BABA - Alibaba

[Jurgis]

How do you guys get comfortable investing in BABA or Tencent or others given the legally unenforceable rights to assets?  I'm not asking as a bear or short or anything.  I'd love to own these companies but I just worry about this. 

 

I remember when Jack Ma sort of seized Alipay from Yahoo! and they were basically helpless.  In fact I had a conversation with CFO at the time about this. And that has kind of been seared in my mind.  Also all these stories from Bill Browder with his experience in Russia and whatever (although a very different govt and situation, but still lack of enforceable rights for foreigners). What gives you comfort or how do you think about the risk?

 

I think this is a good and relevant question. I have asked this in the past and I continue to have this in mind. The short answer is that this is a risk and I would never put more than couple % of my money into these stocks.

 

The longer answer is that it's likely neither management nor the government will screw you... but if they wanted to, they could, and you'd have no recourse pretty much. I don't know China as well as I know Russia. I think that large-well-known-tech Chinese companies are likely (much) more shareholder friendly than various Russian entities. OTOH I've had bad experiences with Chinese fraudulent reverse mergers. And there are examples (that did not blow up yet) where government told CHL to invest its cash into some crappy bank(s), etc. And there is example of AliPay - although some people would argue that if Jack Ma kept AliPay within BABA, government would have killed it as "foreign-controlled" financial firm.

 

On yet another hand, if I had held when I first bought Tencent ages ago, I'd be way rich(er) - and nothing bad happened in these 10+ years while the stock went up 100x or so.

 

Maybe someone should ask Warren and Charlie how can they be comfortable investing and holding BYD...  8)

 

Good luck  8)

[Shooter MacGavin]

Fair points.

 

BYD is a different animal though.  As far as I know, BYD, listed in Hong Kong, can be owned locally by Chinese citizens and foreigners.  In other words, I believe Berkshire would have the same ownership rights as a Chinese citizen of BYD.

 

In China, Internet stocks are specifically prohibited from foreign ownership, so what you own in BABA are basically shares in a Cayman Island VIE that contracts with Jack Ma to provide profit share in exchange for the IPO capital. It was specifically designed to skirt Chinese foreign ownership laws while listing outside of China.

 

So in the first, the China's government recognizes the foreign legal ownership as pari passu with that of local owners.

 

But in the second, the instruments were actually designed by lawyers, and they have not officially had the blessing of the Chinese government. 

 

I worry if Trump keeps agitating China (whether he should or not is a different debate), that the Chinese govt could in theory nullify US/Foreign ownership in these companies.

 

Anyway, I guess the answer is don't bet with too much.

 

[Jurgis]

Yes, right VIEs and contractual rights and all that. I am aware. But Chinese government could kick BYDs ass if they wanted to too. For example if they decided that "Great Wall" or some other car company should be preferred vendor in China or if they decided that BYD CEO is corrupt and should be jailed. And "the same ownership rights as a Chinese citizen" would be worth zilch. But, yeah, VIEs and contractual rights might be more risky.

[cmlber]

I worry if Trump keeps agitating China (whether he should or not is a different debate), that the Chinese govt could in theory nullify US/Foreign ownership in these companies.

 

Does China have any incentive to nullify foreign ownership in these companies?

 

First, doing so would permanently impair Chinese access to foreign capital markets.

 

Second, how do you think any President, let alone Donald Trump, would react to the Chinese government effectively stealing hundreds of billions of dollars in value from American investors?  China holds $1 trillion in treasury securities...  If they want to steal property from American investors, what's to stop Trump retaliating by voiding debt?  That sort of retaliation may be a little extreme, but you could certainly imagine this starting a massive trade war.

 

Third, the Chinese government has had a draft ruling open for comment for a couple years now that would legitimize the VIE structure so long as the company is controlled by a Chinese national.  If that is passed, it would effectively give you the same legal rights as a shareholder in FB or GOOG; legitimate property rights but a founder controlled business where the founder can theoretically take advantage of you or poorly allocate capital and you have to judge whether or not you think that's likely.

[Jerry Capital]

Firstly, limit size where where a 100% loss would still be manageable.

