Jack Ma, founder of Alibaba Group Holding, at the company’s annual party in 2017.
STR / AFP via Getty Images
Text size
“Maybe the party has caught him and he may be in a dark room right now,” the head of a China investigation group told me last week. He was talking about it
Alibaba
founder Jack Ma, the richest man in China, who has not been seen for weeks.
By “party,” I didn’t mean the festive type, like Alibaba’s annual party in 2017, when Ma, dressed in Michael Jackson in a gold mask, rode a motorcycle on stage and then threw herself into some moves. dance, especially pelvic. He was referring to China’s ruling communist party, which has apparently crossed Ma, and whose regulators have now followed suit.
Sounds bassist. But it’s 2021: bond yields are meager, Bitcoin just topped $ 40,000, and investors are pushing like Michael Jack-Ma toward anything with rapid revenue growth. Of course, the shares of Alibaba Group Holding (marker: BABA) have been sold. But in a FactSet poll, a remarkable 53 of 54 analysts covering Alibaba say now is a good time to buy. Is this?
Let’s start with some positives. Alibaba is an impressive company, with an active user base more than double the American population. It is more dominant in e-commerce in China than
Amazon.com
(AMZN) is in the United States and is more profitable than Amazon or
Walmart
(WMT). Its main retail businesses are Alibaba.com, which connects manufacturers with wholesale buyers from around the world; Taobao.com, an intermediary for buyers and sellers, such as
eBay
(EBAY); and Tmall.com, a marketplace for global brands such as
Nike
(OF).
“China has these tech companies that aren’t … copies of equivalents in the United States,” says Leland Miller, CEO of China Beige Book, the researcher I mentioned. “They’re really innovative and spectacular companies.”
Alibaba has complementary complementary companies covering cloud computing, shipping logistics and more. He created Alipay to increase confidence in online payments, and then split in 2011. Today, Alipay is called Ant Group, it is much larger than
PayPal Holdings
(PYPL), and has become loans, investments and insurance.
Ant Group would be launched last year. Some bulls had predicted a market value of $ 300 billion, compared to Alibaba’s last $ 617 billion and $ 414 billion
JPMorgan Chase
(JPM). Alibaba owns a third of the Ant group.
In November, the stock offer was suddenly suspended. Near Christmas, Chinese regulators announced an antitrust investigation into Alibaba, as well as a review of the establishment of new rules for Ant Group.
Ma, worth more than $ 40 billion, has squandered scheduled appearances on television. He has not appeared in public since he criticized China’s state-owned banks for operating with a “pawnshop” mentality in a speech in October.
“Jack has a lot of problems, both personally and in terms of his business,” Miller says in the China Beige Book. He may have “smartly held his head down” or may have been arrested for “not paying homage to the party,” Miller says.
Alibaba did not immediately answer questions about Ma’s whereabouts.
It’s not just about appearances. For a long time, Alibaba’s financial companies have the free hand to pay depositors more than China’s tightly regulated banks, Miller notes.
“All that money would come out shouting out of the state system … and it drove state bankers crazy,” he says. “Here was Jack Ma, making a fortune, stealing his deposits, without having to do anything.” Bankers facing a reduction in deposits have cried out in Beijing.
Miller, a former company lawyer who advises hedge funds in China, founded China Beige Book in 2010 to address two issues. Official economic data coming out of China is neither reliable nor complete, he says. Its workers collect data by surveying Chinese companies: private and state-owned, large and small, coastal and rural, national and global.
What do they see now? China’s official history of the rebound of an economic recession is accurate, unconfirmed figures confirm, but the recovery is not particularly strong and is driven too much by rising production and not enough by household demand private.
Ma’s curious case illustrates the unique risks of investing in China. The government can change the rules quickly and without notice. Ma could reappear in weeks or months, with Alibaba suddenly restructured and Ant Group under new government control.
There is a different risk for investors buying shares listed in the United States. They get their own resources in an offshore vehicle that invests in Alibaba, not Alibaba itself. “There’s nothing to say that the Chinese government can’t break that bond,” Miller says.
Trade tensions between the US and China could one day leave China in search of new means of retaliation, including US investors in Chinese companies. So how will trade work with a new US administration?
There is a political sentiment on both sides against a softening of relations, Miller says, adding that “tensions … are not only about to stay, but will get considerably worse.”
Where does this possibility for Alibaba investors go? One of the rarest things in the investor universe right now is a fast-growing company that trades at a modest price. Tesla gets a quarter of a quarter for the growth in car shipments, but is quoted at more than 100 times the free cash flow the company is expected to generate in years to come, in 2024. Amazon has a much more reasonable price than 15 times the free cash flow expected for the year. Of course, it is estimated that distant are only polite assumptions. Still, Alibaba is approaching eleven times the free cash it is generating in 2024.
This is a tempting discount for such a passionate company in the world. But it’s best to wait until Ma reappears, with or without her dancing shoes, before deciding if the actions are worth the risk.
Write to Jack Hough to [email protected]. Follow him on Twitter and subscribe to their Barron’s Streetwise podcast.