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Alibaba Group Holding office building in Shanghai, China.
Qilai Shen / Bloomberg
Chinese regulators put on
Alibaba Group Holding
(ticker: BABA) and other major tech companies last month informed that they would be under scrutiny for their business practices.
On Thursday, China’s main market regulator said it was investigating Alibaba’s use of exclusivity arrangements with merchants selling on its e-commerce platform, thus avoiding them through rivals such as
JD.com
(JD).
Investors reacted strongly to the news, causing Alibaba to drop a whopping 17.5% in US trade. It is the largest percentage decline for the stock since it went public in 2014. “We think it’s a bit of an overreaction,” Raymond James told analyst Aaron Kessler. Barron’s.
Alibaba acknowledged the notice from the State Administration for Market Regulation, which said China is investigating antimonopoly laws. Alibaba said it would cooperate with the investigation and its business “remains normal.”
Beijing also said it would meet with Alibaba unit Ant Group over financial regulations. Last month, Ant postponed its highly anticipated IPO. In his own statement, Ant said, “We will seriously study and strictly comply with all legal requirements, and we will make every effort to fulfill all related work.”
The sharp sell-off could surprise investors. As in the US, Chinese regulators have been scrutinizing giant tech companies like Alibaba over concerns about their rising power. Google’s
Alphabet
(GOOGL) and
Facebook
(FB) are each facing multiple lawsuits over their competitive practices.
Last month, China published draft antitrust rules designed to prevent popular digital sites from using their position to coerce traders into exclusivity schemes and other monopolistic practices.
Raymond James Kessler said the tricky part will be quantifying the hit by any revenue. And the Chinese regulators are likely to go after other companies, he said.
Analysts estimate that Alibaba’s revenue will be $ 106 billion in fiscal 2021, ending in March, according to FactSet. That would be an increase of 49% over fiscal year 2020. And Kessler said Barron’s e-commerce sales for the industry are growing by 20%, which estimates growth of 24% for Alibaba in fiscal year 2021. Alibaba’s practices “don’t appear to be hurting competitors,” he said.
Alibaba owns one-third of fintech company Ant, which was on deck last month to raise $ 34 billion on its IPO, but canceled its debut last-minute after controlling shareholder Jack Ma was called to a meeting with regulators.
Ant executives will meet again with regulators in the coming days. The People’s Bank of China issued a statement saying that the meeting was to “guide Ant Group in implementing financial supervision, fair competition and protecting the legitimate rights and interests of consumers,” Reuters reported in China.
In a note on Thursday, Kessler said that “the timing of the IPO remains highly uncertain.” Ant could be “required to make concessions to the Chinese government as well as tighter regulatory scrutiny.”
Write to Liz Moyer at [email protected]