 

Secondly, require a higher "margin of safety"... whatever that term means to you... For me it means only buying Alibaba when it trades at a significant discount to similar US based companies. All else equal you should vastly prefer to own Google, Amazon, and/or Facebook if the valuation gap can't be eyeballed as egregiously large.

 

Thirdly, be less inclined to let Alibaba run up in portfolio weight and be OK trimming. For domestic companies I never trim, hate paying capital gains taxes and don't believe in "trading around a core position", I have no limit on market value position size just average cost position size. However, with Alibaba if it becomes your largest position don't be afraid to trim a little in order to not violate rule #1.

 

These thoughts are inspired by Seth Karmans June 1996 Baupost Letter to Shareholders where he was purchasing Russian ADRs:

 

"The Fund also initiated positions in the U.S.-listed ADR's of three Russian companies (two in the oil and gas business and one electric utility). Baupost has been following the nascent Russian stock market for three years, and we are excited that the Fund now has the ability to participate in this dramatically undervalued part of the world.  Of course, because of the higher risk involved, we are limiting our overall exposure in Russia to a level where even a total loss would still be manageable."

[walkie518]

The VIEs are certainly troubling, but it's hard to get around it since there is no way to invest in Chinese companies otherwise. 

 

However, I am of the opinion that while rights may be in law unenforceable by the letter of the law, the spirit of the law, should there be an opportune or unfortunate event requiring litigation, would likely prevail. 

 

If it walks like a duck and quacks like a duck...

[Jurgis]

Or this could happen:

 

https://www.nytimes.com/2018/04/12/business/china-bytedance-duanzi-censor.html

[Shooter MacGavin]

Firstly, limit size where where a 100% loss would still be manageable.

 

Secondly, require a higher "margin of safety"... whatever that term means to you... For me it means only buying Alibaba when it trades at a significant discount to similar US based companies. All else equal you should vastly prefer to own Google, Amazon, and/or Facebook if the valuation gap can't be eyeballed as egregiously large.

 

Thirdly, be less inclined to let Alibaba run up in portfolio weight and be OK trimming. For domestic companies I never trim, hate paying capital gains taxes and don't believe in "trading around a core position", I have no limit on market value position size just average cost position size. However, with Alibaba if it becomes your largest position don't be afraid to trim a little in order to not violate rule #1.

 

These thoughts are inspired by Seth Karmans June 1996 Baupost Letter to Shareholders where he was purchasing Russian ADRs:

 

"The Fund also initiated positions in the U.S.-listed ADR's of three Russian companies (two in the oil and gas business and one electric utility). Baupost has been following the nascent Russian stock market for three years, and we are excited that the Fund now has the ability to participate in this dramatically undervalued part of the world.  Of course, because of the higher risk involved, we are limiting our overall exposure in Russia to a level where even a total loss would still be manageable."

 

Thanks

 

Do you know how they ended up doing in Russia?

 

The thing is, unless I can make it a meaningful position, I think why bother?  If I think BABA can compound at a mid 30's clip for the next 5 to 7 years, but then I make it a 2% position, I think why not just look somewhere else?  Unless there is another reason to get comfortable enough that i'm not understanding and then I can make it a 5-7-10% position.  But it seems like most people kinda approach it by "only dipping one toe in"

 

[Shooter MacGavin]

Or this could happen:

 

https://www.nytimes.com/2018/04/12/business/china-bytedance-duanzi-censor.html

 

funny and troubling article.  Yeesh.  thanks for sharing.

[walkie518]

Or this could happen:

 

https://www.nytimes.com/2018/04/12/business/china-bytedance-duanzi-censor.html

 

funny and troubling article.  Yeesh.  thanks for sharing.

 

This is not a direct comparison except for the fact that Alibaba is a Chinese internet company. More than just a website but an infrastructure with global reach, not to mention ant.

 

If I'm missing something, can you spell it out for me?

 

 

[Voodooking]

https://www.economist.com/business/2018/01/18/chinese-tech-companies-plan-to-steal-american-cloud-firms-thunder

 

I've been hearing a lot recently about how Alibaba is planning to list on the main exchange in China this summer, by offering Chinese residents the opportunity to purchase stock (possibly by way of CDR's).

