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THE MAIN STORY: CHINA’S SUPER-AMAZON

Overview

Famed value investors from Thomas Russo, Mohnish Pabrai, and Guy Spier to Charlie Munger have taken positions in the Chinese tech-behemoth Alibaba (BABA).

However, harsh regulations from the Chinese Communist Party, slowing Chinese economic growth broadly and amidst Covid-zero lockdowns, and fears that many Chinese stocks could be de-listed from U.S. exchanges, among many other reasons, have weighed heavily on the company’s stock price.

Shares on U.S. markets are down over 50% in the last five years, hitting a peak of over $300 before falling swiftly to current levels around $90.

What’s the deal, then? Were these legendary investors simply wrong on this bet?

We read over Thomas Chua’s thoughts on the topic to garner better insights.

Diving in

He explains that Alibaba’s ecosystem is expansive, covering the entire e-commerce value chain, including branding, broadcasting, sales conversion, and payments.

In the U.S., sellers may go onto Amazon or Shopify to sell their products while designing their marketing materials on Fiverr, then use Stripe to handle payments.

Alibaba, however, dominates all of these aspects.

According to Chua, Alibaba operates the world’s largest retail commerce business, measured by gross merchandise value.

For context, in the fiscal year ending in March 2021, over $1 trillion had transacted across their platform, whereas Amazon only did $475 billion, and Shopify and eBay did $120 and $100 billion, respectively.

Commerce empire

Alibaba also hosts the consumer-to-consumer social commerce platform, TaoBao, which holds no inventory and instead offers a platform for other merchants to sell their products. Unlike eBay, Taobao’s “micro-merchants” sell new products rather than second-hand ones, and it makes money from selling ad space.

Within Alibaba’s commerce empire is also Tmall, which hosts large retailers and luxury brands, where merchants pay commissions directly to Alibaba on product sales.

Like Amazon’s endeavors in purchasing Whole Foods, Alibaba has ventured into the supermarket space, with a 72% stake in Sun Art and its 484 physical retail locations.

This enabled the company to digitize these shopping experiences by offering on-demand food delivery and scannable QR codes to see where food was sourced.

Wholesale business

In its wholesale marketplaces, Alibaba has two businesses: 1688.com and Ling Shou Tong. These subsidiaries offer paid memberships to merchants who rely on their services for sourcing materials for operations in everything from consumer goods manufacturing to mom-and-pop stores.

These systems help retailers analyze data trends in sales, provide inventory recommendations, and even offer supplier credit to finance their inventory.

Global reach

Outside of China, Alibaba has subsidiaries such as Lazada, which aims to be a retail commerce super app across southeast Asia. And AliExpress operates across Europe, the U.S., and Brazil, enabling consumers globally to purchase directly from manufacturers and distributors in China.

On top of all this, the company operates its own version of DoorDash, known as Ele.me, a Yelp alternative called Koubei, and a Chinese version of Booking.com.

Payments and finance

If that wasn’t enough different business models, Alibaba holds a 33% stake in Ant Financial which shouldn’t be overlooked.

Ant Financial’s planned listing on the Shanghai and Hong Kong stock exchanges was famously blocked in 2020 by regulators, yet it continues to grow from a humble payments company to a “one-stop shop for all things financial.”

Amazingly, it operates with over 1 billion active users annually while working with over 80 million merchants and 2,000+ financial institutions.

Amazon vs. Alibaba

Chua argues, “we often hear people liken Alibaba to China’s Amazon, but other than being in e-commerce, they’re actually quite different.”

Whereas Amazon will hold inventory directly to sell to customers, Alibaba primarily facilitates business by enabling third-party sales without being a physical intermediary.

This means the company can command higher margins since it wields fewer inventories.

The downside for Alibaba is that it faces more challenges with fraud and fulfillment, while Amazon can manage quality assurance and product delivery directly. Alibaba has also faced fines for “monopolistic conduct,” which amounted to $2.8 billion in 2019 (22% of net profits).

Amazon’s cloud computing business has been a tremendously profitable tailwind for the company, though Alibaba looks set to dominate here, too, at least according to Chua. It currently holds about half of the market share in China.

Takeaways

Perhaps you can see now why we called Alibaba a tech behemoth. It’s impossible to adequately touch on all of their businesses in one sitting, but you can see why any investor would want a piece of this huge and growing business.

However, any investment in China carries significant regulatory risks.

Given the Chinese government’s ambitions for “common prosperity,” Alibaba has pledged to invest over $15 billion by 2025 towards projects related to generating social welfare. Rather than raising taxes or levying fines, this is one way for the government to extract money from tech giants voluntarily.

As a result, the company will push forward with less profitable projects, such as “digitizing rural villages and encouraging them to participate in e-commerce,” which would intend to boost sustainable development across society.

Regardless of pressures from the Communist Party, Chua remains optimistic about Alibaba long-term and cites a target share price of $288.90.

SEE YOU NEXT TIME!

That’s it for today on We Study Markets!

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