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The Ant Group is headquartered in Hangzhou, eastern Zhejiang Province, China.
STR / AFP via Getty Images
Investors took a breather on Monday to plunge stocks
Alibaba Group Holding
(ticker: BABY), the Chinese e-commerce giant just under investigation. The stock traded down two sessions after a 13% decline.
Danton Goei, global portfolio manager at Davis Advisors, is betting on a setback towards 2021. “The government’s actions do not really affect Alibaba’s overall prospects,” he says. “We think the stock is very cheap now.”
The drop in price reflects official tensions around three related but distinct entities: Alibaba; its sister financial company Ant Group, whose instant listing was canceled in early November; and their co-founder Jack Ma. Of the three, Alibaba’s problems seem the least severe. A stricter December 24 announcement by the state administration for market regulation indicated that it envisages the company’s ‘choice of one’ practice, ie should force traders to sell only on Alibaba rather than competitors such as
JD.com
(JD) of
Pinduoduo
(PDD).
It should not only give a lightning bolt to the core of e-commerce, and leave growth companies such as cloud computing completely uncomfortable, says Goei. The likely follow-up of authorities, which impairs the pricing of loss leaders, falls into the same category.
Ant Group’s challenges are more serious. The issuance of the scholarship was lifted after authorities questioned the most profitable practice: to establish consumer loans and then sell them to banks without carrying any risk or capital in its own books. A second shoe fell over the weekend when a central bank statement accused Ant of “having little legal knowledge and blinded compliance with the requirements.” ‘
The regulator suggested that the fintech high-flyer ‘return to its origins’ as a simple payment network. “The regulators’ biggest concern is that Internet banking services are out of control,” said Tracy Chen, a global credit portfolio manager at Brandywine Global.
Mom, who until recently was a revered symbol of China’s online revolution, did her companies no favors with ‘flamboyant behavior’ as Chen puts it. At a recent conference with Party bigwigs, he made a mockery of China’s dominant state banks for their ‘pawn shop mentality’, and he even half-heartedly apologized.
Alibaba still owns a third of Ant Group. But the paper losses on the deferred IPO are more than priced in its own stock, according to Goei. Even if Ant is halved from the $ 300 billion valuation he was aiming for, it means a $ 50 billion drop in Alibaba’s stake. Alibaba’s market capitalization has plummeted by more than $ 200 billion since the IPO debacle.
Goei says Chinese regulatory concerns tend to move in waves and move from industry to industry. Shares in Alibaba’s co-owner
Tencent Holdings
(700: Hong Kong) was depressed for much of 2019 when the government froze the approval of new video games, the largest source of revenue. The ban was lifted and Tencent achieved almost 40% this year.
There’s a chance that sentiment has widened towards issues in Beijing’s opaque areas of power, and Jack Ma will end up as ‘the chicken you kill to scare the monkey,’ ”Chen says. But that is unlikely. Alibaba may now be China’s largest employer, she notes, and a cherished national champion, once shaved off a bit. “China finally wants to win the technological war, and Alibaba must do it,” she said.
Then there is the argument from valuation. Raymond James analyst Aaron Kessler believes that Alibaba is trading at 20 times the expected revenue of 2021, which is compelling for a company that increased revenue by 30% in the most recent quarter and Ebitda by 28%. “We remain buyers of BABY at current levels,” he says.