 

What do you guys think the result of this will be, do you think the stock will rise when the Chinese get a chance to buy something that until now they have not been able to own? I know that savings rates are very high in China, approx 50% by some reports. People with that much cash saved are capable of buying a lot of shares if there is indeed demand.

 

This article also suggests that BABA will compete or overtake Amazon Web Services in cloud offerings in the US...

 

I wish I could see the runway a bit more clearly on this one to anticipate growth in 20 or 30 years and whether it matches the rise in Chinese consumption.

[Guest jeffswaldron]

It looks like Li lu / Himalaya Capital Management LLC has bought into this company.  Does that intrigue anyone to research this more and am I missing something?

 

https://fintel.io/i13f/himalaya-capital-management/2018-03-31-0

 

[mwtorock]

It looks like Li lu / Himalaya Capital Management LLC has bought into this company.  Does that intrigue anyone to research this more and am I missing something?

 

https://fintel.io/i13f/himalaya-capital-management/2018-03-31-0

 

i dont know if this is just a tracking position or not. For high conviction ideas, he usually bets a lot more than that. personally i would not read too much into it.

[Guest ajc]

 

 

It looks like Li lu / Himalaya Capital Management LLC has bought into this company.  Does that intrigue anyone to research this more and am I missing something?

 

https://fintel.io/i13f/himalaya-capital-management/2018-03-31-0

 

 

 

It's a sizeable position of mine via my Softbank holding and my FCSS.L stake. I don't think it's too complex of an idea.

 

- They're still growing at a very good clip with their core business.

- They own Lazada which is ASEAN's biggest e-commerce player and they've only recently started putting resources and effort into that. It's a market of more than 600 million people.

- They also own about half of Cainiao, which is China's biggest logistics company (like UPS and FedEx combined, I guess).

- Their Amazon Web Services-like platform, Aliyun, has a huge growth runway for at least a decade or two.

- There are other things to mention like their big PayTM stake, Ele.me, etc, but if you do some rough math on what the above businesses could be worth then that's a fair start.

 

In terms of near-term catalysts, there are a few:

 

- They own 33% of Ant Financial. It's due to IPO late this year or in 2019. I think it's currently valued at around $150B. Yu'e Bao is also part of Ant, and is the world's biggest money-market fund.

- Didi has also apparently hired banks for a 2019 IPO. $BABA owns about 15% of the company from my estimates. Roughly, they should get a market cap of around $120B, so that's worth $20B right there.

- There's also the listing of China's major tech companies on their home exchanges, including $BABA. Until now, local Chinese have been unable to own their own national champions. The government is fast-tracking this process. As catalysts go, I think it could potentially be a massive one.

 

There're other mentionables, like it's capital-light, the Chinese market is cheap, etc, but I think those are some reasonable ones that are worth taking into account.

 

 

 

[Guest ajc]

 

 

It's a sizeable position of mine via my Softbank holding and my FCSS.L stake. I don't think it's too complex of an idea.

 

- They're still growing at a very good clip with their core business.

- They own Lazada which is ASEAN's biggest e-commerce player and they've only recently started putting resources and effort into that. It's a market of more than 600 million people.

- They also own about half of Cainiao, which is China's biggest logistics company (like UPS and FedEx combined, I guess).

- Their Amazon Web Services-like platform, Aliyun, has a huge growth runway for at least a decade or two.

- There are other things to mention like their big PayTM stake, Ele.me, etc, but if you do some rough math on what the above businesses could be worth then that's a fair start.

 

In terms of near-term catalysts, there are a few:

 

- They own 33% of Ant Financial. It's due to IPO late this year or in 2019. I think it's currently valued at around $150B. Yu'e Bao is also part of Ant, and is the world's biggest money-market fund.

- Didi has also apparently hired banks for a 2019 IPO. $BABA owns about 15% of the company from my estimates. Roughly, they should get a market cap of around $120B, so that's worth $20B right there.

- There's also the listing of China's major tech companies on their home exchanges, including $BABA. Until now, local Chinese have been unable to own their own national champions. The government is fast-tracking this process. As catalysts go, I think it could potentially be a massive one.

