The Ant Group headquarters in Hangzhou, in China's eastern Zhejiang province.
STR/AFP via Getty ImagesInvestors took a breather Monday from dumping shares in Alibaba Group Holding (ticker: BABA), the Chinese e-commerce giant newly under antitrust scrutiny. The stock traded flat after a 13% skid in two sessions.
Danton Goei, global portfolio manager at Davis Advisors, is betting on a rebound heading into 2021. “The government’s action doesn’t really impact Alibaba’s overall prospects,” he says. “We think the stock is very cheap now.”
The price plunge reflected official tensions surrounding three related but distinct entities: Alibaba; its sister financial company Ant Group, whose blockbuster IPO was canceled at the last minute in early November; and their joint founder Jack Ma. Of the three, Alibaba’s problems look the least severe. A terse Dec. 24 announcement from the State Administration for Market Regulation indicated it was targeting the company’s “choosing one from two” practice—i.e. forcing merchants to sell only on Alibaba rather than competitors like JD.com (JD) or Pinduoduo (PDD).
That should deal no more than a glancing blow to the core e-commerce trade, and leave growth businesses like cloud computing completely unmolested, Goei says. Authorities’ most likely follow-up, cracking down on loss-leader pricing, falls in the same category.
Ant Group’s challenges are more serious. Its IPO was pulled after authorities questioned its most profitable practice: originating consumer loans, then selling them on to banks without carrying any risk, or capital, on its own books. A second shoe dropped this weekend as a central bank statement accused Ant of “having little legal knowledge and turning a blind eye to compliance requirements.”
The regulator suggested the fintech high-flyer “return to its origins” as a simple payments network. “The regulators’ principal concern is that internet banking is out of control,” says Tracy Chen, a portfolio manager for global credit at Brandywine Global.
Ma, who until lately was a revered symbol of China’s online revolution, has not done his companies any favors with “flamboyant behavior” as Chen puts it. He famously ridiculed China’s dominant state banks for their “pawn shop mentality” at a recent conference with Party bigwigs, and has apologized half-heartedly, if at all.
Alibaba still owns a third of Ant Group. But its paper losses on the postponed IPO are more than priced into its own stock, Goei figures. Even if Ant gets marked down by half from the $300 billion valuation it was aiming for, that means a drop of $50 billion in Alibaba’s stake. Alibaba’s market cap has shed more than $200 billion since the IPO debacle.
Chinese regulatory concern tends to come in waves and move from industry to industry, Goei notes. Shares in Alibaba’s co-behemoth Tencent Holdings (700: Hong Kong) were depressed for much of 2019 as the government froze approval of new video games, its biggest revenue source. The ban was lifted, and Tencent gained nearly 40% this year.
There is a chance that sentiment has shifted more broadly against business in Beijing’s opaque precincts of power, and Jack Ma will end up as “the chicken you kill to frighten the monkey,” Chen says. But it’s unlikely. Alibaba may now be China’s biggest employer, she observes, and a cherished national champion, once it’s shaved down to size a bit. “China ultimately wants to win the tech war, and it needs Alibaba to do it,” she says
Then there is the argument from valuation. Raymond James analyst Aaron Kessler figures Alibaba is trading at 16 times expected 2021 earnings, compelling for a company that grew revenue by 30% and Ebitda 28% year-on-year in the latest quarter. “We remain buyers of BABA at current levels,” he says.
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