Jack Ma, founder of Alibaba Group Holding, at the company’s annual party in 2017.
STR / AFP through Getty Images
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“Maybe he was grabbed by the party and maybe he’s in a dark room right now,” the head of the Chinese research group told me last week. He was talking about
Alibaba
founder Jack Ma, the richest man in China, who has not been seen in weeks.
By “party,” he wasn’t referring to the festive way, like Alibaba’s annual party in 2017, when Ma, dressed in a Michael Jackson gold mask, spun a motorcycle on stage, then jumped to some dance moves – especially pelvic. He was referring to the Communist Party of China, which Ma seems to have crossed and whose regulators have now come after his companies.
Sounds bad. But it’s 2021: bond yields are weak, Bitcoin has just surpassed $ 40,000, and investors, like Michael Jack-Ma, are heading for anything with rapid revenue growth. Of course, the shares of Alibaba Group Holding (marker: BABA) were sold. But in a FactSet poll, a whopping 53 out of 54 analysts covering Alibaba say it’s the right time to buy. It is?
Let’s start with some positive aspects. Alibaba is an impressive company with an active user base, which is more than twice the size of the US population. It is more dominant in e-commerce in China than
Amazon.com
(AMZN) is in the US and is more profitable than Amazon or
Walmart
(WMT). Its main retail business is Alibaba.com, which connects manufacturers with wholesale buyers worldwide; Taobao.com, an intermediary for buyers and sellers such as
eBay
(EBay); and Tmall.com, a marketplace for global brands such as
NIKE
(OF).
“China has these technology companies that are not … copies of the US equivalent,” says Leland Miller, CEO of China Beige Book, the researcher I mentioned. “They are truly innovative, spectacular companies.”
Alibaba has complementary companies covering cloud computing, transportation logistics and more. He created Alipay to increase confidence in online payments, then started it in 2011. Today, Alipay is called Ant Group, it is much larger than
PayPal Holdings
(PYPL) and moved into loans, investments and insurance.
Ant Group was due to go public last year. Some bulls have predicted a market value of $ 300 billion, compared to the recent $ 617 billion for Alibaba and $ 414 billion for
JPMorgan Chase
(JPM). Alibaba owns a third of the Ant Group.
In November, the share offer was abruptly suspended. Near Christmas, Chinese regulators announced an antitrust investigation into Alibaba, as well as a look at setting new rules for Ant Group.
Ma, worth more than $ 40 billion, has since missed television appearances. He has not appeared in public since criticizing state-owned banks in China for operating with a “pawn” mentality in an October speech.
“Jack has a lot of problems, both personally and with his company,” Miller told the China Beige Book. He may have “kept his head down wisely” or may have been detained for “not paying homage to the party,” says Miller.
Alibaba did not immediately answer questions about Ma’s whereabouts.
It’s not just about appearances. Alibaba’s financial business has long been free to pay depositors more than China’s tightly regulated banks, Miller notes.
“All this money would come screaming from the state system … and drive the state bankers crazy,” he says. “Here was Jack Ma, who was making a fortune, stealing their deposits, not having to do anything.” Bankers facing declining deposits have called on Beijing.
Miller, a former company Lawyer advising speculative funds on China, founded China Beige Book in 2010 to address two issues. Official economic data coming from China is not reliable or complete, he says. Its workers collect data through a survey of Chinese companies: private and state-owned, large and small, coastal and rural, domestic and global.
What do I see now? China’s official story of a recovery from an economic downturn is correct, unprecedented figures confirm it, but the recovery is not particularly strong and is driven too much by rising production and not enough by demand from private households.
Ma’s curious case illustrates the unique risks of investing in China. The government can change the rules quickly and without warning. I could reappear weeks or months from now, with Alibaba suddenly restructured and the Ant Group under new government control.
There is a separate risk for investors buying shares listed in the US. They raise equity in an offshore vehicle that invests in Alibaba, not Alibaba itself. “There’s nothing to say that the Chinese government couldn’t just break that connection,” says Miller.
Trade tensions between the US and China could one day leave China looking for new means of retaliation, including with US investors in Chinese companies. So how will the transaction go in a new US administration?
There is a political sentiment on both sides against a weakening of relations, says Miller, adding that “tensions … are not just here to stay, but will get considerably worse.”
Where will these Alibaba investors leave? One of the rarest things in the investment universe is now a fast-growing company that trades at a modest price. Tesla is approaching a quarter of the increase in car deliveries, but is trading more than 100 times the free cash flow the company expects to generate in a few years – in 2024. Amazon seems much more reasonable at prices 15 times higher greater than the projected free cash flow year. It is estimated that far from being just educated assumptions, of course. However, Alibaba is 11 times closer to the free cash it sees generating in 2024.
This is a tempting discount for such a global company. But it is best to wait until Ma reappears, with or without dance shoes, before deciding whether the actions are still worth the risk.
Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to Barron’s Streetwise podcast.