Jack Ma, founder of Alibaba Group Holding, during the company’s annual party in 2017.
STR / AFP via Getty Images
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“Maybe he’s been grabbed by the party and maybe he’s in a dark room now,” the head of a research group in China told me last week. He talked about
Alibaba
founder Jack Ma, the richest man in China, who has not been seen for weeks.
By ‘party’ he does not mean the festive kind, like Alibaba’s annual party in 2017, when Ma, dressed as Michael Jackson with a gold mask, turned a motorcycle on stage and then set off for a few dance steps – usually pelvic thrust. He means China’s ruling Communist Party, which Ma apparently crossed over, and whose regulators have now come after his companies.
It sounds clumsy. But it’s 2021: bond yields are meager, Bitcoin has pulled in just over $ 40,000, pushing investors like Michael Jack-Ma to anything with rapid revenue growth. Certainly, the shares of Alibaba Group Holding (ticker: BABA) have been sold. But in a poll by FactSet, a remarkable 53 out of 54 analysts discussing Alibaba say it’s a good time to buy. Is it?
Let’s start with some positive aspects. Alibaba is an impressive enterprise with an active user base that is more than twice the size of the US population. It is more dominant in e-commerce in China than
Amazon.com
(AMZN) is in the US and more profitable than Amazon or
Walmart
(WMT). Its main retail business is Alibaba.com, which connects manufacturers with wholesale buyers worldwide; Taobao.com, an intermediary for buyers and sellers, such as
eBay
(EBAY); and Tmall.com, a market for global brands such as
Nike
(NKE).
“China has these technological ventures that are not … copies of American equivalents,” said Leland Miller, CEO of China Beige Book, the researcher I mentioned. “They are truly innovative, spectacular enterprises.”
Alibaba has complementary side businesses that cover cloud computing, shipping logistics, and more. This created Alipay to gain confidence in online payments, and abolished it in 2011. Alipay is today called Ant Group and is much larger than
PayPal Holdings
(PYPL), and switched to loans, investments and insurance.
Ant Group was to be announced last year. Some bulls have predicted a market value of $ 300 billion, compared to a recent $ 617 billion for Alibaba, and $ 414 billion for
JPMorgan Chase
(JPM). Alibaba owns one third of Ant Group.
In November, the stock offer was suddenly suspended. Near Christmas, China’s regulators announced an antitrust investigation into Alibaba, as well as an investigation into setting new rules for Ant Group.
Mom, who is worth more than $ 40 billion, has since missed scheduled television appearances. He has not appeared in public since criticizing in a speech by China’s state banks in October for acting with a ‘pawn shop mentality’.
“Jack has a lot of problems, personally as well as his company,” says Miller at China Beige Book. He could ‘wisely hold his head’, or he may have been detained for “not honoring the party”, Miller said.
Alibaba did not immediately respond to questions about Mom’s location.
It’s not just about looks. Alibaba’s financial businesses have long had the free hand to pay depositors more than China’s tightly regulated banks, Miller said.
“All this money will scream out of the state system … and that drove the state bankers crazy,” he says. “Here Jack Ma earned a fortune, stole their deposits and did nothing.” Bankers facing shrinking deposits have made a dirty call to Beijing.
Miller, a former corporate advocate advising hedge funds across China founded China Beige Book in 2010 to address two issues. Official economic data coming from China is not reliable or complete, he says. Its workers collect data by researching Chinese enterprises: private and state-owned, large and small, coastal and rural, domestic and global.
What do they see now? China’s official story of a downturn due to an economic downturn is accurate, the unadorned figures confirm, but the recovery is not very strong and is driven too much by increased production, and not enough by the demand for private households.
Ma’s curious case illustrates the unique risks of investing in China. The government can change the rules quickly and without warning. Mom could reappear for weeks or months, with Alibaba suddenly restructured and Ant Group under new government control.
There is a separate risk for investors buying the US listed shares. They get shares in a foreign vehicle that invests in Alibaba, not in Alibaba itself. “There’s nothing to say that the Chinese government can not just break the link,” Miller said.
Trade tensions between the US and China may one day China seek new retaliation, including with US investors in Chinese companies. So how will trade fare under a new US government?
There is a political sentiment on both sides against the softening of relations, Miller said, adding that “tensions … are not just here to stay, but that they are going to get significantly worse.”
Where do prospective Alibaba investors leave behind? One of the rarest things in the investment university is a fast growing company that trades at a modest price. Tesla is giving up a quarter for growth in car shipments, but it is trading more than 100 times the free cash flow the company is expected to generate for years – in 2024. Amazon looks much cheaper at 15 times more than year’s projected free cash flow . Estimates that are far away are, of course, only trained guesses. Yet Alibaba is approaching 11 times the free cash seen in 2024.
This is an attractive discount for such a world-beating company. However, you must first wait until Mom reappears, with or without his dancing shoes, before deciding whether shares are still worth the risk.
Write to Jack Hough by [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.