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Ant Group is headquartered in Hangzhou, eastern China, Zhejiang Province.
STR / AFP through Getty Images
Investors were reassured by the dumping of shares at
Alibaba Group Holding
(ticker: BABA), the Chinese e-commerce giant recently under antitrust control. The shares traded flat after a 13% slip in two sessions.
Danton Goei, global portfolio manager at Davis Advisors, is betting on a comeback in 2021. “Government action has no impact on Alibaba’s overall outlook,” he says. “We think the stock is very cheap now.”
The drop in prices reflected official tensions around three related but distinct entities: Alibaba; its financial company Ant Group, whose blockbuster IPO was last canceled in early November; and their joint founder Jack Ma. Of the three, Alibaba’s problems seem to be the least serious. A concise December 24 announcement from the State Market Regulation Administration indicated that it was aimed at the practice of “choosing one of the two” of the company – that is, forcing traders to sell only on Alibaba, rather than competitors such as
JD.com
(JD) or
Pinduoduo
(PDD).
That should be nothing more than a blow to core commerce with e-commerce and leave companies growing, such as cloud computing, completely untouched, Goei says. The most likely pursuit of the authorities, the reduction of prices for loss leaders, falls into the same category.
The challenges of the Ant Group are more serious. His IPO was eliminated after the authorities questioned his most profitable practice: obtaining consumer loans, then selling them to banks without carrying any risk or capital, in his own books. A second shoe fell this weekend, as a central bank statement accused Ant of “having little legal knowledge and closing his eyes to compliance requirements.”
The regulator suggested fintech high-flyer “go back to its origins” as a simple payment network. “The main concern of regulators is that internet banking is out of control,” said Tracy Chen, global credit portfolio manager at Brandywine Global.
Ma, who until recently was a revered symbol of China’s online revolution, has not favored companies with “extraordinary behavior,” as Chen puts it. He ridiculed China’s famous dominant state-owned banks for their “pawn mentality” at a recent conference with party grandparents and apologized halfway, if not.
Alibaba still owns a third of the Ant Group. But its paper losses on the deferred IPO are more than quoted in its own stock, Goei figures. Even though Ant is down half of the $ 300 billion valuation it was pursuing, that means a $ 50 billion drop in Alibaba’s stake. Alibaba’s market cap has fallen by more than $ 200 billion since the IPO disaster.
China’s regulatory concern tends to surge and move from industry to industry, Goei notes. Shares in co-behemoth Alibaba
Tencent Holdings
(700: Hong Kong) were depressed for most of 2019 because the government froze the approval of new video games, its biggest source of income. The ban has been lifted, and Tencent has gained almost 40% this year.
Chances are the sentiment has shifted more broadly against business in Beijing’s opaque powerhouse, and Jack Ma will end up as “the chick you kill to scare the monkey,” says Chen. But it is unlikely. Alibaba could now be China’s largest employer, she notes, and a prized national champion, once shaved a little in size. “China finally wants to win the technology war and needs Alibaba to do it,” she says.
Then there is the argument in the evaluation. Raymond James analyst Aaron Kessler calculates that Alibaba is trading with 16 times expected earnings for 2021, convincing for a company that increased revenues by 30% and Ebitda by 28% over the year in the last quarter. “We remain buyers of BABA at current levels,” he says.