factory fell into a bird factory, and I fell away. Later, it fell from a bird factory to a black factory, and there is nothing left."

"Alibaba, it has fallen to Ali 66." (Ali has fallen from around 80 to around 60)

"I didn't expect that the most ruthless discount on Double Eleven was not Tmall, but Pinduoduo." (The day was the day when Tmall made a deposit for Double Eleven, and Pinduoduo had the largest share price drop among e-commerce platforms that day, with a drop of 34% at one point. % about)

Although there has been a small recovery of blood in the past two days, compared to the big drop that day, it basically picked you up and punched and kicked you to the point of comminuted fractures, and gave you a Band-Aid.

In terms of stock price decline, Chinese Internet companies in the past two years can only say that there is no lowest, only lower.

To what extent? The Zhiwei editorial department made a simple table:

Too many things have happened in the past two years: the risk of delisting of Chinese concept stocks caused by the Sino-US audit manuscript dispute, the national anti-monopoly, preventing the disorderly expansion of capital, the impact of the epidemic on consumption, and the dividend of Internet user growth has subsided. . .

These bad news, like the nails on the coffin, one after another, want to nail the Internet companies in the coffin.

On the day of the big drop this week, Duan Yongping said on Snowball that he had increased his position in Tencent: "I bought a little more, although I don't know what happened."

At first glance, it seems a little funny, but it shows that in a sense, the decline has been separated from the level of fundamental or technical explanation.

The market value is a reflection of the company's future profitability or growth. If it continues to fall like this, can we draw a terrible conclusion:

China's Internet has stopped growing, or is even dying?

Or, now we are all in chaos, blinded by a thick fog:

Are Chinese Internet companies undervalued now?

Today, the Zhiwei editorial department is ready to seriously think about and discuss this issue, including the two aspects of "uncalculable" environmental factors and "calculable" Internet company fundamentals.

Let's talk about the "incalculable" and falling environmental factors, which have been mentioned above, and we will now dismantle them one by one to talk about them in a little more detail.

The first is the negative sentiment caused by the delisting risk of Chinese concept stocks caused by the dispute over the audit papers between China and the United States.

According to the "Sarbanes-Oxley Act" (2002) of the United States, the audit materials of all listed companies in the United States need to be inspected by the PCAOB (American Public Company Accounting Oversight Board) . U.S.-listed companies have not been substantively inspected under the Act, including a large number of Chinese companies listed in the U.S. In order to enhance the influence of the Act, the PCAOB has had several disagreements with China over the past decade.

On December 18, 2020, then-President Trump officially signed the Foreign Company Accountability Act passed by the Senate and the House of Representatives that year.

The Act provides for:

The SEC will delist the listed companies audited by these accounting firms based on the list of accounting firms provided by the PCAOB.

If the public company's auditors have not been inspected by the PCAOB for three consecutive years, the public company's shares will be delisted from the U.S. market or suspended from over-the-counter trading.

In the past two years, more than 100 Chinese concept stocks have been included in the list, facing the risk of forced delisting, which has led to pessimistic market sentiment and led to multiple selling.

However, at around 8 pm on August 26, 2022, the China Securities Regulatory Commission officially announced that China and the United States signed an audit cooperation agreement.

Although the specific implementation of the agreement depends on the follow-up cooperation, it also means that the ten-year-long dispute between China and the United States on the audit of Chinese concept stocks will be resolved, and the delisting crisis of Chinese concept stocks will be eliminated . The bad news will be eliminated.

The second negative is the state-sponsored anti-monopoly action against Internet giants to prevent the disorderly expansion of capital.

In January 2020, the State Administration for Market Regulation released the "Anti-Monopoly Law Revision Draft (Draft for Public Comments)".

In November of the same year, the "Anti-Monopoly Guidelines on Platform Economy (Draft for Comment)" for Internet platforms was launched.

On December 24 of that year, the State Administration for Market Regulation launched an investigation into Alibaba Group's alleged monopolistic behavior.

