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The Ant Group headquarters in Hangzhou, Zhejiang province, eastern China.
STR / AFP via Getty Images
Investors stopped breathing on Monday after selling shares in
Alibaba Group Holding
(ticker: BABA), the Chinese e-commerce giant recently under antitrust scrutiny. The stock traded steady after a 13% slippage over two sessions.
Danton Goei, global portfolio manager at Davis Advisors, is betting on a recovery towards 2021. “Government action does not really affect 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 sister financial company Ant Group, whose successful IPO was canceled at the last minute in early November; and its founder, Jack Ma. Of the three, Alibaba’s problems seem the least serious. A concise December 24 announcement by the State Administration for Market Regulation indicated that the company’s goal was to “choose one of two”, that is, to force traders to sell only on Alibaba, rather than competitors like
JD.com
(JD) or
Pinduoduo
(PDD).
This should be no more than a coup d’état for e-commerce commerce and leave businesses growing, like cloud computing, completely unmolested, says Goei. The authorities’ most likely follow-up, cracking down on the loss leader’s pricing, falls into the same category.
Ant Group’s challenges are more serious. His IPO was pulled after the authorities questioned his most profitable practice: originating consumer loans and then selling them to banks without taking any risk or capital in his own books. A second shoe fell this weekend, when an extract from the central bank accused Ant of “having little legal knowledge and turning a blind eye to compliance requirements”.
The regulator suggested that the fintech high-flyer “return to its origins” as a simple payment network. “The main concern of regulators is that internet banking is out of control,” says Tracy Chen, global credit portfolio manager at Brandywine Global.
Ma, who until recently was a revered symbol of China’s online revolution, did his companies no “extravagant behavior,” as Chen said. He ridiculed China’s dominant state-owned banks for their “pawn shop mentality” at a recent conference with Party bigwigs, and apologized without much conviction if he did.
Alibaba still owns a third of the Ant Group. But the paper losses on the postponed IPO are more than priced in its own shares, calculates Goei. Even if Ant is cut in half from the $ 300 billion valuation it intended, that means a $ 50 billion drop in Alibaba’s stake. Alibaba’s market capitalization has fallen by more than $ 200 billion since the IPO disaster.
Concern about Chinese regulation tends to arise in waves and move from one industry to another, notes Goei. Shares of Alibaba’s co-giant
Tencent Holdings
(700: Hong Kong) were depressed for much of 2019, when the government froze approval for new video games, its biggest source of revenue. The ban was lifted and Tencent gained almost 40% this year.
There is a chance that sentiment has shifted more widely against business in Beijing’s opaque powerhouses, and Jack Ma will end up as “the chicken you kill to scare the monkey,” says Chen. But it is unlikely. Alibaba may now be China’s largest employer, she notes, and a beloved national champion, once it is a bit down. “Ultimately, China wants to win the technological war and needs Alibaba to do that,” she says
Then there is the evaluation argument. Aaron Kessler, an analyst at Raymond James, estimates that Alibaba is trading at 16 times the expected profit for 2021, attractive to a company that grew its revenue by 30% and Ebitda by 28% year-over-year in the last quarter. “We remain buyers of BABA at current levels,” he says.