BABA - Alibaba

[Lakesider]

Also saw a report that beijing had denied they were considering this record fine on baba. Not sure what to believe about it.

[LC]

Discussions over the matter have been held since early this year, after Chinese regulators reviewed a list of media assets owned by the Hangzhou-based company, whose mainstay business is online retail. Officials were appalled at how expansive Alibaba’s media interests have become and asked the company to come up with a plan to substantially curtail its media holdings, the people said. The government didn’t specify which assets would need to be unloaded.

 

Alibaba, founded by billionaire Jack Ma, has throughout the years assembled a formidable portfolio of media assets that span print, broadcast, digital, social media and advertising. Notable holdings include stakes in the Twitter -like Weibo platform and several popular Chinese digital and print news outlets, as well as the South China Morning Post, a leading English-language newspaper in Hong Kong. Several of these holdings are in U.S.-listed companies.

 

Such influence is seen as posing serious challenges to the Chinese Communist Party and its own powerful propaganda apparatus, the people said.

 

 

 

Beyond media and online retail, Alibaba also has a sizable entertainment division, consisting mainly of Hong Kong-listed Alibaba Pictures Group Ltd. and Youku Tudou Inc., one of China’s largest video streaming platforms. Officials also reviewed Alibaba’s entertainment portfolio, although outright divestitures in that part of Alibaba’s business may not be necessary, people familiar with discussions related to Alibaba’s entertainment business said.

 

It isn’t clear whether Alibaba will need to sell all of its media assets. Any plan that Alibaba comes up with will need approval from China’s senior leadership, people familiar with the matter said.

 

Concerns have been growing in recent years in China’s officialdom over Alibaba’s media clout and how the company may have leveraged its investments in news and social media to influence government policies deemed unfavorable to its businesses.

 

Those concerns grew following an incident in May last year when scores of Weibo posts about a senior Alibaba executive’s alleged involvement in an extramarital affair were deleted.

 

 

An ensuing investigation by the Cyberspace Administration of China, the country’s internet watchdog, found that Alibaba was responsible for the interference with Weibo posts and said the company had used “capital to manipulate public opinion” in a report to the leadership, the Journal has reported, citing officials who saw the report. It is the Communist Party that controls public opinion on all media platforms and the private sector should not take up the role, the officials said.

 

Alibaba owns about 30% of Nasdaq-listed Weibo Corp. and has been the largest customer of the social-media company, having contributed nearly $100 million in advertising and marketing revenue in 2019 to its platform, according to the most recent annual data available.

 

In June, the internet watchdog publicly reprimanded Weibo for what it called “interference with online communication” and asked it to rectify the situation. In November, Xu Lin, a vice-director of the Party’s central propaganda department, said in a public forum that China must “resolutely prohibit dilution of the party’s leadership in the name of [media] convergence, resolutely guard against risks of capital manipulating public opinion.”

 

 

 

[bizaro86]

Great to hear the government of China is now in favour of free and open online communication.

[fareastwarriors]

Great to hear the government of China is now in favour of free and open online communication.

 

At least they are "honest" about it...

 

It is the Communist Party that controls public opinion on all media platforms and the private sector should not take up the role, the officials said.

 

If that's how the game is play, then play the game.

[bizaro86]

Great to hear the government of China is now in favour of free and open online communication.

 

At least they are "honest" about it...

 

It is the Communist Party that controls public opinion on all media platforms and the private sector should not take up the role, the officials said.

 

If that's how the game is play, then play the game.

 

Oh for sure, I was definitely joking. Wasn't my intention to make this political, so apologies for that!

[Lakesider]

I think it would be unwise to discuss BABA without talking politics.

[Gregmal]

I will refrain from discussing the political aspect so as not to offend certain people who like to report everything I post....I'll just leave it at....

 

bought more today at 227.

[winjitsu]

I think it would be unwise to discuss BABA without talking politics.

