Alibaba can withstand China’s investigation, says VanEck’s Semple

Last week, the People’s Bank of China (PBOC) announced that it had started an anti-monopoly investigation. Analysts think it is investigating whether Alibaba requires sellers on its platform to sell exclusively there and not through competitors, a practice known as ‘choosing between two’.

Regulators are also looking to Ant Group, a fintech company third-party owned by Alibaba. They are investigating whether they should treat Ant more like a bank and regulate it that way. Ant recently canceled what was expected to be the largest IPO ever.

Alibaba shares are up nearly 10% this year, compared to the 16.3% gain in the S&P 500 index.

David Semple, $ 2.6 billion portfolio manager

VanEck Emerging Markets Fund

(GBFAX), says Alibaba can beat others on product quality and service, even as regulators cut their wings.

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

Barron’s: What are the Chinese regulators looking at?

David Semple: It is like many other sectors in China where regulatory development has failed to keep up with economic development. In essence, entrepreneurship invades gray areas and then catching up is more of a black line. Some people will be on the wrong side of that; some practices will be on the wrong side of that, and that’s what they clean up.

It was a bit of an open secret in the industry that there were certain practices that pushed the boundaries, and I think that might be the target. It is more about the best development of the industry and the protection of consumers.

I don’t think it’s irrelevant that Jack Ma was visible until recently and now he’s invisible. Obviously, a lot of the fintech development was areas where the PBOC felt uncomfortable, but needed a little more political leverage to really get started and better regulate. People get very excited about this regulation and the spotlight on it. But things will settle down. There are some great options. It does not take away from the underlying structural growth of many of these companies.

For Alibaba, it doesn’t matter which way you attack it. There is value in it. It’s just a matter of time as to how long it takes for that to come back into the stock price. We still think it’s a great core ecommerce business and if we make a wise multiple of that it means pretty much everything else is free. That’s the value of it. Will it perform in the coming months? I do not know. But we do see a lot of value.

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

That would be pure speculation on my part. I do not know. The Ant IPO has been separated. Never underestimate the vested interests in China. The banking sector is almost exclusively in the hands of the state, and they would be reasonably happy to spread its wings. The grim reality is that objectively it didn’t seem like it played on a level playing field. That’s why there has been this backlash.

Alibaba isn’t the only company with exclusivity deals, we’ve been told.

No. Other people do it in other places in other countries in different situations. But I think in the long run it just means that the delta of growth is a little less. (Alibaba) can beat on service quality. It’s quite competitive. This is the irony of it. Its competitiveness alone led to the anti-monopolistic regulation. The newbies – JD.com and PDD – if they could, bet your lowest dollar they will too.

Are regulators then only focused on Alibaba?

The standard practice I’ve observed in many of these cases is like the Chinese saying, where you throw a pebble into a pond and everyone notices the ripples. In other words, there is an example to make here and everyone should sit up and pay attention. I don’t think it has to do with Jack specifically, but if the secondary benefit is to keep him in check, that’s an added benefit. But it applies to the entire sector.

But you have to be careful. Because this has been a wonderful innovation laboratory worldwide. In a country eager to prove its credentials for innovation, this is one area it can clearly point to. So there is certainly a balance.

How does this affect other Chinese internet stocks?

Obviously, the contenders take advantage of this if you think Alibaba will cut its wings. JD and PDD are the two obvious ones. There were concerns that this could affect local service providers, for example

Meituan Dianping

(3690 Hong Kong). They are the leaders in local services (such as food delivery), competing with Ele.me, Alibaba’s local service provider. And Meituan is partially owned

Tencent Holdings

(700: Hong Kong).

When I look at gaming, it has become 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.

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

Why do you say that?

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

Where else in the world are you looking?

For e-commerce? Obviously, India is a big one, but the opportunity to directly participate in it is very limited as the pure India focused companies are private or part of bigger companies. In Poland,

Allegro

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

Ozone Holdings

(OZON). Again, it’s a pretty straightforward, standalone ecommerce business.

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

Sea

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

SEA is a great company. The concern we have is that the gaming industry is based on a very limited set of games. And then there is the appreciation. SEA has done very well, has grown very quickly, but at 10x the business value for sale, is that right? Who knows. That I have enormous weight in it worries me.

What about outside ecommerce? Are there any stocks to watch?

We love BTPS, [which is 70% owned by

BTPN

] in Indonesia. It’s a female-based group loan model, so they lend to groups of women. They are all jointly and severally liable for the loans, so you will only get together with your friends who are trustworthy. It is for productive use only. So if you want to set up a booth, that’s what you get the loans for. There is a lot of financial education involved. It is very possible for these women. It has been a great stock for us. During the pandemic, the stock price halved, but it immediately went up again.

One of our long-term investments is located in South Africa,

Transaction capital

(TCP), a company that provides loans to minibus taxis. That’s how people move around South Africa when they can’t afford Uber, taxis or cars. If you are in a township and you have to work, find one of these taxis. They are managed by the individual owner. These guys lend to them. They keep track of where the buses are so they know where the collateral is and if there is a problem. Is the operator ill or is the cabin defective? They will get help or fix it. It is very possible. It has been a very positive experience for us to invest in this company.

Write to Liz Moyer at [email protected]