 

There're other mentionables, like it's capital-light, the Chinese market is cheap, etc, but I think those are some reasonable ones that are worth taking into account.

 

 

 

I'll add one final thing from a Connie Chan (a16z) presentation I watched yesterday.

 

The video is somewhere over ten minutes in total, and a fair amount of it sounds a bit Orwellian, but the part from 7m20s to 8m15s is really interesting from an Alibaba investment perspective.

 

The opportunity she discusses seems like a really substantial one, and that could potentially be another significant growth driver for them over time.

 

 

 

 

[Voodooking]

Well, the China Securities Regulation Commission have yesterday approved the sale of CDR's for overseas-listed companies to offer a secondary listing in mainland China, with immediate effect.

 

I wonder how long it will take Alibaba to take advantage of this and offer CDR's for Chinese investors?

 

I'm also interested how this will alter any ownership stake that the American listed ADR's currently have. Will this dilute the ownership stake of the ADR's at all? Will the large numbers of Chinese purchasing Alibaba push the price of the stock up?

 

This is a long term holding for me. Another poster mentioned Li Lu and I think it is encouraging from a due diligence point of view, as he carries out incredibly in-depth research before he initiates a position, but I also remember that most of his portfolio will be in China, and the only reason we are seeing this as a large percentage of it is because it is one of 2 or 3 American listed stocks that are subject to 13F listing.

 

The fact that the following well respected investors all have significant holdings also gives me a fair degree of confidence in the stock, which has been called a "Toll road on the spending of emerging middle-class China". I think it has a nice runway.

 

Himalaya Capital (Li Lu): 56.9% of portfolio.

Joho Capital (Robert Karr): 40.62% of portfolio.

Tairen Capital (Larry Chen & Terry Zhang): 36.49% of portfolio.

Temasek Holdings Ltd (Lim Boon Heng): 35.83% of portfolio.

Northern Cross, Llc (Jean-Francois Ducrest): 13.87% of portfolio.

Platinum Asset Management (Kerr Neilson): 11.74% of portfolio.

Sands Capital Management, Llc (Frank Sands): 8.16% of portfolio.

Parus Finance (uk) Ltd (Fabrice Vecchioli & Edouard Vecchioli): 8.14% of portfolio.

Appaloosa Management LP (David Tepper): 7.65% of portfolio.

Duquesne Capital (Stanley Druckenmiller): 6.66% of portfolio.

Discovery Capital Management (Rob Citrone): 6.54% of portfolio.

Coatue Management (Philippe Laffont): 6.18% of portfolio.

Lone Pine Capital (Stephen Mandel): 5.56% of portfolio.

Third Point (Daniel Loeb): 5.51% of portfolio.

Hillhouse Capital Management (Lei Zhang): 5.03% of portfolio.

Moore Global Investments (Louis Bacon): 5.03% of portfolio.

[Liberty]

More details on the ruling here, for those curious:

 

https://www.ft.com/content/7e243658-6a0c-11e8-8cf3-0c230fa67aec

 

Chinese direct link: http://www.csrc.gov.cn/pub/zjhpublic/zjh/201806/t20180606_339317.htm

[walkie518]

 

 

It looks like Li lu / Himalaya Capital Management LLC has bought into this company.  Does that intrigue anyone to research this more and am I missing something?

 

https://fintel.io/i13f/himalaya-capital-management/2018-03-31-0

 

 

 

It's a sizeable position of mine via my Softbank holding and my FCSS.L stake. I don't think it's too complex of an idea.

 

- They're still growing at a very good clip with their core business.

- They own Lazada which is ASEAN's biggest e-commerce player and they've only recently started putting resources and effort into that. It's a market of more than 600 million people.

- They also own about half of Cainiao, which is China's biggest logistics company (like UPS and FedEx combined, I guess).

- Their Amazon Web Services-like platform, Aliyun, has a huge growth runway for at least a decade or two.

- There are other things to mention like their big PayTM stake, Ele.me, etc, but if you do some rough math on what the above businesses could be worth then that's a fair start.