On April 10, 2021, Alibaba Group announced that it has received an administrative penalty decision from the State Administration for Market Regulation.

The amount of the fine is 18.228 billion, which is relatively moderate , and there is no full penalty.

Because according to the anti-monopoly law, a fine of more than 1% and less than 10% of the sales in the previous year can be imposed. The investigation of Alibaba should start in 2020, and the fine was imposed on 4% of the domestic sales in 2019. % .

At the end of April 2021, Meituan was also subject to an anti-monopoly investigation, and the relevant penalties were imposed in October. It was imposed a fine of 3% of the annual sales of 114.748 billion yuan in 2020, with an amount of 3.442 billion yuan.

In addition to these huge penalties, Ali, Meituan, and Tencent have also received various other fines, orders of rectification, and prohibition of mergers and acquisitions . The dominant tiger tooth fighting fish merger, etc.

After the Internet giants have been beaten by turns, they have become very well-behaved. Since this year, officials have begun to reset the tone on various occasions to "support the healthy and sustainable development of the platform economy."

This may mean that anti-monopoly and anti-disorderly expansion have become normalized and moderated. As long as it is not out of line and maintains healthy development, the sword hanging over the Internet giants will not fall, and there will be no problems.

Source: "Notice of the General Office of the State Council on Printing and Distributing the Key Task Division Plan for the 10th National Video and Telephone Conference on Deepening the Reform of "Decentralization, Regulation and Service", October 15, 2022

Objectively speaking, despite the ridicule of "996" and "Fu Bao", Internet companies do provide a large number of jobs.

Explicitly, Alibaba announced that the group had a total of 245,700 full-time employees as of June 30, 2022;

According to Tencent's 2021 annual report, by the end of 2021, Tencent has 112,700 employees;

According to JD.com's 2021 ESG report, by the end of 2021, JD.com has 420,000 employees (including JD.com couriers) ;

According to Baidu's 2021 annual report, by the end of 2021, Baidu has 45,500 employees;

According to data from consulting firm Statista, by the end of 2021, Meituan has about 100,000 employees (the official data is not released, and the number of employees does not include delivery staff).

Invisibly, the jobs directly provided by Internet companies are far more than the above figures, because these companies still have a large number of outsourced employees. For example, companies such as Chinasoft and Beyondsoft will provide a large number of outsourced programmer jobs to Internet companies such as Baidu, Alibaba and Tencent.

And companies like Meituan are even more exaggerated. According to Meituan’s 2021 financial report, there are 5.27 million riders earning income on the Meituan platform , which we can understand in disguise as providing more than 5 million jobs. You have to understand that this profession was born out of thin air. It did not invade some of the past industries too much, but created new jobs.

There are even more jobs indirectly provided by Internet companies. We can understand that it is Internet companies that drive the upstream and downstream industries.

For example, in 2005, Jack Ma found China Post, hoping to sign an agreement with the Post to reduce the cost of online shopping postage, but the cooperation was not quickly promoted, so private express companies such as Yuantong and Shentong seized the opportunity. Now , these private companies have greatly improved the efficiency of commodity circulation in society and provided millions of courier jobs.

The upstream and downstream industrial chains driven by these Internet companies have driven the flow of people, the flow of goods, and ultimately the active flow of money in the market, and the active flow of money is a necessary factor for the vigorous development of the economy.

In addition to the economy, Internet companies have also played a part in the research and development of new technologies. According to each company's 2021 annual report, Baidu's R&D expenditure is 22.1 billion, Tencent has 51.88 billion, Ali has 57.8 billion, Pinduoduo has 2.7 billion, and Meituan has 2.7 billion. There are 4.58 billion. Once there is a breakthrough, the society will ultimately benefit.

Therefore, in general, the Zhiwei editorial department believes that the negative risks of anti- monopoly and anti-disorderly expansion to Internet companies have been relatively eliminated.

In terms of the impact of "Internet user dividends peaking" on Internet companies, Zhiwei editorial department believes that it is slightly one-sided to conclude that Chinese Internet companies have stopped growing on the grounds of peaking user dividends.

