One might think that we've seen this movie before. Here in the U.S., and even in western Europe, internet based tech giants often face regulatory scrutiny. Often there are fines. Sometimes large. There is at times speculation that firms such as Facebook (FB) , Amazon (AMZN) , and Alphabet (GOOGL) might be broken up into several separate companies, and management is dragged before Congress and questioned. The difference is that these firms are hardly defenseless when brought before regulators either in DC, or Brussels.
Where I am going right now is where your brain already went. Alibaba Group (BABA) is on the ropes. While most analysts have not yet changed their opinion on the name, at least one very highly rated sell-side analyst did reduce his price target this (Monday) morning, as Colin Sebastian of Baird took his price target from $325 down to $285. Just in case readers are not following Alibaba closely, the U.S. ADRs peaked at $319.32 in late October, and closed at an even $222 on Christmas Eve, down 13% for the half session. Those ADRs were down further ahead of the U.S. open.
Why did I open by making mention of a few U.S. tech firms that have faced regulatory scrutiny? To show contrast. The difference is that these U.S. firms are hardly defenseless when brought before regulators either in DC, or Brussels. The stocks barely sneeze on this kind of news. In China, the government is all powerful. When Beijing says jump, Chinese companies say "How high?" They have no choice. This is one good reason for investors to simply avoid investing in nations where there is more at play than the business cycle or demand versus supply. You don't know, because you can not know. There is not the same kind of transparency.
Dress Right Dress
This past November, Chinese regulators pulled what would have been a record-breaking $34.4B IPO for fintech giant Ant Group, whose shares were set to dual list in Shanghai and Hong Kong. If this is unfamiliar to the reader, Ant Group started out as a digital payments service for Alibaba's e-commerce platform. Ant Group had since moved into insurance, investing, credit, and wealth management. Ant Group is 33% owned by Alibaba, and both companies were founded by former Alibaba Chairman Jack Ma who currently owns a controlling interest in Ant Group. News broke early last week that Jack Ma had offered the government "any of the platforms Ant has, as long as the country needs it" during negotiations in November, according to the Wall Street Journal. That sounds like something Ma's U.S. counterparts would normally say when forced to testify before a Congressional committee, right? No? No.
By the end of the week, CNBC was reporting that Chinese authorities had launched an antitrust probe into Alibaba itself. Apparently in question was Alibaba's policy of "choose one of two", which forces out competition. The People's Bank of China (the central bank) also made clear its intention to summon executives of Ant Group for a little discussion. That's when the BABA ADRs in the U.S. gapped lower.
Over the weekend, it was learned that Ant Group had been ordered to establish a financial holding company that must hold sufficient capital. The company itself would be told to return to its digital payment origins, increase transparency around transactions, and improve upon internal corporate governance. Not surprisingly, by Sunday, Ant Group had made a public statement that the firm would comply and that necessary rectifications would be made.
In the meantime, as Alibaba, the minority owner separate from Jack Ma, goes into its own investigation, the firm increased its share repurchase program from $6 billion to $10 billion authorized through 2022.
My Thoughts
You may get a bounce in the ADRs (BABA) today (Monday). This is why, in my opinion, the firm increased the buy back. My feeling is that if one is into speculation, one can trade names like Alibaba. That said, as far as investment goes, even as big and successful as this firm is, and even as large as its addressable market is, I can not invest. I won't tell you what to do, and you may hit one out of the park, but when a government has the power to pick and choose, or to change the dynamics around price discovery or the business itself through intervention, investing in private companies in nations like that is really just gambling. Those companies in my opinion are really only as private as they are allowed to be. I think I'll take a pass.
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