Alibaba's China Addiction Isn't Such an Asset Anymore

  • Shares approach IPO price as China GDP grows least since 1990
  • Alibaba's 83 percent of sales in China most in three quarters

People walk through Ltd.'s headquarters in Hangzhou.

Photographer: Nelson Ching/Bloomberg

Alibaba Group Holding Ltd.’s initial public offering was the biggest ever as the company profited from being a proxy for a Chinese economy that investors were counting on. Just 16 months later, that reliance is perceived to be a liability.

QuickTake Alibaba

Alibaba has lost almost $29 billion in market capitalization this month alone as investors fret over the e-commerce emporium’s dependence on China, where there’s slowing growth, tumbling markets and a weakening yuan. Shares almost reverted to the IPO price, underperforming both the New York Stock Exchange Composite Index and the Bloomberg China-US Equity Index.

The battering comes as Alibaba’s quarterly results due Thursday are expected to show revenue growth of 27 percent, its lowest since at least June 2012. The portion of sales coming from China rose during the last three quarters to 83 percent, prompting billionaire founder Jack Ma to pursue growth abroad through deals including ride-sharing service Lyft Inc. and Hong Kong’s South China Morning Post newspaper.

“Investors largely see Alibaba as a proxy for China’s economy, and right now there’s just not a lot of good news,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP. “Alibaba has been trying to branch out revenue streams, but that takes time to develop.”

Ma’s Strategy

Ma warned investors in November of a rocky 15 months ahead, saying many Internet companies would fail as China tried to rebalance its economy. He told Bloomberg Television he wanted more than 50 percent of revenue to come from outside China, and his strategy included a spree of 28 announced deals worth a combined $17.3 billion.

The company invested in the movie “Mission: Impossible - Rogue Nation,” appointed directors for its operations in France and Germany, and expanded its online payment system Alipay to more than 100 countries. This year’s priorities include adding the largest American brands to its platform for Chinese buyers, President Michael Evans said in November. The company’s international strategy may use acquisitions as well as organic growth.

“Over reliance on China will make the stock more risky to hold and also cap its valuation,” Cyrus Mewawalla, managing director of London-based CM Research, said in an e-mail. “To justify a higher market cap it really needs to be a global player.”

Xi’s Pivot

Yet Chinese buyers remain a focus, and not just for Alibaba. Wall Street’s pessimism toward the company may be undeserved as investors overlook the transformation taking place in China. President Xi Jinping wants to pivot the economy away from a focus on debt-funded investment, heavy industry and overseas demand to one driven by consumption, services and innovation.

Consumption accounted for about 66 percent of GDP growth in 2015, compared with 51 percent the year before, according to the National Bureau of Statistics. That should help smartphone vendors, brick-and-mortar retailers and movie-ticket sales.

Apple Inc. said Tuesday its sales in the Greater China region grew 84 percent last year, and Chief Executive Officer Tim Cook vowed to continue investing there through any downturn. Starbucks Corp.plans to open about 500 new coffee stores in China in the year ending Sept. 27, compared with 450 a year earlier. China also is expected to become the world’s biggest movie market by next year.

Growing Consumption

Alibaba, which has a hand in selling many of those products, generated record revenue of 91.2 billion yuan during its annual Nov. 11 promotion known as Singles’ Day -- a 60 percent increase from a year earlier.

“Stocks have been going down with the consideration of China, but that may not be fully justified,” said Gil Luria, an analyst at Wedbush Securities Inc. in Los Angeles. “Within China, consumption should be the source of the growth.”

Still, Alibaba shares declined 22 percent in New York last year, falling below the IPO price of $68. The plunge, at one point, destroyed about $121 billion in shareholder value.

This year, shares are down another 14 percent amid estimates that China’s annual GDP growth will decelerate to 6.5 percent. Alibaba, whose stock was little changed on Wednesday, on Thursday will report earnings for the quarter ended Dec. 31.

Revenue is expected to reach 33.2 billion yuan, according to the average estimates of 28 analysts surveyed by Bloomberg. That compares with 26.2 billion yuan during the same period a year earlier. Net income is projected to grow 73 percent to 10.3 billion yuan, according to 20 analyst estimates.

“My suspicion is that the results will look better than the headlines coming out of China,” said R.J. Hottovy, a Chicago-based analyst with Morningstar Inc. who is second on the Bloomberg Absolute Return Rank. “Alibaba is viewed as a proxy on consumer spending, and we think that data will do fairly well.”

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