The editorial department has mentioned in past articles that while Alibaba maintains GMV growth, the latecomer Pinduoduo can still continue to grow rapidly, creating an annual GMV of more than 2 trillion, which shows that there is obviously a certain room for exploration in the market.

Secondly, Internet companies have already begun to deploy businesses that are not highly related to "user dividends" , such as cloud computing, quantum computing, OA office, data center, AI, autonomous driving, etc. These businesses have considerable space.

In addition, the giants have deployed overseas business , Tencent is doing the game business overseas; Alibaba has expanded its international e-commerce business through AliExpress, Lazada, etc.; Pinduoduo has launched Temu e-commerce business in the United States, Singapore, Canada and other places; Meituan has also recently piloted a food delivery business in Hong Kong, China, with the intention of gradually expanding its business overseas.

Pinduoduo has even put physical gift cards in Temu’s courier to call on users to pull the heads of people around them. New users can directly get the item scratched on the gift card, and if all three are used by the new user, the card issuer will also get a free item. Image source: Snowball @ Beijing Yanbei

Therefore, in general, the editorial department of Zhiwei believes that the development space of Chinese Internet companies is still relatively considerable, and it is not so pessimistic.

Finally, there is the topic of the impact of the impact of the epidemic on consumption on Internet companies. This is a difficult question to answer, but we believe that policy relaxation is a matter of time. The cash flow held by the Internet giants is very large and can last for a long time. From the perspective of discounted cash flow in the future, the impact of the epidemic in one or two years will not be particularly large. We hold a relatively neutral attitude.

Next, is the "calculable" part. The editorial department of Zhiwei will take several giant companies and start the hard-core crazy press calculator mode. (The intermediate process cannot be explained in too much detail. If you are annoying, you can directly see the results of each)

Let’s talk about Tencent first. The editorial department adopts DCF (discounted free cash flow) to estimate Tencent’s valuation.

First, Tencent's revenue is classified into: value-added services, online advertising, financial technology and enterprise services, and others.

Value-added services include online games and social network businesses. The domestic growth of online games has generally slowed down, and the incremental era has turned to the stock era. Competitors have also begun to grow, and competition has intensified, but they may gain new growth in overseas markets.

The social network business includes QQ VIP, video membership, copyrighted music, digital reading, and all non-game paid income. This business may continue to maintain steady growth as the acceptance of content payment increases in China. Our expectation for value-added services is to maintain an overall 10% growth in the next five years.

Online advertising is likely to continue to maintain relatively high growth after business integration (the integration of Tencent advertising and WeChat advertising) , and we expect a 20% growth in the next five years.

In terms of financial technology and corporate services, the former will become another pillar of Tencent's business after games, while in terms of corporate services, competition is currently fierce. Although Tencent has the desire to develop to B, it has been difficult to find a breakthrough in recent years. Taken together, we expect 30% growth over the next 5 years (because the base is now small).

Other business annual reports do not disclose specific information, and they only account for 2% of total revenue, which has very little impact on the stock price, and is estimated based on a 30% increase.

Since the RMB is used in Tencent's annual report, for the convenience of estimation, the entire process is in RMB. And take 10-year treasury bonds as the risk-free interest rate, the latest value is 2.19%.

In terms of risk premium level, according to Tencent's 2021 annual report, overseas revenue accounts for only 4%. Therefore, only the risk premium in the domestic market needs to be considered.

According to the calculation, see the implied risk premium of the A-share market, the domestic market risk premium is 20% (the market is undervalued) . The ideal risk premium level is 6.1%.

In terms of Unlevered beta (deleveraging beta) , Unlevered beta can be calculated by linear regression according to the following equation, and we get Unlevered beta=1.03 by calculation.

