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…

 

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…

Trade Notes: buy Louis Dreyfus?

This is a much older story, first breaking in late September that has since gone into silent mode — probably as the deal-making is done or is killed by the majority owner.  Essentially, the 150-year old trader Louis Dreyfus Commodities is hoping to reinvent itself from a flow-trader agency trading commodities to someone who can bet its own balance sheet. 

Background: Pakistan is not as bad as Burma, or is it?

Asif Ali Zardari

With the world still tut-tutting and trying to figure out what the most recent election in Burma portends, there seem renewed worries about Pakistan’s military taking charge again.  Most of this is, rightly, due to the venal incompetence of its President Asif Ali Zardari.  According to Maria Kuusisto of the Eurasia Group,

Background: Burma’s “Election” and Possible Military Noise

Burma’s military government has slated nationwide parliamentary elections for November 7.  Well, nationwide except for the

more than 3,300 villages located near conflict zones where the lumbering civil wars between the state forces and ethnic armies have never ceased. At least 110,000 internally displaced people live in these regions, many of them in hiding and on the run from the Burmese army. Another 140,000 subsist in refugee camps up and down the Thai-Myanmar border.

Trade Notes: Buy Coal India?

Image via Wikipedia

The head of Coal India’s IT department told me a remarkable story in the mid-1990s.  They had started putting the CV’s of all their employees (about 800,00 of them, though the numbers were a bit imprecise) into what they called the world’s largest employee database.  That’s when they’d found that some of their employees, if alive, should be more than a century old.

Turns out some of the coolies (the people who would be physically transporting the coal) and other laborers had been transferring employment from father to son and so on.  Each coolie had a medallion as an identity piece, as long as you had one, you could work and you could get paid. 

Background: The Economist on the KKH

 

Image via Wikipedia

 

The Economist’s Asia View blog has this travelogue of their correspondent traveling on the KKH (the Karakoram Highway) that links China to Pakistan.  Built quite a few years ago (I think it started in the late 1960’s) by the Pakistan Army Corps of Engineers and the Chinese (oh, who’re we kidding!  The Chinese), it was opened to civilian traffic more recently.  As is usually the case in Pakistan, the Pakistani side of the KKR has fallen into disrepair and the Chinese have taken on the task of rebuilding the highway.  As the correspondent says,

Our bus pulls away, beginning the descent to the Pakistani border town of Sust. The imposing communist-style archway that informs travellers officially that they are leaving China is a less effective border marker than the change in the Karakoram Highway itself: the paved road, which I had grown accustomed to since leaving the Chinese border town of Tashkurgan in the morning, deteriorates into a muddy, pot-holed track.

Background: Maoism is bad Enough Without Arundhati Roy

The Naxalite Corridor in India

The Indian prime minister Manmohan Singh considers Maoism the biggest security threat to his country.  Considering India has two nuclear-armed and decidedly unfriendly neighbors, this is a pretty strong statement but I think he’s right.  China is more of a long-term threat, especially in terms of future competition for resources and markets while Pakistan remains a fissiparous, albeit nuclear armed, foe with little strategic depth.  But the Maoist (also called Naxalite after the village of Naxalbari in West Bengal) threat is both more immediate and more critical to the future of India.This counterinsurgency is a reaction to decades of misrule and corruption in some of the poorest Indian States with the worst record of local government.  In a sense, if it hadn’t been for the Naxalites, the long-suffering locals would very probably have had to come up with versions of their own (left, right, extremist Muslim, extremist Hindu, animist, you name it).

Pared down to its essentials, the solution is also somewhat simple (not easy, simple):  fix the military threat, fix the governance.  But India is somewhat ill-prepared to deal with threats like this.

Trade Notes: Play Short China Like Hugh Hendry?

A short view of China is not a new thing for me, but I’ve always been cautious about getting into that particular trade because of the surprises it can spring.  As Clusterstock mentions:

actually shorting China has never been a straightforward proposition. For one thing, due to the bubbly nature of the market, you can get your clock-cleaned really fast, even if you’re correct in the medium term. So you have to make related bets.

Background: India’s Promise and the Labor Grenade in the Room

We are beginning to see images like this more and more in the financial press, and with good reason.  There is going to be a pretty big imbalance between India and China in terms of working age populations (and it is likely to get worse, given China’s huge male to female ratio imbalance).  In some ways, that presents a massive relative opportunity to India in terms of potential growth.  But India’s inability to provide neither more agricultural productivity and rural employment (where most of the population still lives) nor more factories (where the rural to urban influx could be absorbed) is a major potential headache.  As this story in the FT says:

Background: Defining emerging markets: “The 7 per cent Club”

The BRIC Nations

Trust Goldman Sachs and their chief economist Jim O’Neill to come up with a nifty handle like BRIC.  Make no mistake, I like Jim O’Neill, he’s got an earthiness that belies a pretty sharp mind and I’ve always enjoyed listening to him.  Of course, sharp minds are par for the course at Goldy but Jim does have some pretty good strategic thinking brain cells.  At an intellectual level, you can’t argue with the reasoning that leads to this grouping.  But the cynic in me is always left cringeing at the the hype surrounding this bullshit.  What makes it worse is the way the people in the BRIC countries start believing all that guff.  Anyone who’s had to endure “India Shining” (or is it “Rising”?  Hard to tell with the gorge rising in one’s throat) will know what I mean.