Alibaba – The house wins

This is about Jack, not the house. 

• Alibaba escapes with a slap on the wrist and Beijing’s further actions demonstrate very clearly that its actions are all about bringing Jack Ma to heel rather than killing the economic powerhouses that he created.
• The Chinese regulator has fined Alibaba RMB18.2bn ($2.8bn) for market abuses and ordered it to file a report within 15 days detailing the actions it will be taking to ensure that the “illegal behaviour” does not re-occur.
• Alibaba has “sincerely accepted” its punishment, but I think that behind the scenes it will be delighted with this outcome which is pretty much exactly what I thought it would be (see here).
• This is because I don’t think that the China Communist Party (CCP) has any real interest in disrupting Alibaba’s progress or of the development of digital financial services in China.
• In fact, the more digitised the economy becomes, the easier it is for the CCP to exert control over it and Jack Ma’s companies Alibaba and Ant Group are right at the forefront of this shift.
• Instead, I think the CCP will be very happy to let Alibaba continue in the way that it has which is why this censure is a slap on the wrist at most.
• The fine amounts to 37 days of 2020 cash flow or 5% of its current cash balance meaning that Alibaba shareholders are barely going to notice the impact of this fine when it is paid.
• At the same time, the regulator has now gone after another of Jack Ma’s creations, Hupan University which is his executive training program which is extremely popular and difficult to get into.
• New admissions have now been suspended and there is no visibility on when they will be able to resume although the current classes are continuing to function.
• These actions combined with what the regulator did to Ant Group right before its IPO (see here), is a clear sign that the CCP’s chief aim is to remind Mr Ma who really is in charge in China and that he must toe the line in future.
• Jack Ma has all but disappeared from the public eye although he is free to move around China which is exactly what the CCP wants.
• I think that this situation creates significant investment opportunities.
• Jack Ma has built some great assets the valuations of which have been badly hit by fears of regulatory interference and restrictions on business activities.
• I think that reality is very far from this and that once Jack backs away from one of his assets (like he has with Alibaba) the heavy hand of the state will recede back into the background.
• Hence, there is an opportunity in Alibaba which has badly underperformed Tencent but where there is now regulatory clarity and much better visibility going forward.
• Furthermore, the outlook for the Chinese economy over the next year or two is a lot better than for pretty much everyone else meaning that Alibaba’s fundamentals should also outperform its international peers.
• I have a small position in Alibaba and given the fairly tepid response of the shares to this news, I will be increasing my position.
• Alibaba is one of the cheapest global ecosystems and I think it now has a pretty well defined and prosperous future ahead.
• I think it can at least re-rate to be in line with its global peers.