In order to carry out the next calculation, we must first define Tencent's market value and the total amount of debt and equity. Tencent's average price in the past 20 days is 234 Hong Kong dollars, and its total share capital is 9.609 billion. As of the time of this calculation (October 27) Tencent's stock market value is 2,116.8 billion yuan. (The exchange rate is: 1 Hong Kong dollar ≈ 0.81 RMB)

For debt, see the table below:

By omitting several processes, we get:

In terms of Pre -tax cost of debt , according to page 169 of the 2021 financial report: “Leaseholders can obtain observable amortized loan rates through recent financing or market data and have lease-like payments , then the entity of the Group adopts this interest rate as the starting point for determining the incremental lending rate.”, then it can be estimated that Tencent’s Pre-tax cost of debt is 4.58%.

In terms of operating lease debt, since Tencent's 2019 financial report has used the new accounting standard (IFRS16) , the calculation is omitted.

After one operation, we can calculate:

We then capitalized Tencent's R&D expenses to refine our results, a process that doesn't show.

In terms of sales revenue growth rate, although Tencent has been in a period of high growth in the past five years, due to the impact of the epidemic and the overall financial downturn, we estimate that the sales revenue growth rate is: 10%.

In terms of sustainable growth rate, we estimate that Tencent's sustainable growth rate is 5.98%.

So far, we have obtained all the pre-parameters of the DCF model, bringing in a valuation model that is difficult to explain in a few sentences.

Model example↓

Finally, it is calculated that Tencent's stock price should be: 467.38 Hong Kong dollars / share. (The estimated time of the valuation is from the end of 2023 to the beginning of 2024)

The current price of Tencent's Hong Kong stock is around HK$200 per share, so it is undervalued to a certain extent.

It is worth noting that because Tencent has a lot of external equity investment, it will bring potential cash flow, which is very huge and complicated. The editorial department has not made a calculation due to time problems. The estimate should be even higher.

At the same time, we try our best to ensure the scientific nature of the calculation process, but it is still one-sided from the perspective of God. The process includes some growth rates with subjective predictions. It is good to see the trend, and the same is true for the following companies.

Regarding Baidu, we also use the DCF method for valuation, the process will not be repeated, but directly on the big table:

We calculated that Baidu's share price in 5 years should be: HKD 147/share.

Baidu's current Hong Kong stock price is around HK$75 per share, which is also undervalued to a certain extent.

Regarding Alibaba, we use the STOP valuation method, which is GMV+market-to-market valuation, GMV valuation for core business, and market-to-sales valuation for Alibaba Cloud+Cainiao business, as shown in the figure below:

Finally, we concluded that the valuation of Ali stock should be: HKD 232/share or USD 233/share. (The number of shares of US stocks and Hong Kong stocks is different, so the prices look similar)

The current prices of Alibaba's Hong Kong stocks and US stocks are both around HK$61/share and US$65/share, which are also undervalued to a certain extent.

Regarding Pinduoduo, we also adopted the GMV valuation method, as shown in the figure below:

We concluded that the share price of Pinduoduo should be: $121 per share.

The current share price of Pinduoduo is around $53 per share, which is also somewhat undervalued.

Regarding Meituan, we used the market-to-sales valuation method. We calculated a price-to-sales ratio of 4.15, and finally concluded that the stock price of Meituan should be: HKD 214 per share.

The current price of Meituan is around HK$120/share, which is still undervalued to a certain extent.

The above data are based on the existing data in the past . It is theoretical to catch some clues in the future in the fog. The market value of the company is also related to many factors.

However, we do not demand that this is accurate and correct, and we cannot be accurate and correct.

As Buffett said: "Better to be vaguely right than precisely wrong."

We think we've touched the vague right.

In general, the view of the Zhiwei editorial department is:

Chinese internet giants are being undervalued.

We are still optimistic about the Chinese Internet.

What people lack now seems to be confidence.

Some people see dust, some people see stars.

What are you seeing?

Written by: Alex, Dabing

Edit: Flatbread

statement:

This article is for communication only and does not constitute any investment advice.

If you think this article is well written

Welcome to pay attention to the hatched business and financial account: Know the danger ( ID: BusinessAlert )