 

In terms of near-term catalysts, there are a few:

 

- They own 33% of Ant Financial. It's due to IPO late this year or in 2019. I think it's currently valued at around $150B. Yu'e Bao is also part of Ant, and is the world's biggest money-market fund.

- Didi has also apparently hired banks for a 2019 IPO. $BABA owns about 15% of the company from my estimates. Roughly, they should get a market cap of around $120B, so that's worth $20B right there.

- There's also the listing of China's major tech companies on their home exchanges, including $BABA. Until now, local Chinese have been unable to own their own national champions. The government is fast-tracking this process. As catalysts go, I think it could potentially be a massive one.

 

There're other mentionables, like it's capital-light, the Chinese market is cheap, etc, but I think those are some reasonable ones that are worth taking into account.

 

ajc: how do you get to 15% of Didi? I see 6%? 

[Guest ajc]

 

 

ajc: how do you get to 15% of Didi? I see 6%?

 

 

 

You're likely right. Sorry about that. Thinking about it, some of my $BABA notes need updating. My old ones were:

 

- Cainiao (logistics) 47% Alibaba and 8 biggest logistics companies in China all combined.

- Ant Financial (Alipay) 33% stake includes Yu'e Bao (100 billion dollars AUM), Alipay is biggest player in total market of $500 billion per quarter.

- Didi (guess at 15% stake). Tencent seemed to own about 20% of Didi Dache at 100 million dollar valuation early on, and has participated since.

- Lyft (7.5% appr.) Didi also a large shareholder.

- Lazada Group (controlling stake).

- Guangzhou Evergrande (soccer) 50%.

- Quantium Solutions (SingPost logistics) 34%. Oct 2016 Singapore logistics ops does business for Adidas, Canon, etc.

- Singapore Post (mail/parcel) 10%. Logistics interests in US with Adidas others.

- Also Sina Weibo (18%), Meizu (5% guess), and Magic Leap (10%).

- PayTM (Indian payments) 50% Alibaba owned, 20% Ant Financial owned.

- Aliyun (Chinese AWS) 100% owned.

- Kakao Pay (Korean payments) $200M in Feb 2017 for payments division of Kakao valued at $5B for whole company.

- AGTech (Chinese e-gambling) 60% of major Chinese online gambling company.

- Snapdeal and Snapchat (very minor stakes).

 

I see they did a Didi round with Ant in 2016 for $200M each, but eye-balling it I'd say the dilution since and lack of participation by $BABA makes your number far more accurate. I'd also think my Lyft, Magic Leap, and PayTM numbers from those notes, are all too high since they've been most active in raising new rounds. My screw-up.

 

 

 

[Guest ajc]

 

 

 

ajc: how do you get to 15% of Didi? I see 6%?

 

 

You're likely right. Sorry about that. Thinking about it, some of my $BABA notes need updating. My old ones were:

 

- Cainiao (logistics) 47% Alibaba and 8 biggest logistics companies in China all combined.

- Ant Financial (Alipay) 33% stake includes Yu'e Bao (100 billion dollars AUM), Alipay is biggest player in total market of $500 billion per quarter.

- Didi (guess at 15% stake). Tencent seemed to own about 20% of Didi Dache at 100 million dollar valuation early on, and has participated since.

- Lyft (7.5% appr.) Didi also a large shareholder.

- Lazada Group (controlling stake).

- Guangzhou Evergrande (soccer) 50%.

- Quantium Solutions (SingPost logistics) 34%. Oct 2016 Singapore logistics ops does business for Adidas, Canon, etc.

- Singapore Post (mail/parcel) 10%. Logistics interests in US with Adidas others.

- Also Sina Weibo (18%), Meizu (5% guess), and Magic Leap (10%).

- PayTM (Indian payments) 50% Alibaba owned, 20% Ant Financial owned.

- Aliyun (Chinese AWS) 100% owned.

- Kakao Pay (Korean payments) $200M in Feb 2017 for payments division of Kakao valued at $5B for whole company.

- AGTech (Chinese e-gambling) 60% of major Chinese online gambling company.

- Snapdeal and Snapchat (very minor stakes).