 

You missed a one post accounts on this thread a few months back explicitly asking us to refrain from politics. Perhaps we're all on a list somewhere :)

[fareastwarriors]

I don't think anyone is discussing politics. We are just sharing a potential development. Right?

 

I just Accept how things Are versus how things Should be.

 

[Fitz]

I have been adding away to BABA also recently. I find it quite attractive a price to pay 21x EV-EBITDA (some people hate this metric... not all EBITDA is created equal). To look another way backing out the cash your paying 17x FCF for a business growing revenue at 45% and profits at 48%. A price to growth that leaves quite a bit of room for deceleration in either and still a fair price.

 

I agree with the statement above that it's hard to think about a company in a communist country and not consider the politics to a certain extent. I think when you look at the PRC's goals and where they would like to be as industry leaders. BABA is the market leader in; Cloud computing, AI and digital commerce. I don't think it is in the interest of the PRC to cripple one of there champions, I would guess they will reset the relationship and let them know who is the bigger of the two, slap some fines and come away with a public victory.

 

I kinda smile a little that ANT is getting hosed right now, seems like a little bit of karma how it was cut out of BABA and Jack Ma took an outsized piece of that pie.

 

It's hard not to get excited when you see how much growth there is in cloud, and commerce with BABA. And when you look at how complete the offering is to a small business, they solve almost every logistical problem for a smaller entrepreneur and really do deliver on their stated goal of helping small business.

[Longtermlens]

https://www.cnbc.com/2021/03/16/alibabas-uc-browser-deleted-from-android-app-stores-in-china.html

[Spekulatius]

https://www.cnbc.com/2021/03/16/alibabas-uc-browser-deleted-from-android-app-stores-in-china.html

 

The end must be near.

[Lakesider]

Negative story after negative story, Baba tanked today after the SEC warned that duel listed companies could be delisted.

 

"The Holding Foreign Companies Accountable Act, signed into law by then-President Donald Trump in December, is aimed at removing Chinese companies from U.S. exchanges if they fail to comply with American auditing standards for three years in a row."

 

Now what looks like the likely outcome here, is there really a large risk of BABA being delisted? Personally, I don’t think so, I don’t think the SEC really want to start delisting companies which many Americans are invested in. Also, I see the most likely outcome is Chinese companies complying with the new rule, they have 3 years to do so. Baba has followed the other duel listed stocks down even dropping more than other stocks with much higher valuations. I am still seeing this as an opportunity and have been rooting around my garage looking for more buckets because I pretty sure its raining outside.

 

 

 

 

[alpha]

I don't understand the bullishness here, hasn't Jack Ma basically been blacklisted by the CCP?

 

From what I have read it's quite reasonably to predict the company could be blocked from various Chinese markets going forward, or have it's current market share reduced via government intervention.

 

Are you guys basically betting it's too big to fail?

 

[Lakesider]

Jack ma has upset the CCP, but he’s largely no longer connected with BABA. He only owns about 5% of it and doesn’t have much input anymore. He’s still heavily involved with Ant but really I’m kind of ignoring that.

 

The antitrust clamp down is said  to have a minimal impact on the future growth of the business. The biggest thing being they can no longer force vendors to exclusively trade on Alibaba. They are forcing the sale of some none core media assets after BABA used their sway to censor news of an affair of one of the board members. These assets only represented a minimal fraction on the business. Some of the Antitrust laws are actually a positive for Alibaba. They are now able to have apps on WeChat and have announced a new deals app to launch on the platform.

 

The CCP is pro-business, and Alibaba is one of their darling success stories and in my opinion, this will be no more than a slap on the wrists, the company and analysts believe there will be minimal impact on the core of the business. Ecommerce sales have had a very strong quarter this year, Alibaba have confirmed strong sales that are in line with this great quarter too.

