One of the bull cases for Alibaba is seeing Cainiao, their logistics business, go public on the Hong Kong stock exchange. Recently, Alibaba chose to scrap their IPO plans and instead decided to take full ownership of the business by buying out the remaining 36% of Cainiao it didn't own. While this move doesn't unlock shareholder value and won't give Alibaba the cash injection it needs to expand their share buyback program, I think the move to own Cainiao is smart.

To understand why the move is smart, consider the story of $AMZN logistics. For a long time, Amazon relied on third parties like UPS and FedEx to deliver their packages to customers. Then overtime, they created their own logistics business to reduce their logistics costs and eventually started offering their logistics services to other companies. Amazon Logistics is now the largest parcel shipping company in the world.

With the Chinese and Hong Kong stock markets trading at dirt cheap levels, taking Cainiao public would be a mistake. Alibaba and Cainiao's minority stake investors want to maximize the money they can cash out through an IPO and the current environment is unfavorable for that behavior. With that, Cainiao's minority investors find that they can get the most money by selling their stake to Alibaba, who is already cash rich as a business. Through this acquisition, Alibaba no longer has to pay a premium for Cainiao's logistics services and can save immensely on shipping. Also, Alibaba's chairman, Joe Tsai, said that this move to acquire Cainiao is Alibaba's way of doubling down on the logistics business.

From a macro perspective, the picture of China is mixed. You have a real estate bubble burst that is taking up most of the coverage on China's economy. Then you have the booming electric vehicle industry where Xiaomi sold their entire production lineup for 2024 and other players are seeing their exports soar by over 300%. Then you have manufacturing, which recently saw an uptick in activity. Speaking of manufacturing, Chinese businesses are offshoring their low value manufacturing activities to Africa and Latin America and are dedicating their production capacity in China on higher value manufacturing like semiconductors and electric vehicles. With the CCP telling households to stop speculating/hoarding properties, Chinese households will either look to spend their dry powder on dirt cheap Chinese equities or start spending on consumer discretionary items. Then you have American fast food companies looking to open more stores in China at an accelerated pace.

By being a part of Alibaba, Cainiao will miss out on the opportunity of being able to capitalize on the rapid growth of Temu by PDD Holdings, a competitor of Alibaba, along with Alibaba's other competitors. But that's alright because Alibaba's biggest competitors have their own logistics businesses. Like Amazon, Alibaba can provide logistics services to smaller retail business in China and to other retail businesses globally. The synergies that Alibaba will reap from owning all of Cainiao will be similar to what happened when Amazon took full control of its logistics operations. $BABA bulls have more to look forward to.