Jack Ma, founder of Alibaba Group Holding, at the company’s 2017 annual party.
STR / AFP via Getty Images
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“He may have been grabbed by the party and may be in a dark room now,” the head of a Chinese research group told me last week. He was talking about
Alibaba
founder Jack Ma, the richest man in China, who has not been seen for weeks.
By “party”, he did not refer to the festive type, such as Alibaba’s annual party in 2017, when Ma, dressed in Michael Jackson in a golden mask, sped up a motorcycle on stage and then jumped for a few dance steps – mainly movements pelvic. He was referring to the Communist Party of China, which Ma apparently crossed over and whose regulators are now after his companies.
That looks like a bass player. But it’s 2021: bond yields are scarce, Bitcoin has just reached $ 40,000 and investors are investing, like Michael Jack-Ma, in anything with rapid revenue growth. Of course, Alibaba Group Holding shares (ticker: BABA) were sold. But in a FactSet survey, a notable 53 of the 54 analysts covering Alibaba say that now is a good time to buy. It is?
Let’s start with some good points. Alibaba is an impressive company, with an active user base twice as large as the population of the United States. It is more dominant in e-commerce in China than
Amazon.com
(AMZN) is in the U.S. and is more profitable than Amazon or
Walmart
(WMT). Its main retail businesses are Alibaba.com, which connects manufacturers to wholesale buyers worldwide; Taobao.com, an intermediary for buyers and sellers, as
eBay
(EBAY); and Tmall.com, a market for global brands like
Nike
(NKE).
“China has these technology companies that are not … copies of equivalents in the United States,” says Leland Miller, CEO of China Beige Book, the researcher I mentioned. “They are truly innovative and spectacular companies.”
Alibaba has complementary businesses that cover cloud computing, shipping logistics and more. Created Alipay to increase confidence in online payments and spun off in 2011. Today, Alipay goes by the name of Ant Group, it is much bigger than
PayPal Holdings
(PYPL), and moved to loans, investments and insurance.
The Ant Group was set to go public last year. Some bulls predicted a market value of US $ 300 billion, against recent US $ 617 billion for Alibaba and US $ 414 billion for
JPMorgan Chase
(JPM). Alibaba owns a third of the Ant Group.
In November, the stock offering was suddenly suspended. Near Christmas, China’s regulators announced an antitrust investigation of Alibaba, as well as a study on the establishment of new rules for the Ant Group.
Ma, who is worth more than $ 40 billion, has since missed scheduled television appearances. He has not appeared in public since he criticized China’s state-owned banks for operating with a “pawnshop” mentality in a speech in October.
“Jack is in a lot of trouble, both personally and in terms of his company,” says Miller, of China Beige Book. He may be “wisely keeping his head down” or he may have been arrested for “not paying tribute to the party,” says Miller.
Alibaba did not immediately answer questions about Ma’s whereabouts.
It is not just about appearances. Alibaba’s financial businesses have long been free to pay more to depositors than China’s strictly regulated banks, notes Miller.
“All of that money would scream out of the state system … and drive state bankers crazy,” he says. “Here was Jack Ma, making a fortune, stealing his deposits, without having to do anything.” Bankers facing reduced deposits complain about Beijing.
Miller, a former corporate lawyer who advises hedge funds in China, founded the China Beige Book in 2010 to solve two problems. Official economic data from China is not reliable or complete, he says. Its workers collect data by researching Chinese companies: private and state, large and small, coastal and rural, domestic and global.
What do they see now? China’s official story about recovering from an economic crisis is accurate, the clear numbers confirm, but the recovery is not particularly strong and is driven much by increased production, not enough by the demand of private households.
Ma’s curious case illustrates the unique risks of investing in China. The government can change the rules quickly and without notice. Ma may reappear weeks or months from now, with Alibaba suddenly restructured and the Ant Group under new government control.
There is a separate risk for investors who buy shares listed in the United States. They obtain a stake in an offshore vehicle that invests in Alibaba, not Alibaba itself. “There is nothing to say that the Chinese government could not simply sever this link,” says Miller.
Trade tensions between the U.S. and China may one day leave China in search of new means of retaliation, including with American investors in Chinese companies. So, how will trade do under a new US administration?
There is a political feeling on both sides against a slowdown in relations, says Miller, adding that “the tensions … are not just here to stay, but are going to get considerably worse.”
Where does this leave potential Alibaba investors? One of the rarest things in the investment universe is now a fast-growing company, trading at a modest price. Tesla is coming out of a smaller quarter for growth in auto shipments, but negotiating more than 100 times the free cash flow the company hopes to generate years from now – in 2024. Amazon’s price seems much more reasonable , 15 times higher than the projected free cash flow for the year. Such exaggerated estimates are just well-founded assumptions, of course. Still, Alibaba costs about 11 times the free cash it is expected to generate in 2024.
It is a tempting discount for a company so world champion. But it is better to wait until Ma reappears, with or without his dancing shoes, before deciding whether the actions are still worth the risk.
Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.