 

I see they did a Didi round with Ant in 2016 for $200M each, but eye-balling it I'd say the dilution since and lack of participation by $BABA makes your number far more accurate. I'd also think my Lyft, Magic Leap, and PayTM numbers from those notes, are all too high since they've been most active in raising new rounds. My screw-up.

 

 

 

Speaking of my screw-ups... I've now owned SFTBY (which is how I own basically all my BABA) for three years and earned a massive 6% CAGR on it after averaging down.

However, I'm pretty darn sure the Vision Fund does own 20% of Didi, as well as 30%+ of Ola, 40%+ of Grab, and around 15% of Uber.

Time will tell if Softbank shares continue going nowhere, while Alibaba carries on steadily upward.

 

I've got a sense that between the Ant IPO and the local listing of Chinese tech stocks, Alibaba has some good upcoming catalysts to go along with their impressive growth.

At the same time, Softbank is trying for the TMUS/S merger, an IPO of their Japanese telecom, and they've got the Uber and Didi IPO's coming up which, all things being equal, will be great for the Vision Fund. If they can get 2 of the 4 done this year or early next, that might be very good for their stock. If they can get 3 done, it might be even better.

 

So I'm tempted to say SFTBY has more catalysts here than BABA this year but judging by my past 3 years owning the stock, it's fair to ask what the hell I know.

 

 

 

[plato1976]

The fear about SoftBank is really the constant high debt load; they may delever with s merger and telecom IPO but they are talking about vision fund II so the leverage may go up when that happens. Tech is at a high point in general — obviously the market doesn’t like the idea to use leverage to acquire high risk tech assets at this point

[cameronfen]

The fear about SoftBank is really the constant high debt load; they may delever with s merger and telecom IPO but they are talking about vision fund II so the leverage may go up when that happens. Tech is at a high point in general — obviously the market doesn’t like the idea to use leverage to acquire high risk tech assets at this point

 

I don't have the numbers right on me but a telecom like softbank's japan assets can hold 4 or 5 turns of EBITDA.  After subtracting that out leverage is more than manageable.  I think asset managers can hold some leverage especially with SB cost plus management fee of 5% model.  And then you can hold some debt around equity positions, but that is more questionable in my mind but the remaining debt is not too high (or zero). 

[Guest ajc]

 

The fear about SoftBank is really the constant high debt load; they may delever with s merger and telecom IPO but they are talking about vision fund II so the leverage may go up when that happens. Tech is at a high point in general — obviously the market doesn’t like the idea to use leverage to acquire high risk tech assets at this point

 

 

Not to take up too much of the Alibaba thread here, but in terms of perception I think that's directionally right. The S/TMUS deal looks like being the main anchor or the main catalyst, depending on what happens. After that, I'd say the home telecom IPO then the Didi and Uber events are probably the next biggest deals. In Softbank's favor, they've obviously been trying to get the stock re-rated for some time now (major buybacks when Arora was there & playing up the 'Berkshire of tech' tag in arguing for a stock premium). The first two moves seem to be in the works with exactly that highlighting in mind.

 

We'll have to agree to disagree on tech valuations generally. I see some expensive stuff, but also some growing cash flows at very reasonable prices. I also think cameronfen's comments about asset managers is accurate. Bloomberg did a short article on that a few weeks back (https://www.bloomberg.com/view/articles/2018-05-08/softbank-is-japan-s-hna-that-s-good). Since then, they did exit Flipkart, which was a concern raised in the article. They'll also get a public 'exit' when those two ride-sharing IPO's happen next year. Anyway... time will tell how well they execute and if other factors go in their favor, but it does look like they're doing what's needed to help close the substantial discount to fair value.

 

 

 

[Spekulatius]

What do people here make of BABA’s accounting. the article below, while biased, raised some valid point regarding BABA’s accounting. having a $1.2B company like Wazmu disappear from BABA’s annual report and balance sheet without a trace is done discomforting:

https://deep-throat-ipo.blogspot.com/2018/08/the-baba-20-ffinancial-comedy-gold.html

[Liberty]

https://www.nytimes.com/2018/09/07/technology/alibaba-jack-ma-retiring.html