“He may have been grabbed by the party, and he may be in a dark room right now,” the head of a China research group told me this past week. He was talking about
founder Jack Ma, the richest man in China, who hasn’t been seen in 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, revved a motorcycle onstage, then hopped off for some dance moves—mostly pelvic thrusting. He meant China’s ruling Communist Party, which Ma has apparently crossed, and whose regulators have now come after his companies.
That sounds bearish. But it’s 2021: Bond yields are meager, Bitcoin just topped $40,000, and investors are thrusting like Michael Jack-Ma toward anything with fast revenue growth. Sure, shares of Alibaba Group Holding (ticker: BABA) have sold off. But in a poll by FactSet, a remarkable 53 out of 54 analysts who cover Alibaba say now is a good time to buy. Is it?
Let’s start with some positives. Alibaba is an impressive company, with an active user base that is more than twice as large as the U.S. population. It’s more dominant in e-commerce in China than
(AMZN) is in the U.S., and more profitable than either Amazon or
(WMT). Its main retail businesses are Alibaba.com, which connects manufacturers with wholesale buyers worldwide; Taobao.com, a go-between for buyers and sellers, like
(EBAY); and Tmall.com, a marketplace for global brands like
“China has these tech firms that are not…copies of U.S. equivalents,” says Leland Miller, CEO of China Beige Book, the researcher I mentioned. “They are truly innovative, spectacular firms.”
Alibaba has complementary side businesses covering cloud computing, shipping logistics, and more. It created Alipay to raise trust in online payments, then spun it off in 2011. Today, Alipay goes by the name Ant Group, is much larger than
(PYPL), and has moved into lending, investing, and insurance.
Ant Group was set to go public last year. Some bulls had predicted a $300 billion market value, versus a recent $617 billion for Alibaba, and $414 billion for
(JPM). Alibaba owns one-third of Ant Group.
In November, the stock offering was suddenly put on hold. Near Christmas, China’s 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 hasn’t turned up in public since he criticized China’s state-owned banks for operating with a “pawnshop” mentality in a speech in October.
“Jack’s in a lot of trouble, both personally and in terms of his company,” says Miller at China Beige Book. He might be “wisely keeping his head down,” or he might have been detained for “not having paid homage to the party,” Miller says.
Alibaba didn’t immediately respond to questions about Ma’s whereabouts.
It isn’t just about appearances. Alibaba’s financial businesses have long had a free hand to pay depositors more than China’s closely regulated banks, Miller notes.
“All this money would come screaming out of the state system…and it drove the state bankers crazy,” he says. “Here was Jack Ma, making a fortune, stealing their deposits, not having to do anything.” Bankers faced with shrinking deposits have cried foul to Beijing.
Miller, a former corporate attorney advising hedge funds on China, founded China Beige Book in 2010 to address two problems. Official economic data coming out of China isn’t trustworthy or complete, he says. His workers gather data by surveying Chinese companies: private and state-owned, large and small, coastal and rural, domestic and global.
What do they see now? China’s official story about rebounding from an economic downturn is accurate, the unvarnished numbers confirm, but the recovery isn’t especially strong, and it’s driven too much by increased production, and not enough by private household demand.
The curious case of Ma illustrates the unique risks of investing in China. The government can change the rules quickly, and without warning. Ma could reappear weeks or months from now, with Alibaba suddenly restructured and Ant Group under new government control.
There is a separate risk for investors buying the U.S.-listed shares. They get equity in an offshore vehicle that invests in Alibaba, not in Alibaba itself. “There’s nothing to say the Chinese government couldn’t just sever that link,” Miller says.
Trade tensions between the U.S. and China could one day leave China looking for new means of retaliation, including with U.S. investors in Chinese companies. So, how will trade fare under a new U.S. administration?
There is political sentiment on both sides against a softening of relations, Miller says, adding that “tensions…are not just here to stay, but are going to get considerably worse.”
Where does that leave would-be Alibaba investors? One of the rarest things in the investing universe now is a fast-growing company trading at a modest price. Tesla is coming off a humdinger of a quarter for growth in car shipments, but it trades at more than 100 times the free cash flow the company is expected to generate years from now—in 2024. Amazon looks much more reasonably priced at 15 times that year’s projected free cash flow. Estimates that far out are only educated guesses, of course. Still, Alibaba goes for closer to 11 times the free cash it is seen generating in 2024.
That’s a tempting discount for such a world-beating company. But best to wait until Ma reappears, with or without his dance shoes, before deciding whether shares are still worth the risk.