 

I think this is like Tencent a couple years ago, people are fearing the worst, but the underlying company is great and will continue to steam ahead. I dont believe the core business to be impared. They are in a dominant position in a fantastic fast-growing market. And as the numbers continue to be great people’s fears will subside.  I think this has multi bagger potential at this value trading well below its peers.

 

Also they own that big share ant that is desperate to IPO. Ant have agreed a structure with the regulators and are working towards it. The valuation will be lower but its still 30% of a mega financial company.

 

Price do bad but company do good.

 

[winjitsu]

Are you guys basically betting it's too big to fail?

 

Yes. If you have friends in China, you'll learn how essential Taobao is to daily life, ANT financial is to payments etc. China needs a cloud champion, and is looking like Alicloud more day by day.

 

Party will just expand ownership / control rather than let it die.

[Jurgis]

Are you guys basically betting it's too big to fail?

 

Yes. If you have friends in China, you'll learn how essential Taobao is to daily life, ANT financial is to payments etc. China needs a cloud champion, and is looking like Alicloud more day by day.

 

Party will just expand ownership / control rather than let it die.

 

Party can screw shareholders without impacting users.

There's a number of ways this can happen:

- Make BABA invest in failing govt enterprises/banks at high prices paid in BABA shares to state

- Make BABA spinoff/sell businesses to state or state-connected owners for low prices

- Make BABA to issue shares to state because it is a business of national interest and should be state controlled.

 

Not saying that any of these will happen. Likely they won't happen.

But there is some probability and CCP definitely has levers to screw shareholders without affecting customers or business itself.

[winjitsu]

 

Party can screw shareholders without impacting users.

There's a number of ways this can happen:

- Make BABA invest in failing govt enterprises/banks at high prices paid in BABA shares to state

- Make BABA spinoff/sell businesses to state or state-connected owners for low prices

- Make BABA to issue shares to state because it is a business of national interest and should be state controlled.

 

Not saying that any of these will happen. Likely they won't happen.

But there is some probability and CCP definitely has levers to screw shareholders without affecting customers or business itself.

 

In a sense most of these already happen... Chinese state banks already bail out / merge with failing banks. Ant was exactly that type of spinoff to enrich certain persons. Possible that they'd issue shares but that'd spook the market... control doesn't need to happen through share ownership though, just expressed through pressure at the board level. No new shares needed to be issued when the CEO was forced out and the new guy brought to the table in a much more humble manner.

 

That's the risk I see. For some it's not palatable. I personally think CCP representation at corporations is the new normal and the price of investing in China. I take this into account with position sizing. If Amazon traded at BABA's valuation, I'd make Amazon a 50% position. But for me, the most this will ever be is ~10%.

[Jurgis]

 

Party can screw shareholders without impacting users.

There's a number of ways this can happen:

- Make BABA invest in failing govt enterprises/banks at high prices paid in BABA shares to state

- Make BABA spinoff/sell businesses to state or state-connected owners for low prices

- Make BABA to issue shares to state because it is a business of national interest and should be state controlled.

 

Not saying that any of these will happen. Likely they won't happen.

But there is some probability and CCP definitely has levers to screw shareholders without affecting customers or business itself.

 

In a sense most of these already happen... Chinese state banks already bail out / merge with failing banks. Ant was exactly that type of spinoff to enrich certain persons. Possible that they'd issue shares but that'd spook the market... control doesn't need to happen through share ownership though, just expressed through pressure at the board level. No new shares needed to be issued when the CEO was forced out and the new guy brought to the table in a much more humble manner.

 

Right. That's why I presented these possibilities - because they are pretty much real. You are right that some of them happen in subtle ways.

 

That's the risk I see. For some it's not palatable. I personally think CCP representation at corporations is the new normal and the price of investing in China. I take this into account with position sizing. If Amazon traded at BABA's valuation, I'd make Amazon a 50% position. But for me, the most this will ever be is ~10%.

 

Makes sense.

