“He may have been caught by the party, and he may be in a dark room right now,” the head of a Chinese research group told me last week. He was talking about
founder Jack Ma, China’s richest man, who has not been seen for weeks.
By “party,” he didn’t mean the festive kind, like Alibaba’s annual party in 2017, when Ma, dressed as Michael Jackson with a gold mask, rode a motorbike on stage, then jumped for. some dance moves – mostly pelvic thrusts. He meant the ruling Communist Party in China, which Ma apparently broke through, and whose regulators have now come after his companies.
It looks bearish. But it’s 2021: bond yields are meager, Bitcoin has just passed $ 40,000, and investors like Michael Jack-Ma are pushing towards anything that has rapid income growth. Of course, shares of Alibaba Group Holding (ticker: BABA) have sold. But in a survey by FactSet, 53 out of 54 notable analysts who cover Alibaba say it’s a good time to buy. That’s it?
Let’s start with some good points. Alibaba is an impressive company, with an active user base more than twice the size of the US population. It is more dominant in e-commerce in China than
(AMZN) is in the United States and more profitable than Amazon or
(WMT). Its main retail activities are Alibaba.com, which connects manufacturers with wholesale buyers around the world; Taobao.com, an intermediary between buyers and sellers, like
(EBAY); and Tmall.com, a marketplace for global brands like
“China has these tech companies that aren’t… copies of American equivalents,” says Leland Miller, CEO of China Beige Book, the researcher I mentioned. “These are really innovative and spectacular companies.”
Alibaba has complementary secondary activities covering cloud computing, shipping logistics, etc. He created Alipay to increase confidence in online payments, then ran it in 2011. Today, Alipay is called Ant Group, is much bigger than
(PYPL), and turned to loans, investments and insurance.
Ant Group was scheduled to go public last year. Some bulls had predicted a market value of $ 300 billion, compared to $ 617 billion for Alibaba and $ 414 billion for
(JPM). Alibaba owns a third of the Ant group.
In November, the share offering was suddenly suspended. Around Christmas, Chinese regulators announced an antitrust investigation into Alibaba, as well as a look at setting new rules for Ant Group.
Ma, worth more than $ 40 billion, has since missed scheduled television appearances. He has not appeared in public since criticizing China’s state-owned banks for operating with a “pawnshop” mentality in a speech in October.
“Jack has a lot of issues, both personally and with his business,” says Miller of China Beige Book. He may be “wisely keeping his head down” or being detained for “not paying tribute to the party,” Miller says.
Alibaba did not immediately respond to questions about Ma’s whereabouts.
It’s not just a question of appearances. Alibaba’s financial firms have long had a free hand to pay depositors more than tightly regulated Chinese banks, Miller notes.
“All this money was coming from the state system… and it was driving state bankers crazy,” he says. “This is Jack Ma, who was making a fortune, stealing their deposits, having nothing to do. Bankers faced with shrinking deposits have cried foul in Beijing.
Miller, a former company lawyer advising hedge funds on China, founded China Beige Book in 2010 to solve two problems. Official economic data from China is neither reliable nor complete, he said. Its employees collect data by surveying Chinese companies: private and public, large and small, coastal and rural, national and global.
What do they see now? China’s official story of the rebound from an economic downturn is correct, unvarnished numbers confirm it, but the recovery is not particularly strong and is driven too much by increased production, and not enough by demand from private households.
Ma’s curious case illustrates the unique risks of investing in China. The government can change the rules quickly and without warning. Ma could reappear in weeks or months, with Alibaba suddenly restructured and Ant Group under new government control.
There is a separate risk for investors who buy stocks listed in the United States. They get equity in an offshore vehicle that invests in Alibaba, not in Alibaba itself. “There’s no evidence that the Chinese government couldn’t just sever that link,” Miller says.
Trade tensions between the United States and China could one day leave China looking for new avenues of retaliation, including with U.S. investors in Chinese companies. So how will trade play out under a new US administration?
There is political sentiment on both sides against an easing of relations, Miller said, adding that “the tensions … are not just here to stay, but will escalate considerably. ”
Where does that leave Alibaba’s potential investors? One of the rarest things in the investing world now is a fast growing company that trades for a modest price. Tesla is coming out of a quarter of an hour for growth in car shipments, but it is trading at over 100 times the free cash flow the company is expected to generate in the years to come – in 2024. Amazon looks much more reasonable at 15 times that price. forecast free cash flow for the year. Estimates that are far are only educated guesses, of course. Still, Alibaba is approaching 11 times the free cash it is supposed to generate in 2024.
This is a tempting discount for such a world famous company. But better wait until Ma reappears, with or without her dancing shoes, before deciding whether the actions are still worth the risk.
Write to Jack Hough à [email protected] Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.