Alibaba

[karlmarx]

My view is the biggest unknown is simply regulation, period.

Alibaba has been executing extremely consistently over the last few years (again, look at MAU, growth rate of R&D spend, topline, gross earnings, margin of individual business segments, FCF etc.; looking at GAAP net income alone is the wrong metric here).

The main issue is regulation. With CCP's renewed focus at "common prosperity", and strengthening oversight (ie control); would a figurative/literal high-margin "toll booth" at China's most important sectors (e-commerce, fintech etc.) serves CCP's best interest?

Personally do not think Alibaba is just a simple "toll booth". "Toll booth" has implications that it simply extracts value, and does not contribute; personally I think it provides more value than it extracts. Alibaba took risks, put in the work (R&D, capex etc.), and build out the most critical infrastructures (digital, financial, logistics etc.) of modern Chinese economy; but I'm not sure what the CCP thinks.

Certainly, if an entire industry can be decimated just based on the snap of government's fingers, there is much for investors to be worried about since just about anything can be done to hurt any industry, and even company. 

Maybe e-commerce trading will slow with the on-going slew of regulations. But what would be the argument for killing the companies which support Chinese e-commerce? And if there were a better model for the distribution/trading of goods in China, what would that look like?

As new regulations continue to be released -- the latest on the rules of tech's use algorithms -- and we look at that together with the recent crackdowns on fan clubs, 'errant' and 'unmanly' celebrities, private education, gaming, and the rest of its crackdowns in the past decade or so, the rationale behind all of them are consistent with one or all of the following:
a. consumer protection,
b. future social development, and hence, economic development, and
c. CPC influence and control.

Of course, you would be unhappy with you are a business owner and you could do all these things to enrich yourself, and now the rules and enforcement comes down and makes it more difficult for you to make a buck.

But these moves convince me that there is no doubt to me that the Chinese economy, and the incomes of its people, will grow for a long time. I agree with some commentators' views that all of China's recent moves is to build sustainable future growth (which includes political stability). But whether alibaba will be a benefactor of this growth is a separate matter for discussion.

U.S. regulators came down strongly on its own railroads for differentiated pricing, and the giant Standard Oil for anti-competitive behaviour, in the early 1900s, but the broken up Standard Oil and railroads still grew nonetheless. Because they still had the advantage of scale compared to their competitors. Of course, alibaba could have a very different fate.

Coming back to alibaba, the largest part of its revenue comes from ads. So like most tech companies, users don't directly pay for using its services. With the latest restrictions on algorithms, it may see a hit on its ad revenues as users will be allowed to switch off recommendation ads, which means more difficulty for alibaba to sell targeted ads. They will have to figure out how they are going to sell ads.

The good thing is that more control is put into the users' hands, which will probably provide better user experience. Unfortunately for the user, ads will not be completely eliminated since consumers/buyers are not paying broker fees; unless users are willing to pay for an ad free experience.

But I think the most interesting part of alibaba is Ant, which had the potential to become the biggest bank for developing countries or underbanked populations. Unfortunately for alibaba, it owns too little of Ant, and the regulations on its consumer businesses will undoubtedly slow its growth. It probably still has opportunities to grow in China since state lenders do not appear to be moving quickly into algo/credit-scoring based lending. 

Outside of China, if traditional banks are not moving fast enough to enhance value proposition, Ant has the potential to disrupt their long-held export-import trade financing role.

[Wildreamz]

Hi Karlmarx,

Getting to granular is pointless, as reality will often turn out very different with the details; usually, it's the larger trends that will turn out more predictable (e.g. great companies will continue to be great, innovators will continue to innovate etc.).

But we can still talk about the details, just for fun. Alibaba already has some form of algorithm control: https://twitter.com/ruima/status/1431348322871115776

So does Facebook (settings>ads>ads settings), I doubt 99.9% of users goes into the setting to customize that. So there is that.

But, how China is going to enforce these "algorithm laws" is frankly a blackbox, due to the very ambiguous language used "Companies must not set up algorithms that push users to become addicted or spend large amounts of money" (what does it even mean? How to enforce?).

As for Ant Financial, it used to be critical financial infrastructure of China, and a huge growth vertical. But after recent crackdown and "de-risking" by the CCP, the growth prospects have been greatly crippled; both domestically and internationally (as other countries have grown wary of Chinese institutions).

