Alibaba may withstand China’s scrutiny, says VanEck’s Semple

Last week, the People’s Bank of China (PBOC) announced that it had begun an antitrust investigation. Analysts believe it is looking at whether Alibaba is asking sellers on its platform to sell exclusively there and not through competitors, a practice known as “choosing one of two.”

Regulators are also looking at Ant Group, a fintech technology company owned by Alibaba. They are examining whether to treat Ant more like a bank and regulate it in this way. Ant recently canceled what was expected to be the largest initial public offering ever.

Alibaba shares gained nearly 10% this year, compared to a 16.3% increase in the S&P 500 index.

David Semple, $ 2.6 billion portfolio manager

VanEck Emerging Markets Fund

(GBFAX) says Alibaba can beat others in terms of product quality and service, even if regulators take their wings.

She recently spoke to him Barron’s about his views on Alibaba and other Chinese e-commerce stocks and other investment ideas. An edited version of the conversation follows.

Barron’s: What are the Chinese regulators looking at?

David Semple: It is like many other sectors in China, where regulatory development has not kept pace with economic development. In essence, entrepreneurship invades the gray areas and then recovery is more of a black line. Some people will be on the wrong side; some practices will be on the wrong side of this and that is what it commands.

It was kind of a public secret in the industry that there were some practices that pushed the envelope and I think that’s probably the point. It is more about the best development of the industry and consumer protection.

I don’t think it’s irrelevant that Jack Ma was visible until quite recently and now he’s been invisible. Obviously, much of the development of fintech was areas where PBOC was awkward, but it needed more political influence to really start jumping and regulating better. People are very busy working on these regulations that are happening and paying attention to them. But things will work out. There are some fantastic areas of opportunity. It does not eliminate the underlying structural growth of many of these companies.

For Alibaba, it doesn’t matter how you attack her. There is value in it. It is only a matter of time before it is reflected in the share price again. We still consider it a basic business for e-commerce, and putting a sensitive multiple on it means that everything else is free. This is the value of it. Will it work in the next few months? I do not know. But we see a lot of value.

Was there a catalyst to get regulators to act now? Was it IPO Ant Group?

That would be pure speculation on my part. I do not know. IPO Ant is separate. Never underestimate the interests gained in China. The banking sector is almost exclusively state-owned and would be reasonably happy to flap its wings. The stark reality is that, objectively, he didn’t seem to be playing on an equal playing field. That was the reason why this push took place.

We have been told that Alibaba is not the only company with exclusive agreements.

Not. Other people do it in other places in other countries in other situations. But I think in the long run it just means that the growth delta is a little smaller. (Alibaba) can beat the quality of services. It’s quite competitive. This is her irony. The absolute competitiveness of this fact led to the regulation of antitrust. Up-and-coming – JD.com and PDD – if you can, bet the bottom dollar will do the same.

Then do regulators only target Alibaba?

The standard practice I have noticed anyway in many of these cases is like the Chinese saying, in which you throw a pebble into a pond and everyone notices the waves. In other words, there is an example to be made here and everyone should stand up and observe. I don’t think it’s specifically related to Jack, but if the collateral benefit is to curb it, that’s an added benefit. But it applies throughout the sector.

But you have to be careful. Because it has been a wonderful innovation laboratory globally. In a country that wants to prove its credentials for innovation, this is an area it can clearly point to. So there is definitely a balance.

What effect does this have on other Chinese internet stocks?

Clearly, competitors benefit from this if you think Alibaba will have its wings cut off. JD and PDD are the two obvious ones. There is concern that this could affect local service companies, for example

Meituan Dianping

(3690. Hong Kong). They are leaders in local services (such as food delivery) and compete head-on with Ele.me, which is Alibaba’s local services business. And Meituan is partially owned by

Tencent Holdings

(700: Hong Kong).

It became clear to me that I was watching games that Tencent’s tentacles were everywhere or rather the penguin’s fingerprints were everywhere. There are a lot of potential areas that could be under the microscope.

Ant IPO is an excellent IPO, but not an excellent investment.

Why do you say that?

Hype, enthusiasm. The IPO until it worked would work very well. Everyone was very excited about it, everyone was in a hurry to look for stock. But the monetization aspect of fintech is harder than people think, especially if fintech boys have to play by the same set of rules.

Where else are you looking in the world?

For e-commerce? Obviously, India is a big one, but the ability to participate directly in it is very limited, because those who face pure India are private or part of larger companies. In Poland,

Allegro

(ALE.POLAND) is a simple independent e-commerce company. In Russia,

Ozone Holdings

(OZON) listed. Again, it is an independent e-commerce business, quite simple.

Then it happens what happens in Southeast Asia and who will win there. Shopee [the ecommerce business that is part of online marketplace

Sea

(SE)] is headquartered in Singapore and most of their profitability comes from Taiwan, but their footprint is in Southeast Asia. What’s impressive is how well they did in Taiwan. But there are a number of unicorns [in Southeast Asia] who are involved in e-commerce and local services, especially Lazada, which is partly owned by Alibaba.

SEA is an excellent business. Our concern is that the gaming business is based on a very small set of games. And then there is the evaluation. SEA did very well, grew very fast, but at an enterprise value 10 times higher than sales, right? Who knows. Having a huge weight because it worries me.

But outside of e-commerce? Do you have actions to see?

We like BTPS, [which is 70% owned by

BTPN

] in Indonesia. It is a group loan model based on women, so it borrows groups of women. Everyone is jointly and severally liable for loans, so you only meet your friends who are trustworthy. It is for productive use only. So, if you want to install a stall, that’s why you get the loans. Along with this comes a lot of financial education. He is very active for these women. It was an excellent stock for us. During the pandemic, the stock price halved, but rose immediately.

One of our long-term holdings is in South Africa,

Transaction capital

(TCP), a company that lends to minibus taxi operators. This is how people travel to South Africa if they can’t afford Uber, taxis or cars. If you are in a city and need to start working, look for one of these taxis. They are managed individually by the owner. These guys borrow them. I keep track of where the buses are so they know where the warranty is and if there is a problem. Is the operator ill or is the cab defective? They will receive help or fix it. He is very active. It was a very positive experience for us to be invested in this company.

Write to Liz Moyer at [email protected]