BABA - Alibaba

[adhital]

wsj: “As part of the penalty, reg­u­la­tors will re­quire that Al­ibaba carry out a com­pre­hen-sive re­vamp of its op­er­a­tions and sub­mit a “self-ex­am­i­na­tion com­pli­ance re­port” within the next three years, they said. The 18.2 bil­lion yuan fine is equiv­a­lent to 4% of the com­pa­ny’s do­mes­tic an­nual sales, the reg­u­la­tor added. Un­der Chi­nese rules, an­titrust fines are capped at 10% of a com­pa­ny’s an­nual sales.”

”Al­ibaba ac­cepts the penalty with sin­cer­ity and will en­sure its com­pli­ance with de­ter­mi­na­tion,” the com­pany said. “To serve its re­spon­si­bil­ity to so­ci­ety, Al­ibaba will op­er­ate in ac­cor­dance with the law with ut­most dili­gence, con­tinue to strengthen its com­pli­ance sys­tems and build on growth through in­no­va­tion.”

“The reg­u­la­tor’s pun­ish­ment of Al­ibaba Group is a move to stan­dard­ize the com­pa­ny’s de­vel­op­ment and set it on the right path, to pu­rify the in­dus­try, and to force­fully pro­tect fair com­pe­ti­tion in the mar­ket,” the Com­mu­nist Par­ty’s flag­ship news­pa­per the Peo­ple’s Daily said in a com­men­tary on the reg­u­la­tor’s state­ment, adding that the fine is “also a kind of love.”

[Pistachio_Lawyer]

50 minutes ago, fareastwarriors said:

 

It's less than $3 billion. Is it That significant? What else is there besides the fine? What's in the wsj article? 

Assuming I read their latest annual report right, they got 46b in cash and another 34bil in current liabilities. 

[ANP301191]

I dont think this is as big a fine as I first thought from reading the headlines. As Pistachio_lawyer indicated, I think its miniscule as compared to their cash on hand or the amount of cash they are generating on a quarterly/yearly basis. Its also less than the 10% cap that the government has for monopolistic competition fines, so obviously there is some discussions/negotiations on this fine that have gone on behind close doors.

If this is the "price" that Baba needs to pay for the cloud to be lifted and for regulators to back off, I think its a no-brainer and long-term investors should welcome it.

Also, I dont know how much of the discussions on baba have surrounded its ancillary businesses as compare to the e-com business, I think much like Amazon, part of the reason you own baba is for all the moonshots that are inside the company that could potentially be the next big thing. I appreciate the VIE structure probably doesnt offer as much protection as I would like, but thats the hope atleast.

 

[DumDumInvestor]

2 hours ago, ANP301191 said:

I think much like Amazon, part of the reason you own baba is for all the moonshots that are inside the company that could potentially be the next big thing. I appreciate the VIE structure probably doesnt offer as much protection as I would like, but thats the hope atleast.

 

Currently BABA is 600 billion market cap, how it can be a moonshot?(I understand that it can double in couple of years like apple, but to call it a moonshot you need a bit more, or not?) Or I do not understand something? I personally doubt that such huge company can continue to grow at very high rate.

[Agrippa07]

I don't think it could have been much better, this looks more like a slap on the wrist than anything else. Besides ANT, the impact on Alibaba's will be relativity insignificant 

[DumDumInvestor]

This chart is particularly interesting. BABA trails AMZN(what I do own) and all other mega tech and even QQQ from beginning of IPO.

[DooDiligence]

Random excerpts from a Bloomberg article.

---

The fine -- about 12% of Alibaba’s fiscal 2020 net income -- helps remove some of the uncertainty that’s hung over China’s second-largest corporation. But Beijing remains intent on reining in its internet and fintech giants and is said to be scrutinizing other parts of billionaire founder Jack Ma’s empire, including Ant Group Co.’s consumer-lending businesses and Alibaba’s extensive media holdings.

“China’s record fine on Alibaba may lift the regulatory overhang that has weighed on the company since the start of an anti-monopoly probe in late December,” Bloomberg Intelligence analysts Vey-Sern Ling and Tiffany Tam said, describing the fine as a small price to pay to do away with that uncertainty.”

Still, it remains unclear whether the watchdog or other agencies might demand further action. Regulators are said for instance to be concerned about Alibaba’s ability to sway public discourse and want the company to sell some of its media assets, including the South China Morning Post, Hong Kong’s leading English-language newspaper.

 

The Communist Party-run People’s Daily newspaper said in a commentary on Saturday that the punishment involves specific anti-monopoly measures regulatory authorities take to “prevent the disorderly expansion of capital.”

“It doesn’t mean denying the significant role of platform economy in overall economic and social development, and doesn’t signal a shift of attitude in terms of the country’s support to the platform economy,” the newspaper said. “Regulations are for better development, and ‘reining in’ is also a kind of love.”

www.bloomberg.com/news/articles/2021-04-10/china-fines-alibaba-group-2-8-billion-in-monopoly-probe

---

I thought the bolded parts were kind of funny.

