Alibaba can withstand China’s investigation, says VanEck’s Semple

Last week, the People’s Bank of China (PBOC) announced that it was launching an antimonopoly investigation. Analysts believe that it will look at whether Alibaba requires sellers on its platform to sell exclusively there and not by competitors, a practice known as ‘choose one out of two’.

Regulators are also looking at Ant Group, a fintech company that owns a third of Alibaba. They investigate whether they should treat Ant more like a bank and so regulate. Ant recently canceled what was the biggest initial public offering ever.

Alibaba shares rose almost 10% this year, compared to the 16.3% increase in the S&P 500 index.

David Semple, $ 2.6 billion portfolio manager

VanEck Emerging Markets Fund

(GBFAX), says Alibaba can beat others about the quality of the product and service, even if regulators do beat.

He spoke to him recently Barron’s about his views on Alibaba and other Chinese e-commerce stocks, and other investment ideas. An edited version of the conversation follows.

Barron’s: What are China’s regulators looking at?

David Semple: It is like many other sectors in China where the regulatory development has not kept pace with the economic development. In essence, entrepreneurship falls into gray areas and then catching up is more of a black line. Some people will be on the wrong side of it; some practices will be on the wrong side of it, and that’s what they clean up.

It was kind of an open secret in the industry that there were some practices that pushed the envelope, and I think that might be the goal. It’s more about the best development of the industry and the protection of consumers.

I think it is not irrelevant that Jack Ma was visible until fairly recently and is now invisible. Clearly, much of the development of fintech areas was where the PBOC was uncomfortable, but needed more political influence to really start stepping in and better regulating. People get very excited about these regulations and the spotlight on them. But things will go awry. There are some fantastic opportunities. It does not take away the underlying structural growth of many of these companies.

For Alibaba, it does not matter which way you attack it. There is value in that. It’s just a matter of time before it’s reflected in the stock price again. We still think it’s an excellent core e-commerce business, and if you put a sensible multiple to it, it means everything else is free. That’s the value in it. Will it perform in the next few months? I do not know. But we see a lot of value.

Was there now a catalyst for regulators to act? Was it the Ant Group IPO?

That would be pure speculation on my part. I do not know. The Ant exchange is separate. Never underestimate the vested interests in China. The banking sector is almost exclusively state-owned and they would quite like to cut its wings. The stark reality is that it objectively did not look like it was playing on an equal playing field. That was the reason why this setback occurred.

Alibaba is not the only company with exclusivity agreements, we said.

No. Other people do it elsewhere in other countries in different situations. But I think in the long run it just means that the delta of growth is a little less. (Alibaba) can beat the quality of service. It’s pretty competitive. That’s the irony of it. The mere competitiveness of this led to the antimonopoly regulation. The up-and-comers – JD.com and PDD – if they could, you bet on your bottom dollar that they’ll do the same.

Do regulators then only target Alibaba?

The standard practice I have observed in many of these cases anyway is like the Chinese saying, where you throw a pebble into a pond and everyone notices the ripples. In other words, here is an example that needs to be made and everyone needs to sit up and take note. I do not think it is specifically related to Jack, but if the collateral advantage wants to restrain him, it is an added advantage. But this is true throughout the sector.

But you have to be careful. Because it was a wonderful innovation laboratory worldwide. In a country eager to prove its credentials for innovation, this is an area it can clearly point to. So there is definitely a balance.

What effect does this have on other Chinese internet stocks?

It is clear that the claimants will benefit from this if you think Alibaba is going to cut its wings. JD and PDD are the two obvious ones. There were concerns that local service businesses could be affected, for example.

Meituan Dianping

(3690. Hong Kong). They are the leaders in the field of local services (such as food delivery), and they compete head to head with Ele.me, which is Alibaba’s local services business. And Meituan is partly in possession of

Tencent Holdings

(700: Hong Kong).

It became clear to me to look at the game that Tencent’s tentacles are everywhere, or rather that the penguin’s footprints are everywhere. There are many potential areas that could come under scrutiny.

The Ant exchange is an excellent IPO, but not a good investment.

Why do you say that?

The hype, the excitement. The IPO until it does not work is going to do really well. Everyone was very excited about it, everyone was scrambling for supplies. But the monetization aspect of fintech is harder than people think, especially when the fintech guys have to play by the same set of rules.

Where else are you looking in the world?

For e-commerce? It is clear that India is a big one, but the ability to participate directly in it is very limited because the pure Indian parties are private or part of larger companies. In Poland,

Allegro

(ALE.POLAND) is a simple independent e-commerce business. In Russia,

Ozone Holdings

(OZON) listed. Again, this is a fairly simple, standalone e-commerce business.

Then there is what is happening in Southeast Asia and who is going to win there. Shope [the ecommerce business that is part of online marketplace

Sea

(SE)] are based in Singapore and most of their profitability comes from Taiwan, but their footprint is across Southeast Asia. What is impressive is how well they did in Taiwan. But there are a number of unicorns [in Southeast Asia] involved in e-commerce and local services, particularly Lazada, which is partly owned by Alibaba.

SEA is a wonderful business. The concern we have is that the gambling industry is based on a very close set of games. And then there is the valuation. SEAs have performed very well, growing very fast, but is it right at 10x operating value for sales? Who knows. To have a big weight because it worries me.

What about outside e-commerce? Are there stocks to look at?

We like BTPS, [which is 70% owned by

BTPN

] in Indonesia. It is a female group loan model, and it then lends to groups of women. They are all jointly and severally liable for the loans, so you are only going to meet with your trusted friends. It is for productive uses only. So if you want to set up a stall, this is what you get the loans for. With that comes a lot of financial education. It is very empowering for these women. It was an excellent stock for us. During the pandemic, the share price halved, but rose sharply again.

One of our long-term interests is in South Africa,

Transaction capital

(TCP), a company that lends to minibus taxi operators. This is how people get around in South Africa when they can not afford Uber, taxis or cars. If you’re in a township and need to work, look for one of these taxis. They are managed individually. These guys are lending to them. They keep track of where the buses are so they know where the collateral is and if there is a problem. Is the driver sick or is the cabin broken? They will get help or fix it. It is very empowering. It was a very positive experience for us to be invested in this company.

Write to Liz Moyer by [email protected]