Alibaba Group Holding Limited (BABA) faces immense pressure from the authorities in China as an antitrust lawsuit against the Alibaba has been launched. The news took the company’s shares down 13 percent on Thursday and 8 percent in Hong Kong on Friday, the highest single-day decline on the stock market in Alibaba’s history. In our view, such a violent market response is explained by investors’ concerns that there are political motives for the dispute.
In recent months, the owner of the company, Jack Ma, has publicly criticized Chinese business regulators for hindering technology growth. As a result, the financial daughter of Alibaba, Ant Group was unable to carry out an IPO in the fall (by the way, it may become the highest in the history of the Hong Kong stock exchange), a fine of 500,000 yuan was subsequently given to Alibaba Group itself, and now arguments are made as to the rules of cooperation with other retailers.
The authorities are officially working within the scope of the current law, which has a constructive objective: to limit the burden of IT companies on medium and small enterprises. The latest inquiry against Alibaba refers, in particular, to a long-standing conflict between the authorities and Alibaba over exclusive supplier contracts. The website allows suppliers and wholesalers to comply exclusively with Aliexpress and not to show it on rival aggregators, or it violates the deal.
The latest fine may be worth billions of dollars (the previous one, related to non-compliance with formalities when buying a retail chain, amounted to a symbolic 76 thousand in US dollars). But the biggest risk is that it will be appropriate for Alibaba to break its company. For the authorities, Ant Group, the provider of the AliPay operation, is a big irritant. The business is increasingly growing lending in the internet space to firms, bypassing banking regulations. For the first time this year, sales from that segment reached 40 percent of Ant Group’s overall turnover.
It is doubtful that Alibaba will split the company. Jack Ma is a man of repute who knows how to deal with the authorities. Clearly, in the coming years, FINTECH will be confined in China, and this will indirectly impact the profits of the entire Alibaba Group. The heart of the company, though, will still be online trading, and cloud computing will be the new revenue engine.
Compared to Alibaba’s turnover, Ant Group’s turnover is not so large: around $23 billion to $97 billion expected this year. The parent group itself controls just 33% of this service, the remainder being personal investments of Jack Ma and its partners. It follows from this that we are now having one of the best opportunities to buy the Chinese giant’s ADR. Alibaba shares are now at their lowest levels since June, almost nullifying the development of this year due to the emotions of players. In the coming months, the organization has impressive growth prospects.
Shares will easily rebound above the $300 in August they were selling at. It would carry at least 35 percent of the profits to customers.