Chinese internet giant Alibaba has filed documents for a public share sale in the US, sparking a wave of market commentaries.
The company is the biggest online retailer in China, generated revenues of $6.5 billion in the nine months to the end of December 2013, making a net profit of $2.9 billion.
With analysts predicting a bigger market opening than Facebook, Citywire Global has canvassed a number of emerging market and Chinese equity managers on what is widely expected to be one of the biggest IPO in history.
Landmark listing for China
I think the IPO is possibly one of the most eagerly anticipated Chinese IPOs for a long time because of several reasons. As the dominant eCommerce operator, Alibaba is at the intersection of two very dynamic and strong investment themes in China: consumption and the internet.
Also, Alibaba is large size and has chosen to list in the US and not Hong Kong (probably due to its ownership structure) just when investors are becoming concerned over internet valuations and when concerns over the Chinese macroeconomic situation are rising.
The valuation will be an interesting discussion between buyers and sellers. Finally, we will be able to get a full read on their financial statements.
Most mega-IPOs from China tend to be sales in stakes of state owned businesses so this is different. You won’t see another one this size in the Chinese internet space for a long time.
An eye on profits
Robeco’s Wim-Hein Pals, who is head of emerging market equities at the Dutch group, thinks Alibaba will be an attractive investment given the proven track record of profitability.
We would have to look at all the details but we are talking about a company which has potential users and customers of around 600 million. That is because it is arguable a combination of Google, Amazon and eBay but with a backyard of built-in investors.
Whether or not it would prove an attractive investment depends entirely on the valuation and earnings, but the earnings we have seen are very profitable already. This could potentially be a big, big IPO and it will be very interesting to see how this impacts other companies.
Improved visibility is vital
Alibaba’s IPO will significantly increase the visibility of Chinese internet companies to global investors, according to Jian Shi Cortesi, manager of the JB China Evolution fund at Swiss & Global Asset Management.
It’s an exciting event that will open opportunities to invest in one of the best internet assets in China.
This is unlikely to be the first of many mega-IPOs out of China because most of the large cap companies in China are already publicly traded, on the stock exchanges in Shanghai, Shenzhen, Hong Kong, or the US.
That’s also what makes the Alibaba IPO special, as it’s one of the few large successful companies still privately owned today. The IPO also shows that emerging market companies could be larger than developed market companies in the same industry, even in technology and internet.
The gross merchandise volume for Alibaba is bigger than eBay and Amazon combined. Nevertheless, as the business exposure is to EM consumers, Alibaba stock could still exhibit much higher volatility than DM peers.
Poses a threat to established players
Yannick Naud, portfolio manager at Sturgeon Capital, sees Alibaba as a great investment to play the Asian eCommerce growth story, while also showing another potential growth area for internet stocks.
Alibaba is fantastic and its recently launched asset management business, Yu Le Bao, has grown very fast and is competing directly with banks for deposits. Going forward we could see the same sort of thing happening in Europe and US at companies such as Facebook, Amazon and Apple.
Even if it is far from being a 'value investment', I think Alibaba, Tencent and Baidu are probably the best way to play the growth of Chinese/Asian eCommerce with multiples that are a fraction compare to US companies.
The challenge for Chinese eCommerce companies will be to be able to grow outside their protected domestic market. If we look at WeChat, for example, they still haven’t managed to break into Japan (Line) or Korea (Kakao). The same applies to some US companies like WhatsApp.
Watch this space
It’s important to have a closer look at Alibaba’s fundamentals before investing in it, says Alistair Way, emerging markets manager at Standard Life Investments.
The Chinese eCommerce space is one of the most dynamic and rapidly growing sectors in the world, and Alibaba has a dominant market share within it, so the IPO will certainly be of great interest to us. We have already made a very successful investment in this sector, the niche flash marketing company VIPshop.
However, we will need more information on Alibaba’s fundamentals, notably on how exactly earnings are generated, and on valuation, before we can decide whether it will be an attractive deal.
Alibaba is a domestic Chinese internet company but clearly will attract a global investor base. The lines between EM and developed market have already been blurred in internet, which trades as a global sector.
For example Twitter’s weak share price yesterday affecting Tencent’s today. In the high profile mobile instant messaging market, where Facebook recently bought Whatsapp, the key competitors are emerging market companies Tencent and Naver.