Chinese e-commerce giant
Alibaba Group Holding
(ticker: BABA) is feeling the heat from investors and regulators over allegations of monopolistic practices, but that doesn’t mean it will lose its momentum.
Last week, the People’s Bank of China (PBOC) announced it had begun an antimonopoly investigation. Analysts believe it is looking at whether Alibaba requires sellers on its platform to exclusively sell there and not through competitors, a practice known as “picking one from two.”
Regulators are also looking at Ant Group, a fintech company one-third owned by Alibaba. They are examining whether to treat Ant more like a bank and regulate it that way. Ant recently canceled what was expected to be the biggest initial public offering ever.
Alibaba shares gained almost 10% this year, compared to the 16.3% gain in the S&P 500 index.
David Semple, portfolio manager of the $2.6 billion
VanEck Emerging Markets Fund
(GBFAX), says Alibaba can beat others on product quality and service even if regulators do clip its wings.
Barron’s: What are China’s regulators looking at?
David Semple: It’s like many other sectors in China where the regulatory development has not kept up with the economic development. Essentially, entrepreneurialism invades gray areas and then the catch up is more of a black line. Some people will be on the wrong side of that; some practices will be on the wrong side of that, and that’s what they’re tidying up.
It was kind of an open secret in the industry that there were some practices that pushed the envelope, and I think that’s what’s perhaps being targeted. It’s more about the best development of the industry and the protection of consumers.
I don’t think it’s irrelevant that Jack Ma has been visible until fairly recently and now he’s been invisible. Clearly a lot of the fintech development were areas where the PBOC was uncomfortable but needed some more political clout to really start to jump in and regulate better. People get very worked up about these regulations happening and the spotlight on it. But things will settle down. There are some fantastic areas of opportunity. It doesn’t take away from the underlying structural growth of many of these companies.
For Alibaba, it doesn’t matter which way you attack it. There’s value in it. It’s just a question of time about how long it will take before that gets reflected back into the share price. We still think it’s a great core e-commerce business and putting a sensible multiple on that pretty much means everything else is for free. That’s the value in it. Will it perform over the next couple of months? I don’t know. But we do see a lot of value.
Was there a catalyst to make regulators act now? Was it the Ant Group IPO?
That would be pure speculation on my part. I don’t know. The Ant IPO is separate. Never underestimate the vested interests in China. The banking sector is almost exclusively state-owned, and they would be reasonably happy to clip its wings. The stark reality is that, objectively, it didn’t look like it was playing on a level playing field. That was why there’s been this pushback.
Alibaba isn’t the only company with exclusivity agreements, we’ve been told.
No. Other people do it in other places in other countries in other situations. But i think in the long run it just means the delta of growth is a little less. (Alibaba) can beat on quality of service. It is pretty competitive. This is the irony of it. The sheer competitiveness of this led to the antimonopoly regulation. The up-and-comers—JD.com and PDD—if they could, you bet your bottom dollar they’re going to be doing that, too.
Are regulators just targeting Alibaba, then?
The standard practice I’ve observed anyway in many of these cases is like the Chinese saying, where you throw a pebble into a pond and everyone takes notice of the ripples. In other words, there’s an example to be made here and everyone ought to sit up and take notice. I don’t think it’s specifically related to Jack, but if the collateral benefit is to rein him in, that’s an added benefit. But it applies across the sector.
But you have to be careful. Because this has been a wonderful innovation laboratory globally. In a country that is anxious to prove its credentials for innovation, this is an area which it can clearly point to. So there’s definitely a balance.
What effect does this have on other Chinese internet stocks?
Clearly the contenders benefit from this if you think Alibaba’s going to have its wings clipped. JD and PDD are the two obvious ones. There was concern that this may affect local services companies, for example
(3690.Hong Kong). They are the leaders in local services (like food delivery), and they compete head to head with Ele.me, which is Alibaba’s local services business. And Meituan is partly owned by
It’s become clear to me looking at gaming that Tencent’s tentacles are everywhere or rather the penguin’s footprints are everywhere. There’s a lot of potential areas that could be under the microscope.
The Ant IPO is a great IPO but not a great investment.
Why do you say that?
The hype, the excitement. The IPO until it didn’t work was going to do really well. Everyone was super excited about it, everyone was scrambling for stock. But the monetization aspect of fintech is harder than people think, particularly if the fintech guys have to play by the same set of rules.
Where else in the world are you looking?
For e-commerce? Clearly India’s a big one but the ability to participate directly in it is very circumscribed because the pure India-facing ones are private or part of larger companies. In Poland,
(ALE.POLAND) is a simple stand-alone e-commerce company. In Russia,
(OZON) listed. Again it’s a pretty simple stand-alone e-commerce business.
Then there’s what’s happening in Southeast Asia and who is going to win there. Shopee [the ecommerce business that is part of online marketplace
(SE)] is based in Singapore and the largest part of their profitability comes from Taiwan but their footprint is across Southeast Asia. What’s impressive is how well they’ve done in Taiwan. But there are a number of unicorns [in Southeast Asia] that are involved in e-commerce and local services, in particular Lazada, which is part owned by Alibaba.
SEA is a great business. The concern we have is that the gaming business is predicated on a very narrow set of games. And then there’s the valuation. SEA’s done very well, grown very fast, but at 10x enterprise value to sales, is that right? Who knows. To have a huge weighting in that it gives me concern.
What about outside of e-commerce? Any stocks to look at?
We like BTPS, [which is 70% owned by
] in Indonesia. It’s a female-based group lending model, so they lend to groups of women. They’re all jointly and severally liable for the loans so you’re only going to get together with your friends who are reliable. It’s only for productive uses. So if you want to set up a stall, that’s what you get the loans for. With it comes a lot of financial education. It’s very enabling for these women. It’s been a great stock for us. During the pandemic the share price halved but it went right back up.
One of our long-term holdings is in South Africa,
(TCP), a company that lends to minibus taxi operators. That’s how people get around in South Africa if they can’t afford Uber, taxis or cars. If you’re in a township and you need to get to work, you look for one of these taxis. They are individual owner-operated. These guys lend to them. They track where the buses are so they know where the collateral is and if there’s a problem. Is the operator ill or is the cab broken down? They’ll get help or fix it. It is very enabling. It’s been a very positive experience for us to be invested in this company.
Write to Liz Moyer at Liz.Moyer@barrons.com