Alibaba and Casino Capitalism

Note:  I wrote up these notes in 22/09/2014 when my partner asked me if we should invest in Alibaba’s IPO.  I figured I should blog this in, just for history…
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You’re kidding, right?  How can this stock (BAB:US) get a huge pop on the first day?  That on a valuation that some people were already considering rich? It started at USD 92.7 at 11:53, popped to USD 99.4 7 minutes later and ended the day at USD 93.89, on the first day!!

The only smart people in BAB:LN are the ones who got the pre-IPO allocations and then got out (or are in the process of getting out) ASAP.
FT Alphaville calls it a “Cayman e-commerce site.”  Not surprising considering the SEC docs for Alibaba Group Holding Limited.
You’re buying shares of Alibaba Group Holding, which eventually ends up with “contractual arrangements” with the underlying companies everyone is so excited about.  You don’t get a say in anything the company (read Ma) want to do.

The FT had an excellent background story that should be enough to lay greedy hearts to rest:

Alibaba.com, the online business which had been listed to great fanfare in Hong Kong in 2007, was being delisted nearly five years later.

…The business plan for Alibaba.com, a trade website connecting Chinese exporters with foreign customers, had not worked, but a new economic opportunity was emerging. China’s economy was turning from an investment-driven export machine into a liberalising, consumption-driven economy. Alibaba had a chance to be at the centre of it.

That’s the hope everyone is buying into.  But is that going to happen fast enough and in great enough rates to justify BABA valuations? And where is the guarantee that this company will be at the center of it all?

… Total gross merchandise value traded on the two websites increased from Rmb131bn in the three months to end June 2011 to Rmb501bn in the three months to the end of June 2014.”

But that’s not as rosy as it sounds:

…some experts question the numbers Alibaba has published on gross merchandise value.
Anne Stevenson-Yang, the founder of J Capital Research in Beijing, said the rapid growth in Alibaba’s GMV, which it said rose 63 per cent from 2012 to 2013, is not supported by evidence. A study by J Capital of Chinese publicly listed retail companies, meanwhile, revealed a growth rate not exceeding 6 per cent, and online sales were growing slower than offline.”

Some believe ecommerce as a whole is overstated in China. Alibaba’s estimates of its own size put the total value of the ecommerce market at $300bn last year, which is larger than the US ecommerce market. Meanwhile, the size of China’s GDP is just over half that of the US and consumption as a percentage of GDP is under half that of the US.

…Alibaba has also gone on a shopping spree in the past year, spending over $5bn to buy stakes in more than 100 companies, such as Autonavi, a mobile GPS mapping software and UC Web, a popular mobile browser.”

…Some of the sons and daughters of China’s ruling elite managed shareholdings stakes via a team of banks and investment firms that took small stakes in 2012 that are now worth billions of dollars: Boyu Capital, Citic Capital Holdings and CDB Capital, the China Development Bank’s private investment arm.”

…Due to restrictions on foreign ownership, investors in China’s technology companies do not actually own shares in the license-holding company but in an offshore registered VIE, or variable interest entity, that simulates ownership via a series of contracts and directs cash flows to investors.

That presents two nightmare scenarios:

  1. insiders could make off with the company’s assets by simply removing them from the VIE; or
  2. China’s courts, which have turned a blind eye to the practice for more than a decade, could suddenly strike down the structure

The first variant is especially acute given Alibaba’s history with Alipay. Add to this the complicated shareholding structure and the risks are obvious.

I think I’ll pass…

Investment Strategy: Palm Oil & the Africa Connection

There has been a lot of talk about Palm oil, fueled mostly by the meteoric rise of palm oil futures on the back of demand from — where else — China and India.  Red Palm oil is cold-pressed and bottled as cooking oil;  blended into mayonnaise & salad oil;  even fortified into health foods & anti-aging cosmetics.  The main global trade of the product is through RBDPO Continue reading “Investment Strategy: Palm Oil & the Africa Connection”

Trade Notes: Some Tarnish on “India Shining” Might be an Opportunity

RBI head office, Delhi
Image via Wikipedia

Yes, India is most definitely one of the few positive things we could look to in 2010 but there were more than enough warning signs that things might not continue to remain so rosy.  Maoism coupled with the fissiparous nature of Indian politics —based as it is on race, religion, caste, and class — makes government and governance from the center difficult enough.  Rampant corruption in federal & state governments doesn’t help.  Nor does exploitation of that corruption by the large Indian corporates only recently weaned from the vicissitudes (that they so adroitly profited from) of the “Permit Raj.” The demographic advantages that everyone had been touting vis-a-vis China may also be a double-edged sword if not tackled adroitly and with some dispatch. Continue reading “Trade Notes: Some Tarnish on “India Shining” Might be an Opportunity”

Trade Notes: Milk Most Likely to go the way of Onions in India

Manmohan Singh, current prime minister of India.
Image via Wikipedia

I’d mentioned as long ago as March that milk prices are likely to spike higher.  The Economic Times delivered to my hotel room in Kolkata suggests this is coming true

After vegetables, now milk will also pinch consumers, as Gujarat‘s largest milk producer, Gujarat Cooperative Milk Marketing Federation (GCMMF) marketing dairy products under the brand ‘Amul‘ on Tuesday announced a pan-India hike in milk prices by Rs 2 per litre. Continue reading “Trade Notes: Milk Most Likely to go the way of Onions in India”

Background: Incredible India can do your Head in

The Calcutta Club, where The Raj remains in residence

I’ve been coming to this place on and off for about two decades now but the contrasts can still leave you a bit more than bemused.

As our Kingfisher Airlines flight taxiied in to Kolkata — new name of Calcutta, a gift of their identity politics — airport, you can see the place hasn’t changed in the last two decades with that same air of “really can’t be assed” decay.  But the airline I’m flying is new and swanky, with a young and rather good-looking flight attendant who smiles like she actually means it.  And there are a lot more aircraft on the tarmac as well.   You notice the Indian Air Force Embraer Legacy executive jet Continue reading “Background: Incredible India can do your Head in”

Trade Notes: Stay Long Russia or Edge Towards the Door?

THE KREMLIN, MOSCOW. With President-Elect Dmit...
Image via Wikipedia

Around 2007, Tim Rogers —  Valartis’ MC Russian Market Fund PM — said something very interesting about prospects in Russia.  He thought the days of making a killing just by picking under-appreciated Russian companies (i.e., pretty much any Russian company) were pretty much gone after the third level of privatizations.

Henceforth, the managers would have to make money the hard way:  by really working on picking the few remaining gems.  He’s no longer at Valartis, but it would be interesting to see how he would manage now. Continue reading “Trade Notes: Stay Long Russia or Edge Towards the Door?”

Background: Whatever Happened to Tim Rogers?

Geneva at Night

Tim Rogers used to manage the MC Russian Market Fund for Valartis out of Geneva.  I first met him in 2005-6, invested in his fund(s) soon afterward and love the guy as a good solid manager who — perhaps unsurprisingly for a Canadian — is also a very nice guy.  He came to fund management and Russia investment in a rather roundabout way.

In the early/mid 90’s his girlfriend (he tells this story to a lot of investors, so I’m not breaching any confidences) wanted to travel overland from Hong Kong to Geneva.  A large part of this trip necessitated train travel through Yeltsin’s Russia.  The energy of the place then got him thinking about investing in the newly-privatized parts of Russian industry. Continue reading “Background: Whatever Happened to Tim Rogers?”