At the company’s annual party in 2017, Jack Ma, founder of Alibaba Group Holding.
STR / AFP via Getty Image
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The head of a Chinese research group told me last week, “He may have been caught by the party, and he may be in a dark room right now.” he was talking
Alibaba
China’s richest person, founder Jack Ma, who hasn’t been seen in weeks.
By “party”, the sort of celebration it didn’t mean, like Alibaba’s annual party in 2017, was when Ma dressed up as a gold mask with Michael Jackson, reviving a motorcycle stage, then some Closed for dance moves – mostly pelvic thrusting. He meant China’s ruling Communist Party, which Ma has clearly surpassed, and whose regulators now come after his companies.
It seems slow. But this is 2021: Bond yields are meager, Bitcoin tops just $ 40,000, and investors are doing anything with rapid revenue growth like Michael Jack-Ma. Certainly, shares of Alibaba Group Holding (ticker: BABA) have sold out. But in a FactSet survey, 53 out of 54 analysts covering Alibaba say now is a good time to buy. Is this?
Let’s start with something positive. Alibaba is an influential company, with an active user base that is twice that of the US population. It is more effective in e-commerce than China
Amazon.Com
(AMZN) is in the US, and is more profitable than Amazon or
Walmart
(WMT). Its main retail businesses are 0, which connects manufacturers with wholesale buyers worldwide; Taobao.com, for buyers and sellers in a way
EBAY
(Ebay); And a market for global brands such as Tmall.com
Nike
(NKE).
The researcher I mentioned, Liar Miller, CEO of China Beige Book, “China has these technology firms … which are not copies of US counterparts”. “They are truly innovative, brilliant firms.”
Alibaba has complementary side businesses to cover cloud computing, shipping logistics and more. It created Alipay to increase confidence in online payments, then discontinued it in 2011. Today, the ant group is known as Alipay, much more than
PayPal Holdings
(PYPL), and has moved into lending, investment and insurance.
The ant group was scheduled to go public last year. Some bulls predicted a market value of $ 300 billion for Alibaba, most recently $ 617 billion and $ 414 billion.
JPMorgan Chase
(JPM). One third of the ant group belongs to Alibaba.
In November, the stock offering suddenly caught up. Near Christmas, China’s regulators announced an antitrust investigation into Alibaba, as well as a look at setting up new rules for the ant group.
Ma, worth more than $ 40 billion, has since missed out on scheduled television appearances. He has not publicly changed since criticizing China’s state-run banks for acting with a “pawn shop” mentality in a speech in October.
“Jack is in a lot of trouble personally and in the context of his company,” says Miller in the China Beige Book. He may “prudently put his head down,” or he may not “pay homage to the party,” Miller says.
Alibaba did not immediately respond to questions asked about Ma’s whereabouts.
It is not just about appearances. Alibaba’s financial businesses have long had a free hand to pay more depositors than closely regulated banks, Miller notes, to China.
He says, “All this money will go out of the state system … and this drives the bankers of the state crazy.” “Here Jack Ma, was making a fortune, stealing his deposit, doing nothing.” Bankers facing shrinking deposits have called for Beijing.
Miller, a former corporate A lawyer advising hedge funds on China established the China Beige Book in 2010 to address two problems. China’s official economic data is not reliable or complete. Their activists gather data by surveying Chinese companies: private and state-owned, large and small, coastal and rural, domestic and global.
What do they see now? China’s official story about recovering from the economic downturn is accurate, the uneventful numbers are confirmed, but the recovery is not particularly strong, and it is driven by too much output, and not enough from private domestic demand.
Ma’s curious case illustrates the unique risks of investing in China. The government can change the rules quickly and without warning. Ma may reappear a few weeks or months from now, with Alibaba abruptly restructuring and ant group under new government control.
There is a distinct risk for investors buying US-listed shares. They get equity in an offshore vehicle that invests not in Alibaba but in Alibaba. “Nothing says the Chinese government just can’t extend that link,” Miller says.
Trade tensions between the US and China may one day leave China in search of new means of retaliation, including US investors in Chinese companies. So, how will business fare under a new US administration?
There is political sentiment on both sides against softening relations, Miller says, “Tensions … are not only here to stay, but are going to get worse.”
Where will alibaba investors get that holiday? One of the rarest things in the investment universe is now a fast growing company trading at a nominal price. Tesla is coming as a quarter-hummer to increase car shipments, but it trades free cash flow more than 100 times, with the company expected to be several years from now in 2024. Amazon looks much more reasonably priced at 15 times the year’s estimated free cash flow. The estimates so far are only educated guesses, of course. Nevertheless, Alibaba goes close to 11 times the free cash generated in 2024.
This is an attractive discount for such a world-beating company. But it is best to wait until Ma can wait again with or without her dance shoes, before deciding if the shares are still worth the risk.
Write Jack Half at [email protected] Follow her on twitter And subscribe to your Baron’s Streetwide podcast.
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