 

Take care.  8)

[ICUMD]

I hold a significant holding in BABA.  I just came across this article re the VIE structure of Chinese equities making me much more uncomfortable, even considering liquidation at a loss.  Thoughts?

https://globescancapital.com/chinese-vie-structure-wall-street-continues-to-ignore-the-risks/

[Lakesider]

Its a concern but I personally I’m personally willing to take the risk.

I don’t think China wants to alienate foreign investment so I can’t see any incentive for the Gov to strip investors of their holdings

Now as for the Alipay thing, it was a shady deal, but was it a straight up steal as described in that article. Alipay was not taken completely without compensation (correct me if I’m wrong) as BABA ended up with the 33% stake in ANT group, right? I think now the entity is public the chance of assets being stripped away is not as likely to happen because they would have to be robbing Chinese shareholders too.

[Fitz]

I think the risks have to be considered with the Chinese Government and the many ways they could impact the future of this business.

ICU, The VIE or more commonly called ADR's have been the only way for individual Americans to invest in Chinese companies since the first dollar was invested in the 1980's over these unless you become a registered investor in china, which some people and funds are. This is the route Li Lou has used and many other purchasing the Shanghai stock stock with actual ownership and voting.

While the possibility isn't zero that the chinese government could wipe our ADR holders, I would say this would be the nuclear option and would produce a large response by the USA. There is over 1.7 trillion dollars invested in china via ADR's currently. It would be a one time level to pull and would affect a sizable amount of money and investors.

https://stockmarketmba.com/whatisanadr.php#:~:text=As%20of%20today%2C%20there%20are,total%20market%20capitalization%20of%20%248%2C315%2C974%2C925%2C360.&text=ADRs%20have%20been%20around%20since,sponsored%20by%20a%20U.S.%20bank.

As for the ANT transaction, that was definitely a good example of how you can get hosed in China, Jack spun it out without compensating existing shareholder at all, Yahoo had to litigate for a year to finally arrive at Alibaba receiving 1/3 of the profits of Ant group until it became a public company, and at that point would receive 1/3 ownership pre dilution in exchange for the royalty. The laws were changing in China and ownership of a financial institution was going to need to be spun out of BABA but the equitable move would have been to spin it to all shareholders, was a pretty blatant money grab from Jack as he had diluted himself so much when he grew Alibaba. Even if the direct spin wouldn't have worked for all US investors, the move shouldn't have been done in the dark. Ol' Jack didn't want just 5% of ANT.

[Xerxes]

On 3/27/2021 at 10:58 PM, winjitsu said:

 

In a sense most of these already happen... Chinese state banks already bail out / merge with failing banks. Ant was exactly that type of spinoff to enrich certain persons. Possible that they'd issue shares but that'd spook the market... control doesn't need to happen through share ownership though, just expressed through pressure at the board level. No new shares needed to be issued when the CEO was forced out and the new guy brought to the table in a much more humble manner.

 

That's the risk I see. For some it's not palatable. I personally think CCP representation at corporations is the new normal and the price of investing in China. I take this into account with position sizing. If Amazon traded at BABA's valuation, I'd make Amazon a 50% position. But for me, the most this will ever be is ~10%.

Hi Winjitsu,

if you dont me asking, what your valuation method of choice, when comparing Alibaba with Amazon (i.e. e-commerce category). On cash flow yield, or on some sort of EV/EBITDA measure ? i understand that a whole host of metrics might tell you that Alibaba is cheaper, what what is the one measurement or metric that makes the case.

 

[Lakesider]

I'd actually be really interested to hear by what metric people think this isnt cheap. The possibility I see for this being pricey is if the growth gets decimated by the anti trust investigation. 

I understand people just saying no to BABA because of the risks but i think the risk of it being if the environment doesn't change drastically is very low. 

[Thelilyinvestor]

Charlie Munger just bought 37,5M of Alibaba through the DJCO