No need for boo-hooing BABA just yet. We’re aware of the poor performance of Alibaba’s shares, and we’re as disappointed as any. But we haven’t gone sour on the firm.
Chinese stocks (FXI) recently entered a bear market as the Shanghai Composite Index has dropped over 20% from its June 12 peak. The market is now in the midst of what most call a “self-correction,” as Chinese equity valuations have become out of touch with underlying fundamentals, though we maintain our view that both Alibaba and Baidu (BIDU) remain significantly undervalued.
The People’s Bank of China, in an attempt to halt the recent slide in share prices, cut both its one-year lending and deposit rates by 0.25%. In addition, the bank lowered the amount of cash that large banks must keep on reserve by 0.50%, intended to increase the ease of lending for banks. After that didn’t work, the Chinese government then published draft rules that would allow its pension fund to invest up to 30% of its net asset value–the equivalent of up to $97 billion–in the market. The latter seems to have eased the pain a bit.
But artificial moves to prop up its equity markets may do more harm than good over the long haul.
Economic growth is slowing in China, as the country experienced the slowest GDP growth in a quarter since 2009, and continued easing of the pace of expansion is to be expected, even if it remains robust by most any standard. The country continues to navigate through what many have described to be a real estate bubble. Some statistics are staggering: “the ratio of unsold property to annual sales reached 51.5% in 2014 from 24.7% in 2011.” That’s certainly an inventory glut, which doesn’t bode well for housing prices, which could have implications on the country’s banking system, a dynamic we know well as a result of the Global Financial Crisis of late last decade. The makings of a financial calamity have been building for some time in the country.
Unfortunately, Best Ideas Newsletter portfolio holding Alibaba has experienced a fate similar to the overall Chinese market, reaching a peak near $94 on May 21 falling nearly 14% to ~$81 just a little over a month later. We’re not happy about it, especially in light of the excitement of shares reaching $120 last November. Stock selection, however is never performed in isolation, and while the weighting of the position has declined due to poor overall performance, the position is just ~3.4% of the Best Ideas Newsletter portfolio. Other than Alibaba, we have no other international exposure in the Best Ideas Newsletter portfolio (absent multi-nationals), and we think the company remains one of the best ideas to fill that void.
On a firm-specific level, things continue to progress well. Alibaba is looking to invest ~$600 million in Indian online/mobile payments platform Paytm, further boosting Alibaba’s Ant Financial/Alipay affiliate. The news follows reports that Alibaba may invest in Indian online marketplace Snapdeal, and allocate nearly $1 billion in joint-venture Koubei, which will offer local services via mobile devices such as food delivery and booking appointments. Alibaba is taking a giant leap into establishing foundation in the budding Indian e-commerce market. Alibaba is managing its business for the long haul, and we like the moves.
We’re not running for the exits. Alibaba reports second-quarter results August 12. All eyes will be on its reported monetization rate, and we expect an upside surprise.
Related ETFs: FXI, EWH, KWEB, PGJ, GXC, YINN, FXP, ASHR, HAO, TAO, YANG, CHIQ, CQQQ, DSUM, MCHI, CHIX, QQQC, PEK, XPP, YAO, YXI, ECNS, CHXF, CHII, FCA, CN, CHIE, CHIM, EWHS, FCHI, KFYP, ASHS, CNXT, CHNA, CHLC, KBA, FHK, CBON, CHNB