BTND?

[Spekulatius]

I am pretty sure those boded parts are a result of a lousy translation.

 

As for Ant financial, I think Jack Ma ran into the issue that once he wanted to take Ant public, he had to disclose a lot of information to the regulator who then took a deep look and didn’t like what they saw. Ant was supposed to be a fintech, at least that’s how it was sold, but it really is much more than that, it is a vast financial empire that’s is highly leveraged that is involved in payments and various loans (including shady micro loans or loans, working capital loans etc) with some of it tied to banks.

From that perspective , it is understandable that the regulator takes a close look. In China, the listing in an exchange is a big deal and triggers an extensive look into the operations and apparently Ant/ Ma tripped a few wires here.

It will be interesting if Tencent can escape scrutiny, in a way their empire is more complex than Alibaba’s and Wechat as a platform has enormous reach and power.

[Gregmal]

Frankly, if this is what it cost to end the drama, I would have been fine with 10x the amount in fines. Havent we learned anything since the GFC? Paying the big bully a large one off dollar figure in exchange for business clarity is a trade you make all day. Just ask Brian Moynihan. 

[Krapdivad]

In last night’s talk Li Lu essentially echoed Charlie Munger’s advice of “fishing where the fish are.” Munger’s recent purchase of BABA aligns with what Li Lu was saying about the opportunities in China for value investors. 

 

Li Lu sees China as a great place for global value investors. He sees China playing an increasing role of importance in the global economy as it’s earlier in the economic lifecycle compared to the US. Because of this, patient US investors can take advantage of this younger market made up of retail traders with high turnover. 

 

China is shifting from an import/export driven economy to consumer spending driven economy with a rising middle class. China outpaced the US in retail sales for the first time last year. The Chinese government is becoming more aligned with the markets and reforming their regulations. 

 

Li Lu sees more opportunities in a dynamically growing economy like China, where there are a lot of inefficiencies in the market. He sees China undergoing a transition period where upcoming government reform will make the markets more efficient.

 

China stumbled onto the secret of producing sustained compounding growth that America has enjoyed. Li Lu credits this to the acceptance of free markets and advancements in science and technology. They just need the political stability to release this power.

 

There has been a lot of fear among US investors in investing in Chinese companies with the VIE ownership structure. Owning these wouldn’t make us shareholders, but owners of an offshore shell company that has contracts with the Chinese company. There is fear that our ownership couldn’t be enforced, or be wiped out by the Chinese government. 

 

Munger’s recent purchase of BABA and Li Lu’s talk about China opening up to global investors takes the opposite stance of this fear. 

 

Does Munger’s purchase of BABA mostly ease these fears of investing in Chinese companies for you?

[wabuffo]

Does Munger’s purchase of BABA mostly ease these fears of investing in Chinese companies for you?

Nope. 

 

[backtothebeach]

Ultimately, you are investing in BABA at the mercy of the CCP. What they fear most is loss of power. Will they let a private company grow to a 1T or 2T market cap before throwing some wrenches in the works (which arguably they are already doing right now)? I have my doubts.

Easy to put this in the too hard pile, Munger or not.

Edited April 10, 2021 by backtothebeach

[Ice77]

Xi is the President for life now in China. Xi is CCP now. This whole exercise against Jack Ma (the more public/vocal Ma as against the reticent Pony Ma of Tencent) was I believe about reining in potential sources of power within the Chinese power structure. The anti trust is just a smoke screen. There can be any kinds of tail risks here because of that...it is not comparable to the billion dollar fines that US institutions have had to pay for subprime or for anti trust. BABA may just ride this fine but there are a wider set of possible scenarios here than what a similar asset would face in the US. And so the position should be sized accordingly. 

[Pistachio_Lawyer]

1 hour ago, Ice77 said:

Xi is the President for life now in China. Xi is CCP now. This whole exercise against Jack Ma (the more public/vocal Ma as against the reticent Pony Ma of Tencent) was I believe about reining in potential sources of power within the Chinese power structure. The anti trust is just a smoke screen. There can be any kinds of tail risks here because of that...it is not comparable to the billion dollar fines that US institutions have had to pay for subprime or for anti trust. BABA may just ride this fine but there are a wider set of possible scenarios here than what a similar asset would face in the US. And so the position should be sized accordingly. 

I share the same sentiment. At the end of the day BABA is operating in an authoritarian state with rather dubious and tenuous relationship with the west.  The penalty (which stands three times of what BABA was hoping it would be) is a clear signal from the CCP that it won’t tolerate any competition, even from China’s own state sanctioned “private” sector.  IMHO this would have been a great stock if BABA were an American company.

p.s., I hope I am dead wrong for those of you with life savings invested in BABA 

Edited April 10, 2021 by Pistachio_Lawyer
Grammar

[RetroRanger]

The chinese gouvernement would never harm (significantly) one of their biggest companies. 

