Jack Ma, founder of Alibaba Group Holding, at the company’s annual party in 2017.
STR / AFP via Getty Images
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“He may have been captured by the party, and he 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 hasn’t been seen for weeks.
By ‘party’ he didn’t mean the festive kind, like Alibaba’s annual party in 2017, when Ma, dressed as Michael Jackson in a gold mask, rode a motorcycle onstage and then took off for a few dance moves – usually pelvic thrusts . He meant the ruling Communist Party of China, which Ma apparently crossed over and whose regulators are now after his companies.
That sounds bearish. But it’s 2021: Bond yields are meager, Bitcoin just topped $ 40,000, and investors like Michael Jack-Ma are pushing for anything with rapid revenue growth. Certainly, the shares of Alibaba Group Holding (ticker: BABA) have been sold. But in a FactSet poll, 53 of 54 analysts reviewing Alibaba say now is a good time to buy. Is the?
Let’s start with some positives. Alibaba is an impressive company, with an active user base more than twice the size of the US population. It is more dominant in China’s e-commerce than
Amazon.com
(AMZN) is located in the US and is more profitable than Amazon or
Walmart
(WMT). The main retailers are Alibaba.com, which connects manufacturers with wholesale buyers around the world; Taobao.com, an intermediary for buyers and sellers, such as
eBay
(EBAY); and Tmall.com, a marketplace for global brands such as
Nike
(FROM).
“China has these technology companies that are not… copies of US equivalents,” said Leland Miller, CEO of China Beige Book, the researcher I mentioned. “They are truly innovative, spectacular companies.”
Alibaba has additional side businesses in cloud computing, shipping logistics and more. It created Alipay to increase trust in online payments, then spun off in 2011. Today Alipay bears the name Ant Group, is much bigger than
PayPal Holdings
(PYPL), and has switched to borrowing, investing and insurance.
Ant Group would go public last year. Some bulls had predicted a market value of $ 300 billion, versus $ 617 billion for Alibaba and $ 414 billion for
JPMorgan Chase
(JPM). Alibaba owns one third of Ant Group.
In November, the share issue was suddenly put on hold. By Christmas, the Chinese regulators announced an antitrust investigation into Alibaba, as well as an investigation into establishing new rules for Ant Group.
Ma, worth more than $ 40 billion, has since missed scheduled TV appearances. He has not appeared in public since he criticized China’s state-owned banks during a speech in October for operating with a “pawnshop” mentality.
“Jack has a lot of problems, both personally and in terms of his business,” said Miller of China Beige Book. He could “wisely keep his head bowed,” or he could have been detained for “not paying tribute to the party,” Miller says.
Alibaba did not immediately respond to questions about Ma’s whereabouts.
It’s not all about looks. Alibaba’s financial firms have long had a free hand to pay savers more than China’s tightly regulated banks, Miller notes.
“All this money would be screaming out of the state system … and driving state bankers crazy,” he says. “Here was Jack Ma, making a fortune, stole their deposits and didn’t have to do anything.” Bankers facing declining deposits have brutally bruised Beijing.
Miller, a former company lawyer advised hedge funds on China, founded China Beige Book in 2010 to address two issues. Official economic data coming out of China is not reliable or complete, he says. Its employees collect data by researching Chinese companies: private and state-owned, large and small, coastal and rural, domestic and global.
What do they see now? China’s official story of recovering from an economic downturn is correct, the unsalted numbers confirm, but the recovery is not particularly strong, driven too much by increased output and not enough by private household demand.
Ma’s curious case illustrates the unique risks of investing in China. The government can change the rules quickly and without warning. Ma could reappear in weeks or months, with Alibaba suddenly restructured and Ant Group under new government scrutiny.
There is a separate risk for investors purchasing the US-listed shares. They get equity in an offshore vehicle that invests in Alibaba, not Alibaba itself. “There’s nothing to say that the Chinese government couldn’t just break that link,” Miller said.
The trade tensions between the US and China could one day leave China in search of new retaliation, including with US investors in Chinese companies. So, how will trade go under a new US administration?
There is a political sentiment on both sides against a relaxation of relations, Miller says, adding that “tensions … will not only persist but will worsen significantly.”
So where are potential Alibaba investors left? One of the rarest things in the investment universe right now is a fast-growing company trading at a modest price. Tesla is coming off fifteen minutes in growth in car shipments, but it’s trading at more than 100 times the free cash flow the company expects to generate over years – by 2024. Amazon looks much more reasonable with 15 times that expected free cash flow. cash flow for the year. Estimates so far away are, of course, only educated guesses. Still, Alibaba is moving closer to 11 times the free money it will generate in 2024.
That’s a tempting discount for such a world-famous company. But it’s best to wait for Ma to reappear, with or without his dancing shoes, before deciding whether stocks are still worth the risk.
Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.