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The Ant Group is headquartered in Hangzhou, Zhejiang Province, China.
STR / AFP via Getty Images
Investors took a breather Monday in pouring shares of
Participation of the Alibaba group
(ticker: BABA), the Chinese e-commerce giant recently subjected to antitrust control. Shares traded flat after a 13% decline in two sessions.
Danton Goei, Davis Advisors ’global portfolio manager, is betting on a rebound towards 2021.“ Government action doesn’t really affect Alibaba’s overall outlook, ”he says. “We think stocks are very cheap now.”
The fall in prices reflected official tensions around three related but different entities: Alibaba; its sister financial company Ant Group, whose IPO was canceled at the last minute in early November; and its joint founder Jack Ma. Of the three, Alibaba’s problems seem the least serious. A concise December 24 announcement by the State Administration for market regulation indicated that it was aimed at the company’s practice of “choosing one of two,” that is, forcing traders to sell only on Alibaba. instead of competitors like
JD.com
(JD) o
Pinduoduo
(PDD).
Goei says this should be just a look at basic e-commerce and let growing companies like cloud computing be completely hassle-free. The most likely follow-up by the authorities, repressing leading prices at a loss, falls into the same category.
Ant Group’s challenges are more serious. Its IPO was withdrawn after authorities questioned its most profitable practice: to originate consumer loans and sell them to banks without assuming any risk or capital in their own books. A second shoe fell this weekend when a central bank statement accused Ant of “having little legal knowledge and turning a blind eye to compliance requirements.”
The regulator suggested that the high-tech fintech steering wheel “go back to its origins” as a simple payment network. “The main concern of regulators is that Internet banking is out of control,” says Tracy Chen, Brandywine Global’s global credit portfolio manager.
Ma, who until recently was a revered symbol of China’s online revolution, has done no favors to her companies with “extravagant behavior,” as Chen says. He famously ridiculed China’s dominant state banks for their “pawnshop mentality” at a recent conference with the party’s perverts, and has apologized without enthusiasm.
Alibaba still owns a third of the Ant group. But its paper losses from the delayed IPO have more than a price of its own, according to Goei. Even if Ant is reduced to half of the $ 300 billion valuation it intended, that means a $ 50 billion drop in Alibaba’s stake. Alibaba’s market cap has thrown more than $ 200 billion since the IPO debacle.
Chinese regulatory concern tends to wave and move from industry to industry, Goei points out. Actions of the Alibaba codemot
Tencent Holdings
(700: Hong Kong) were depressed for much of 2019 when the government froze the approval of new video games, their largest source of revenue. The ban was lifted and Tencent gained about 40% this year.
There is a possibility that sentiment has shifted more broadly against business in Beijing’s opaque power enclosures, and Jack Ma will end up being “the chicken you kill to scare the monkey,” Chen says. But it is unlikely. Alibaba may now be China’s biggest businessman, he notes, and a beloved national champion, once he’s shaved a bit. “China finally wants to win the technology war and needs Alibaba to do it,” he says
Then there is the valuation argument. Raymond James analyst Aaron Kessler estimates that Alibaba is trading at 16 times the projected earnings for 2021, which is convincing for a company that increased revenue by 30% and EBITDA by 28% year-on-year in the last quarter. “We are still buyers of BABA at current levels,” he says.