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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Background: What is the Intrinsic Value of a Financier?

The question actually came to me last weekend at a party when an Englishman I was talking to said “Good Riddance” on hearing that BlueCrest had moved headquarters from London to Geneva.  I actually partly agree — probably for the first & last time — with Michael Farmer

“If one is a citizen and your country’s having a tough time, you pay your taxes and that’s it – although rather reluctantly if they are not spending it wisely,” Mr Farmer told the Financial Times. Continue reading “Background: What is the Intrinsic Value of a Financier?”

Background: More Institutional Investors in Hedge Funds may be a Mixed Blessing

Preqin has the latest Hedge Funds investor review out.  The headline number itself makes interesting reading:  Institutional Investors now comprise 61% of HF investors globally.  That usually means large investors like pension funds (note:  if you’ve been inclined to scream about greedy HF managers and have a pension fund, now might be a good time to calm down). Continue reading “Background: More Institutional Investors in Hedge Funds may be a Mixed Blessing”

Background: Is Coffey Causing too Many Ripples at Moore?

When Greg Coffey was at GLG running their superstar EM Fund, there were rumors the risk manager was not allowed any oversight of his hedge and long-only funds.  This came from their prime brokers so there is some credence to that statement.  We ourselves would notice his sometimes high allocations to illiquid (how does a ski resort in Hungary strike you?) or downright terrifying (private banks in Nigeria?) positions.  No one said anything because most of these positions paid off and there was also Greg’s trading style.  Sometimes he would trade around a position more than 50 times.  A day! Continue reading “Background: Is Coffey Causing too Many Ripples at Moore?”

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

THE KREMLIN, MOSCOW. With President-Elect Dmit...
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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?”

Investment Strategy: Could you use Taleb’s Anti-Fragility in a Portfolio?

Nassim Nicholas Taleb
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Nassim Taleb of “Black Swan” fame is now talking about “antifragility.”  According to the Buttonwood column, Taleb thinks that:

some systems actually benefit from shocks; a kind of opposite of the black swan idea for which he is best known.  Taleb’s argument is that nature is brilliant at design. “Evolution doesn’t forecast” he says, unlike economists and finance professors.  It is shocks, changes in climate or the availability of food, that cause new species to emerge.  Nature also builds in a fair degree of redundancy into the system to guard against shocks – we have two lungs and two kidneys for example. Nature doesn’t try to optimise. Continue reading “Investment Strategy: Could you use Taleb’s Anti-Fragility in a Portfolio?”