Alibaba may resist scrutiny from China, says VanEck’s Semple

Last week, the People’s Bank of China (PBOC) announced that it had launched an antitrust investigation. Analysts believe it is studying whether Alibaba requires sellers of its platform to sell there exclusively and not through competitors, a practice known as “choosing one of two.”

Regulators are also studying Ant Group, a fintech technology company owned by Alibaba. They are examining whether to treat Ant as a bank and regulate it that way. Ant recently canceled what was expected to be the largest initial public offering in history.

Alibaba shares gained nearly 10% this year, compared to 16.3% in the S&P 500 index.

David Semple, $ 2.6 billion portfolio manager

VanEck Emerging Markets Fund

(GBFAX) says Alibaba can outperform others in product quality and service, even if regulators roll their wings.

He recently spoke De Barron about their views on Alibaba and other Chinese e-commerce stocks and other investment ideas. Follow an edited version of the conversation.

Barron’s: What do China’s regulators look like?

David Semple: It is like many other sectors in China where regulatory development has not been up to date with economic development. Essentially, entrepreneurship invades the gray areas, and then recovery is more of a black line. Some people will be on the wrong side; some practices will be on the wrong side, and that’s what they order.

It was kind of a secret vocation in the industry that there were some practices that pushed the wrapper, and I think that’s what is perhaps being pointed out. It is more about the best development of the industry and consumer protection.

I don’t think it’s irrelevant that Jack Ma was visible until very recently and is now invisible. Clearly, many of the fintech developments were areas where PBOC was uncomfortable, but it needed more political influence to start jumping and regulating better. People are dedicated to working very well on these regulations and the focuses that are there. But things will work out. There are some fantastic areas of opportunity. It does not take away the underlying structural growth of many of these companies.

For Alibaba, it doesn’t matter how you attack it. There is value. It’s only a matter of time before time passes before it is reflected back in the stock price. We still believe it’s a great basic e-commerce business and putting a sensible multiple in it means almost everything else for free. That is its value. Will it be presented over the next two months? I do not know. But we do see a lot of value.

Was there a catalyst to get regulators to act now? Was it the IPO of the Ant group?

That would be pure speculation on my part. I do not know. The Ant stock exchange is independent. Never underestimate the interests created in China. The banking sector is almost exclusively state-owned and they would be reasonably happy to cut off its wings. The stark reality is that, objectively, he didn’t look like he was playing on an even playing field. That is why there has been this setback.

Alibaba is not the only company with exclusivity agreements, we have been told.

No. Other people do it elsewhere in other countries in other situations. But I think in the long run it just means the growth delta is a little lower. (Alibaba) can surpass the quality of service. It is quite competitive. This is his irony. The great competitiveness of this fact led to antitrust regulation. Those who come and go: JD.com and PDD, if they could, bet your lower dollar will too.

Are regulators only targeting Alibaba?

The standard practice I have observed anyway in many of these cases is like the Chinese saying, where you throw a pebble into a pond and everyone notices the waves. In other words, there is an example that can be done here and everyone should sit down and realize it. I don’t think it’s specifically related to Jack, but if the collateral benefit is to slow him down, it’s an added advantage. But it applies to the entire sector.

But you have to be careful. Because this has been a wonderful innovation lab globally. In a country that is eager to demonstrate its credentials for innovation, this is an area it can point out clearly. So there is definitely a balance.

What effect does this have on other Chinese internet stocks?

Clearly, contenders will benefit if you believe Alibaba will have its wings cut off. JD and PDD are both obvious. He was concerned that this could affect local service companies, for example

Meituan Dianping

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

Tencent Holdings

(700: Hong Kong).

It became clear to me looking at the games that Tencent’s tentacles are everywhere or rather the penguin’s footprints everywhere. There are many potential areas that could be under the microscope.

The OP Ant is a big IPO, but not a big investment.

Why do you say that?

The hype, the excitement. The IPO until it worked would go very well. Everyone was very excited about it, everyone was arguing for action. But the monetization aspect of fintech is harder than you think, especially if fintech guys have to follow the same set of rules.

Where in the world are you looking?

For e-commerce? Clearly India is a big deal, but the ability to participate directly in it is very limited because those in pure India are private or part of larger companies. In Poland,

Allegro

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

Ozone Holdings

(OZON) in the list. Again, it’s a fairly simple standalone business.

Then there’s what happens in Southeast Asia and who will win there. Shopee [the ecommerce business that is part of online marketplace

Sea

(SE)] it is headquartered in Singapore and most of its profitability comes from Taiwan, but its footprint is in Southeast Asia. What’s impressive is how well they’ve done in Taiwan. But there are a number of unicorns [in Southeast Asia] involved in e-commerce and local services, in particular Lazada, which belongs to Alibaba.

SEA is big business. The concern we have is that the gaming business is based on a very small set of games. And then there’s the valuation. SEA has been great, has grown very fast, but with a business value 10 times higher than sales, right? Who knows. Having a huge weight in this worries me.

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

We like BTPS, [which is 70% owned by

BTPN

] in Indonesia. It is a women-based group lending model, so they lend to women’s groups. They are all jointly and severally liable for the loans, so you will only meet with your trusted friends. It is for productive uses only. Therefore, if you want to install a stop, you will get the loans for this. With her there is a lot of financial education. It is very facilitative for these women. It has been a great stock for us. During the pandemic, the share price fell by half, but rose again.

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

Transaction capital

(TCP), a company that lends to minibuses. This is how you travel to South Africa if you can’t afford the luxury of Uber, taxis or cars. If you are in a municipality and need to start working, look for one of these taxis. They are individual owners. These guys lend them. Follow where the buses are to find out where the warranty is and if there are any issues. Is the operator ill or is the cabin damaged? They will get help or fix it. It is very enabling. It has been a very positive experience for us to invest in this company.

Write to Liz Moyer to [email protected]