The most critical piece of the puzzle now is what are CCP's intentions for their largest companies like Alibaba and Tencent. We can only speculate. With CCP's new emphasis of (among others) avoiding "Choke-point technologies" （掐脖子技术）, I'm just wondering if they are comfortable with letting their entire economy be dependent on 1 or 2 companies for critical function.

If I'm the CCP, I would wish to have more redundancy in the system. For payments, I will want my Digital Yuan to succeed in the long term; not only I will hold all the data, I also reduce friction (fees) in the system. For ecommerce, I will want as many "platforms" as possible to succeed (and competing margins away); preferably majority owned by Chinese people (not foreign investors), so they can enjoy the growth in capital appreciation.

I'm not saying that investors will not make money investing in Alibaba today at today's price (it is undoubtedly cheap). But, as Buffett says "if you don't feel comfortable owning a stock for 10 years, you shouldn't own it for 10 minutes." I'm not comfortable with the asymmetric balance of power between my largest business partner (CCP; who also happens to be quite unpredictable) and myself (the shareholders); hence, I will abstain from this opportunity.

Peace.

[Choon]

Thanks.

What baffles me is why is there no direct clone competition to Amazon i.e. another platform aggregating third-party merchandise.

Whereas Ali have to spent so much to defend against PDD and JD and Shoppee.

Why are there no PDD and JD equivalents burning cash to compete with Amazon in the US market?

https://www.youtube.com/watch?v=_RE8Xd18BO4

This YouTuber puts forward his view why Amazon does not face any direct similar competitor in the U.S. whereas Ali has to contend with JD and PDD.

In short, his view is that Amazon had from the start focused on addressing the most basic needs of consumers, thus it is difficult for new competing platforms.

Whereas for Taobao, it started of as a C2C business and was more focused on reducing friction and providing a marketplace for merchants. It thus left room for JD to compete on quality and PDD to compete on value.

[Wildreamz]

https://www.straitstimes.com/asia/east-a...-crackdown

Chinese Vice-Premier Liu He assures businesses of support, amid regulatory crackdown

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Good news for Chinese investors. But IMO, "support for businesses" may not extend evenly across all businesses.

[CY09]

Likely Alibaba and Tencent wont be receiving support from China as they are already large. However, China wont be too hard on them such that they will die.

These companies have extremely good execution and products which has transformed them into half a trillion dollar companies. Their potential is large and if the communist government had supported them, they could become 1-2 trillion companies in a decade which rivals the FANG of USA.

However, because the Chinese communist government fear such private enterprises. Hence I think at best, they will only be able to become a trillion dollar company. The mentality of the Chinese government will result in China never producing a top class private company unless it is a state owned enterprise such as Huawei

[Wildreamz]

Fidelity Cuts Ant Valuation Again as China Crackdown Intensifies
https://www.bloomberg.com/news/articles/...ntensifies

Fidelity Investments has slashed its estimate of Ant Group Co.’s valuation for at least the second time this year, underscoring the deteriorating outlook for Jack Ma’s fintech giant as the Chinese government ramps up regulation of the industry.

The Boston-based money manager’s valuation of its Ant holdings at the end of June implied a total market capitalization of about $78 billion, according to regulatory filings compiled by Bloomberg. That’s down from $144 billion in February and $235 billion just before Ant’s initial public offering was abruptly suspended by regulators in early November.

[Wildreamz]

Beijing to break up Ant’s Alipay and force creation of separate loans app

https://www.ft.com/content/01b7c7ca-71ad...pe=nongift
https://www.marketwatch.com/story/chines...1631495430

Chinese fintech will turn over user data to new joint venture partly owned by state

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The first act of "confiscation" by the Chinese government while regulating Big Tech? In this case, the confiscation of "user data".

[CY09]

The wheels of another of their star profit driver is gone...

I think end game, Alibaba is just going to be a conglomerate capable of earning 5% profit annual growth despite the best of their management abilities. Maybe we should add in a new quote adapted from warren buffett:

"When a management with a reputation for brilliance tackles a country with a reputation for bad business sentiments, it is the reputation of the country that remains intact."

[Wildreamz]

I have heard opinions that this is just a necessary step to IPO.

But IPO or not, fundamentals of Alibaba (and Tencent who own Wechat Pay) is materially weakened after this move. Also, could be yet another sign of things to come (e-commerce/cloud/gaming/social media user data next?).

(not vested)

[CY09]

Even if there is IPO, the valuation is severely weakened. Ant initially had a creditbureauasia equivalent in its structure which has now been taken by CCP, so its valuation will fall.