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…

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Looks like Barrons has discovered Bangladesh…

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Bangladesh RMG Factory

Barrons’ Devendra Joshi seems to have discovered Bangladesh.  Cue rueful smiles from anyone who’s tried to sell Bangladesh and been rebuffed by people who would  have rather invested in (I shit you not):  Kurdish oil companies, Ukrainian debt, Greek debt…

A lot of the stuff he says are blindingly obvious to regular denizens of frontier markets.  Nuggets like,

Remittances provide a source of income for many families…

…with a gross national income per capita of USD1,046, Bangladesh broke into its “lower middle-income” category in July 2015. …

But I have more fundamental problems with this report:

  1. He is focusing on equity plays based on the undeniably good macro story.
    1. I have found it well nigh impossible to properly correlate the two as an investor.  I think there probably still are quotes lying around from Soros rueing how difficult that play really is.
    2. It is actually doubly difficult in Bangladesh because the equity market doesn’t reflect the powerhouses of the economy.  The really well-run companies are very closely held public or completely private.
    3. Oh, and let’s not forget that the banks, some of the largest bloc holders of equity, are being forced to offload their equity holdings per Basle rules.
  2. He is talking up the consumer story.  Everything consumer I have found in Bangladesh is focused on the affluent or super-affluent consumer in Bangladesh.  The few who do cater to middle class consumers (where the real long money is) are
    1. private like Square Food and Beverage.  Great products and consumer brand image.  You could play through the “parent” Square Pharmaceuticals but that is a market darling and they don’t need outside money.
    2. bloody dangerous like Pran Foods.  Hugely profitable, a darling of foreign investors like the IFC but a disaster waiting to happen, considering huge debts and a tendency to play fast & loose with product quality
  3. He does like the banks.  That’s not such a bad idea, only (as he rightly points out) they have looming NPL bombs.  However, the good banks (and the bad) are running up against Tier I & II stoppers and quiet a few of them have asked us to raise funds.  You’d be surprised how may people are interested in that kind of paper….
  4. He doesn’t mention the RMG sector much.  Ready Made Garments (factory disasters notwithstanding) manufacturers are the country’s growth engine.  They are almost all privately held and, unless you want to buy Square Textiles, the public ones are not worth the time.  Just one, Mohammadi Group run by Rubana Huq, has revenues in the USD 200 million range and is completely private.

Of course, if you really want to make money in Bangladesh, you have to do it the “old fashioned way:” by investing in proper operating companies that make real products.  Call me if you care…

Background: Buffett and Investing in Indian Companies

Personal Note:  As can probably be guessed from the paucity of recent posts, I have been rather busy trying to set up a new partnership.  So, though there have been a lot of things that have caught my attention, I haven’t been able to post much.  I decided to take the medicine and do a few short posts when I get the time.

James Lamont had an interesting piece — quite a while ago — during Warren Buffett’s visit to India.  Buffett was really there with Gates for his philanthropic work Continue reading “Background: Buffett and Investing in Indian Companies”

Trade Notes: Is it Worth the Trouble Investing in GB Debt?

I first looked into Grameen Bank (GB) almost 3 years ago.  A Deutsche Bank research report in 2007 got us interested in potential MFI (Micro Finance Institution) loan portfolio investments. Continue reading “Trade Notes: Is it Worth the Trouble Investing in GB Debt?”

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”

Background: Bangladesh’s Power Shortage Crisis is Attracting Some very Strange Operators

Note:  I am on vacation.  Patchy internet coverage implies I won’t be doing much heavy writing but I figure I should get rid of some odds & ends and “color” notes I’ve been collecting. “Normal” service should return in a week.  Maybe more. This one is about an interesting — to say the least — encounter I had on a fishing trip in Bangladesh a while ago.  My sources tell me the person and the circumstances haven’t changed much.

Meghnaghat CCGT, Bangladesh

By most accounts, one of the disasters facing Bangladesh is the dire shortage of electric power in the country.  That it doesn’t is testament to the ruling elites’ singular venal incompetence.  The for-profit private sector is rather better at their job and I’ve been sniffing around looking for some investment opportunities for a while.  Public equities in the country are a mug’s game, but the power sector looked interesting because it is that nexus of infrastructure & real assets I love while the investment opportunities were also private. Continue reading “Background: Bangladesh’s Power Shortage Crisis is Attracting Some very Strange Operators”

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”