Alibaba may withstand China’s scrutiny, says VanEck’s Semple

Last week, the People’s Bank of China (PBOC) announced that it had initiated an anti-monopoly investigation. Analysts believe it is looking into whether Alibaba requires sellers on its platform to sell exclusively there and not through competitors, a practice known as “choosing one of two”.

Regulators are also looking at Ant Group, a fintech company with a third of Alibaba. They are examining whether to treat Ant more like a bank and regulate it that way. Ant recently canceled what was expected to be the largest initial public offering of all time.

Alibaba’s shares have gained nearly 10% this year, compared to the 16.3% gain on the S&P 500 index.

David Semple, $ 2.6 billion portfolio manager

VanEck Emerging Markets Fund

(GBFAX), says Alibaba can outperform others in product and service quality, even if regulators cut their wings.

He recently spoke to Barron’s about his views on Alibaba and other Chinese e-commerce actions and other investment ideas. An edited version of the conversation follows.

Barron’s: What are China’s regulators looking at?

David Semple: It is like many other sectors in China where regulatory development has not kept pace with economic development. Essentially, entrepreneurship invades the gray areas and catch up is more of a black line. Some people will be on the wrong side of this; some practices will be on the wrong side of it, and that’s what they’re organizing.

It was kind of an open secret in the industry that there were some practices that went beyond the limit, and I think that’s what maybe is being targeted. It’s more about the industry’s best development and consumer protection.

I don’t think it is irrelevant that Jack Ma was visible until very recently and now he is invisible. Clearly, much of fintech development was an area where PBOC was uncomfortable, but it needed a little more political influence to really start acting and regulating better. People are very concerned about these regulations happening and the spotlight on them. But things will calm down. There are some fantastic areas of opportunity. This does not detract from the underlying structural growth of many of these companies.

For Alibaba, it doesn’t matter how you attack it. There is value in that. It is just a matter of time about how long it will take for this to be reflected in the stock price. We still think it’s a big e-commerce business, and putting a sensible multiple in it means that everything else is free. That is the value of that. Will it work in the coming months? I do not know. But we see a lot of value.

Was there a catalyst to get regulators to act now? Was it the IP of Ant Group?

That would be pure speculation on my part. I do not know. Ant IPO is separate. Never underestimate the interests invested in China. The banking sector is almost exclusively state-owned, and they would be reasonably happy to cut their wings. The harsh reality is that, objectively, it didn’t look like he was playing on equal terms. That is why there was this setback.

Alibaba is not the only company with exclusive agreements, we were told.

No. Other people do it in other places, in other countries, in other situations. But I think, in the long run, that just means that the growth delta is a little smaller. (Alibaba) can beat the quality of service. It is very competitive. That is the irony of that. The sheer competitiveness of this has led to antimonopoly regulation. Newbies – JD.com and PDD – if they could, you can bet they’ll do that too.

Are regulators just targeting Alibaba, then?

The standard practice that I have observed in many of these cases is like the Chinese saying, where you throw a rock in a lake and everyone notices the ripples. In other words, there is an example to be given here and everyone should sit and pay attention. I don’t think it’s specifically related to Jack, but if the collateral benefit is controlling it, it’s an additional benefit. But this applies to the entire industry.

But you have to be careful. Because this has been a wonderful laboratory for global innovation. In a country that is eager to prove its credentials for innovation, this is an area that can clearly be pointed out. So there is definitely a balance.

What effect does this have on other Internet stocks in China?

Clearly, contenders benefit from this if you think Alibaba will have its wings clipped. JD and PDD are the two most obvious. There was a concern that this could affect local service companies, for example

Meituan Dianping

(3690.Hong Kong). They are the leaders in local services (such as food delivery) and compete face to face with Ele.me, which is Alibaba’s local services business. And Meituan is partly owned by

Tencent Holdings

(700: Hong Kong).

Looking at the games, it became clear to me that Tencent’s tentacles are everywhere, or rather, the penguin’s footprints are everywhere. There are many potential areas that could be under the microscope.

Ant IPO is a great IPO, but not a big investment.

Why you say that?

The exaggeration, the excitement. The IPO until it didn’t work would do very well. Everyone was super excited about it, everyone was fighting for actions. But the monetization aspect of fintech is more difficult than people think, especially if the fintech guys have to play by the same set of rules.

Where else are you looking in the world?

For e-commerce? Clearly, India is a big problem, but the ability to participate directly in it is very limited, because companies purely focused on India are either private or part of larger companies. In Poland,

Allegro

(ALE.POLAND) is a simple autonomous e-commerce company. In Russia,

Ozon Holdings

(OZON) listed. Again, it is a very simple stand-alone e-commerce business.

Then there is what is happening in Southeast Asia and who will win there. Shopee [the ecommerce business that is part of online marketplace

Sea

(SE)] is based in Singapore and most of its profitability comes from Taiwan, but its presence is in Southeast Asia. What is impressive is how well they did in Taiwan. But there are a number of unicorns [in Southeast Asia] who are involved in e-commerce and local services, in particular Lazada, which is owned by Alibaba.

SEA is a great deal. The concern we have is that the gaming business is based on a very restricted set of games. And then there is the evaluation. SEA is doing very well, it grew very fast, but at a value 10 times higher than sales, right? Who knows. Having a huge weight on this worries me.

And outside of e-commerce? Any action to look at?

We like BTPS, [which is 70% owned by

BTPN

] In Indonesia. It is a group loan model based on women, so they lend to groups of women. They are all jointly and severally liable for the loans, so you will only be meeting with your trusted friends. It is for productive uses only. So, if you want to open a tent, that’s what you get loans for. With that, a lot of financial education comes. It is very empowering for these women. It is a great stock for us. During the pandemic, the stock price fell by half, but rose again.

One of our long-term holdings is in South Africa,

Transaction Capital

(TCP), a company that serves minibus and taxi operators. That’s how people get around South Africa if they can’t afford Uber, taxis or cars. If you are in a municipality and need to work, look for one of these taxis. They are operated individually by the owner. These guys lend them. They track the location of the buses to see where the warranty is and if there are any problems. Is the operator sick or is the cabin broken? They will get help or fix it. It is very empowering. It has been a very positive experience for us to invest in this company.

Write to Liz Moyer at [email protected]