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Ant Group’s headquarters in Hangzhou, Zhejiang Province, China.
STR / AFP via Getty Images
Investors took a breather from stock dumping on Monday
Alibaba Group Holding
(ticker: BABA), the Chinese e-commerce giant recently under antitrust investigation. The stock traded just after a slip of 13% in two sessions.
Danton Goei, global portfolio manager at Davis Advisors, is betting on a recovery towards 2021. “The government’s actions are not really affecting Alibaba’s overall outlook,” he says. “We think the stock is very cheap now.”
The price drop reflected official tensions surrounding three related but different entities: Alibaba; its financial sister company Ant Group, whose blockbuster IPO was canceled at the last minute in early November; and their co-founder Jack Ma. Of the three, Alibaba’s problems look the least serious. A brief December 24 announcement from the State Administration for Market Regulation indicated it was targeting the company’s ‘choice of two’ practice i.e. forcing traders to sell only on Alibaba rather than competitors
JD.com
(JD) or
Pinduoduo
(PDD).
That should be nothing more than a fleeting blow to the core of e-commerce, leaving growth companies like cloud computing completely untouched, says Goei. The most likely follow-up from the authorities, which crackdown on loss-leading prices, falls into the same category.
Ant Group’s challenges are more serious. The IPO was withdrawn after authorities questioned the most profitable practice of providing consumer loans and then reselling them to banks without carrying any risk or capital under their own management. A second shoe fell out this weekend when a central bank statement accused Ant of “having little legal knowledge and turning a blind eye to compliance requirements.”
The regulator presented the fintech high-flyer “return to its origins” as a simple payment network. “The main concern of regulators is that online banking is getting out of hand,” said Tracy Chen, a portfolio manager for global lending at Brandywine Global.
Ma, who until recently was a revered symbol of China’s online revolution, has not done his businesses any favors with “flamboyant behavior,” as Chen puts it. He famously ridiculed China’s dominant state-owned banks for their “pawnshop mentality” at a recent conference of party leaders, and has apologized halfheartedly or not at all.
Alibaba still owns a third of Ant Group. But the paper losses on the postponed IPO are more than discounted in own stock, Goei estimates. Even if Ant is cut in half from the $ 300 billion valuation he was aiming for, that means a $ 50 billion drop in Alibaba’s best interests. Alibaba’s market cap has lost more than $ 200 billion since the IPO debacle.
Concerns about Chinese regulations tend to come in waves, shifting from industry to industry, Goei notes. Shares in Alibaba’s co-colossus
Tencent Holdings
(700: Hong Kong) were depressed for much of 2019 when the government froze the approval of new video games, the largest source of income. The ban was lifted and Tencent won nearly 40% this year.
There is a chance that sentiment against business in Beijing’s opaque power zone has shifted wider, and Jack Ma will end up as “the chicken you kill to scare the monkey,” Chen said. But it is unlikely. Alibaba is now perhaps China’s largest employer, she notes, and a treasured national champion, once it’s shaved down a bit. “China ultimately wants to win the tech war, and it needs Alibaba for that,” she said
Then there is the argument of appreciation. Raymond James analyst Aaron Kessler estimates that Alibaba is trading at 16 times its expected earnings for 2021, which is compelling for a company that showed sales growth of 30% and an Ebitda of 28% year-over-year in the last quarter. “We remain BABA buyers at the current level,” he says.