 

[DooDiligence]

I think this development makes the risk that we were all aware of, a lot more real.

I've made this a 3% position and am prepared to ride it out.

The potential for the business(s) is simply too huge for me to pass up.

[fareastwarriors]

2 hours ago, Ice77 said:

And so the position should be sized accordingly. 

That's the key right now.

 

If I invest in Russian stocks, then the government changes the rules and I get screwed? Well I'm not gonna bitch about it. I knew that risk is there when I went in there... Same for China and plenty of other places... 

Edited April 10, 2021 by fareastwarriors

[cubsfan]

Yeah, you size this appropriately. I like it a lot, but it's not a Berkshire size position.

The moat is huge, and the CCP is the only one that can wreck this business.

Personally, the cloud business is the reason to be in it - as the runway is very long.

You not going to put your Chinese business on a MSFT, GOOG or AMZN cloud - so your options are very limited locally.

And of course, here, in the US, you're unlikely to do the reverse - as no one is going to trust the host with critical data.

Shit, look how long it's taken US corporations to trust Google and AMZN with their data. 

 

Edited April 10, 2021 by cubsfan

[LearningMachine]

1 hour ago, Ice77 said:

And so the position should be sized accordingly. 

Indeed. $37 million BABA position through Munger's 3.7% share in DJCO is effectively only about 0.065% position for Munger's known net worth of $2.1B. Munger might be using only Daily Journal to hold his BABA holdings.  We know Himalaya Capital sold out of BABA last year.  So, we don't know if he holds any more BABA or 9988 shares outside DJCO or 9988 shares inside DJCO. 

[LearningMachine]

1 hour ago, RetroRanger said:

The chinese gouvernement would never harm (significantly) one of their biggest companies. 

 

More important than that to CCP would be to survive itself, and to not let anyone get too much monopoly or monopsony power over its consumers, merchants, etc. 

It is ironic that the communist government has a stronger incentive to protect its consumers than our democratic system, but that's how the incentives are currently. 

Edited April 10, 2021 by LearningMachine

[LearningMachine]

There might also be a better entry point coming if U.S. ends up delisting Chinese securities not open to audits to protect its investors, causing sell-off in Chinese ETFs.

Edited April 10, 2021 by LearningMachine

[Longtermlens]

51 minutes ago, LearningMachine said:

Indeed. $37 million BABA position through Munger's 3.7% share in DJCO is effectively only about 0.065% position for Munger's known net worth of $2.1B. Munger might be using only Daily Journal to hold his BABA holdings.  We know Himalaya Capital sold out of BABA last year.  So, we don't know if he holds any more BABA or 9988 shares outside DJCO or 9988 shares inside DJCO. 

With respect to Himalaya buying BABA and selling so quickly. Could it be that they bought the ADR and then converted shortly after to the HK 9988 shares? Would this show up as a sale on 13f for BABA shares? Prbly a stretch but just wondering. 

 

Edited April 10, 2021 by Longtermlens

[cubsfan]

Alibaba..... "I think we learned our lesson"

https://www.alizila.com/a-letter-to-our-customers-and-to-the-community/

 

Edited April 10, 2021 by cubsfan

[Lakesider]

If this spells an end to this phase of regulatory uncertainty then I wouldnt be surprised if this is a turning point for the stock. 

[Poor Charlie]

5 hours ago, RetroRanger said:

The chinese gouvernement would never harm (significantly) one of their biggest companies. 

 

There's some truth to this.  It's easy to look at Chinese companies, particularly those with the VIE structure, and dismiss them as uninvestable.  And with the extra-vivid examples of Jack Ma being 'disappeared', the anti-monopoly investigation and the ANT deal, this applies even more so to Alibaba.  But is this really the case?

Loot at some of the recent changes in China's financial system: the zero-tolerance policy on misconduct; the Hong Kong / Shanghai Connect; the liberalization of ownership rules in banking, credit ratings and payments; the so-called National Team; the shift away from financial repression; the support of yuan-based commodity contracts, invoicing and reserves; the digital yuan; etc.  It's clear that Beijing wants the financial sector to be a source of soft power going forward.  Given this objective, are they really going to kneecap Alibaba?  Are they going to allow wholesale theft of Alibaba's assets?  I'm willing to bet they won't.

Charlie Munger's involvement is also interesting.  Charlie has made several large investments where the outcome hinged almost entirely on politics (e.g., Freddie Mac in 1988, the banks in March 2009).  He's also avoided several 'slam dunk' investments because of politics (e.g., Detroit Bridge, Irvine Co.).  It's clear he has his radar tuned for this stuff.  And the fact that he took a position (his first position in nearly a decade) speaks to the reality that investing in China is more nuanced than the "you-don't-own-the-assets-the-Chinese-are-crooks-and-the-CCP-is-out-to-get-you" narrative would have you believe.