Alibaba: master of the treasure cave

The media and netizens alike have been chatting up a storm about the upcoming Alibaba IPO. Even though the offer has not been officially announced, estimates of the company’s potential value once it is listed on the Hong Kong Stock Exchange have literally doubled in the past six months.

Is this a repeat of the frenzy that accompanied Facebook’s IPO, which ended in crashing disappointment when the stock plunged after the sale? Or can Alibaba Group make a better fist of handling the market?

Just like Ali Baba, who foiled the 40 thieves and gained access to a magical cave of treasures, there are no indications to date that Alibaba’s easy access to the Chinese internet market and the online world will abate.

True, there are domestic and foreign competitors snapping at its heels. But Alibaba has been the leader in China, with the most solid reputation in the Chinese online world. It carefully watches established trends in the west and adapts them for its gargantuan domestic market.

Alibaba Group’s net profits for the quarter ended December 2012 skyrocketed 171 per cent to $642.2m, with revenues jumping 84 per cent to a whopping $1.84bn. What began in 1999 as a $60,000 business-to-business online sourcing platform is now estimated to be worth anywhere between $55bn and $120bn.

Eric Qiu, an internet analyst at Guosen Securities in Hong Kong, says the valuation may top $100bn. Alibaba is not just about online sourcing anymore. It’s gone upstream, downstream and almost everywhere in between.

Jack Ma, Alibaba’s founder and chairman, has borrowed from and adapted the west’s Amazon (tMall), eBay (Taobao), PayPal (Alipay), Groupon (Juhuansuan) and Google Android (Aliyun), as well as providing the mother of all shopping search engines. Consumer and small business financing are coursing through the established pipeline, as well as a mobile operating system. Last month the Alibaba Group bought a $586m stake in Sina Corporation‘s Weibo, China’s answer to Twitter.

Imagine owning all the big players of the consumer internet world and presenting them uncensored and without trade restrictions to an online audience of 400m Chinese (roughly double the number of people online in the US). The possibilities are stratospheric.

Ma is a self-proclaimed innovator. But in truth his products are about as innovative as Marco Polo’s when the latter returned to Italy from China. Marco Polo brought noodles from China and easily adapted them into pasta for his fellow countrymen. Unlike Apple, where Steve Jobs’ innovation was critical to the company’s success, good adaptation is what matters at Alibaba.

By stepping down as CEO but retaining the title of chairman, Ma has pre-empted any whingeing from potential institutional investors like those presently plaguing Jamie Dimon at JP Morgan. Yet he can and most likely will continue to exercise full control over corporate strategy and direction, his forte.

Would future changes in the renminbi exchange rate make much difference to the company? Unlikely. Alibaba does not export anything. Its magic is its sole focus on Chinese consumers and SMEs, with 400m of them online and their numbers rising every day. China’s emerging consumers, solidly middle class and newly affluent, are ravenous for consumer goods and will buy domestic and imported goods, brand names and no names, in virtually every price range. Ma’s apostle-like statement, “E-commerce in the States is a dessert. In China it’s become the main course,” reverberates on Wall Street even more today than when it was uttered a few years ago.

Savvy investors want to know the risks in Alibaba’s future. Qiu believes the Chinese government and the banking industry are noteworthy risk factors. The Chinese government has effectively kept out significant foreign competitors until now. It could easily swing the doors open under the new regime or, worse, clamp down on Alibaba’s runaway success.

Alibaba’s aim to be an upstart player in the internet and SME financing business may not go down well with the banking industry or its regulators. Domestic rivals like Tencent and Baidu are chomping at Alibaba’s heels.

If Alibaba does expand overseas, it will finally be vulnerable to foreign currency fluctuations. And finally, who knows when or if the Chinese economy will hit a wall?

For now, though, the rumoured IPO is being compared to Facebook’s. Perhaps this is in itself a risk factor – Facebook had a sky-high valuation that critics said had been pulled out of thin air. In an unprecedented move, key analysts (the underwriters’ analysts) cut their forecasts in the middle of the IPO road show but by that time many investors had already been whipped into a frenzy.

Few people noticed the one line change added to page 57 of the prospectus. With the Alibaba Group, investors will get their China exposure with little currency risk and with the bonus of an internet play. Alibaba’s advisers will need to ensure valuations are firmly grounded in reality from the outset. Or the magic surrounding the company might prove to be illusory.

Related reading:
Alibaba’s hidden treasures, FT
Rivals brace for Alibaba push into overseas markets, FT
Alibaba’s growth brings millions of jobs, FT
Facebook’s dismal IPO emboldens reformers, FT