China Just Signaled Its Support For Alibaba’s Businesses (NYSE:BABA)

By ALT Perspective

The rise in coronavirus cases in the U.K., France, and Spain, among other European nations, spooked the financial markets, sending investors into a risk-off mode. Many Asian economies remain dependent on trade with Europe and the U.S., even as the importance of China increased in recent years.

Source: Google/Wikipedia

At the same time, some Asian countries have yet to keep the COVID-19 outbreak under control thus far. For instance, despite the number of daily cases reported coming off the peak, India is still seeing 80-90 thousand daily cases. In comparison, the total cases reported by Mainland China was 85,337 as of September 15, 2020.

Source: Google/Wikipedia

Even as the coronavirus continues to be menacing, we have yet to see governments around the world cooperating in a significant way to address global challenges. Instead, we see an escalation of the U.S.-China political tensions. Last Tuesday, a U.S. Air Force (USAF) plane allegedly altered its aircraft identification code to disguise itself as a Philippine aircraft as it flew over the Yellow Sea off the Chinese coast.

The incident came a week after another U.S. spy plane was reported to be guilty of the same switch but as a Malaysian civilian aircraft while flying close to Chinese airspace. China’s foreign ministry revealed that the U.S. military had adopted such a “trick” more than 100 times this year. Market players wondered how China would retaliate.

Some investors also sensed danger when China Evergrande Group, the nation’s second-largest property developer conceded cashflow difficulties. If a debt default happened at the world’s most indebted developer, China’s US$50 trillion financial system could face collateral damage.

With bearish news stemming from China and further drag from the weak global sentiment, it’s no wonder that the representative ETFs of Chinese companies (CQQQ)(FXI)(MCHI) underperformed their U.S. counterparts (QQQ)(DIA)(SPY). In particular, the Invesco China Technology ETF (CQQQ) sunk 3.96 percent while the Invesco QQQ Trust (QQQ) was up a positive 1.76 percent. The latter is likely buoyed by stocks that investors deemed to be benefiting from the fresh waves of the coronavirus outbreak.

ChartData by YCharts

The Chinese Internet sector representative ETF, the KraneShares CSI China Internet ETF (KWEB), did better than the broader Chinese ETFs but not by much. The price was down 2.96 percent for the week. Among the key holdings of the KWEB ETF, the share prices of online travel portal Trip.com (TCOM), Internet services and gaming giant NetEase (NTES), and e-commerce player JD.com (JD) were the rare gainers.

Trip.com posted its Q2 2020 results after the market closed on Thursday. Its shares initially gained as the revenue and earnings surpassed consensus estimates handily. However, the share price appreciation evaporated after the management guided for another steep fall in revenue for the current quarter.

Nerves calmed as the market opened for trading and the share price of Trip.com eventually closed up 8.65 percent on Friday, more than offsetting the losses suffered earlier in the week. The March quarter comprised the months at the height of the travel shutdown in China but Trip.com delivered the best revenue beat by far in years. As analysts remained doubtful of a prompt recovery in the June quarter, Trip.com proved naysayers wrong spectacularly, producing an even more amazing beat.

Source: Seeking Alpha Premium

Thus, I suspect that shareholders could have brushed away the pessimistic prognosis of the travel business thinking that the management had gotten the hang of spooking the market, i.e. they were attempting to lowball their forecast yet again.

iQIYI (IQ) was barely positive, up 0.39 percent for the week. Still, it was a remarkable achievement in a sea of red and it was coming on top of an 8.82 percent gain the previous week. In iQIYI: A Strong Buy On Multiple Positive Catalysts, I shared in detail what would drive the share price of the leading Chinese video-streaming platform higher. The stock has continued to play out as anticipated though it’s not happening on huge volume, raising the concern that the trading pattern might not be durable.

The share prices of Pinduoduo (PDD) and GSX Techedu (GSX) fell heavily, dropping 6.87 percent and 7.14 percent respectively. In the prior article, I suggested that shareholders could have panicked after media reports exposed the antics of money-launderers using Chinese online shopping platforms to funnel cash offshore, with Pinduoduo highlighted as the preferred designated platform used by the perpetrators.

The sharp fall in GSX Techedu came after the KWEB ETF accumulated as many as 1.12 million shares in the online K-12 large-class after-school tutoring service provider. The stock dropped from being the seventh-largest holding in the ETF a week ago to the tenth position by Friday close.

Given that the top two holdings representing one-fifth of the net assets, Alibaba Group (BABA) and Tencent Holdings (OTCPK:TCEHY)(OTCPK:TCTZF), lost only 0.48 percent and 2.55 percent, we could say the earlier mentioned duo, Pinduoduo and GSX Techedu, “single-handedly” dragged down the price of the ETF.

As explained in a past issue of the Chinese Internet Weekly, I found the KWEB ETF holding the most representative stocks in the sector. As such, an overview of the week’s share price movements of the top few holdings of KWEB as compared with the ETF itself is provided as follows for convenient reference especially for the stocks mentioned in this article.

ChartData by YCharts

In the subsequent sections, I will update on Alibaba Group (BABA) as its senior management team prepares for its 2020 Investor Day happening virtually on September 28-30. According to Seeking Alpha’s Catalyst Watch, its share price climbed after last year’s event, as the company revealed several goals including the five-year targets for gross merchandise volume and active customers.

Chinese exchanges vying with each other to roll out the red carpet for Ant Group

Officials in the U.S. have been more vocal in warning about investing in Chinese companies recently. Their voices add to the revulsion among some investors towards Chinese stocks, including a few of the largest and established ones like Alibaba Group. “Chinese companies are up to some shenanigans”, “they are nothing but copycats”, “they list in the U.S. to cheat Americans of their money”, are among the common refrain we come across in the comments.

Seeking Alpha readers are cognizant that Alibaba is not spared from the critics. Ironically, the greatest loss would most likely not come from investing in Alibaba (and that the share price subsequently falls due to allegations against it proves true); it is the inability to participate in the initial public offering of its fintech arm, Ant Group – the opportunity cost.

While some parties in the U.S. are rejoicing that the potentially largest-ever IPO would skip American exchanges, the Chinese are ecstatic that they would soon be able to get a piece of the coveted home-grown technology titan without jumping through the hoops. The Shanghai Stock Exchange’s Science and Technology Innovation Board, better known as the STAR market and dubbed the “Chinese Nasdaq,” swiftly approved Ant Group’s IPO paperwork.

The STAR market which recently celebrated its first anniversary gave the green light just four weeks after Ant Group’s filing. This has put pressure on the Hong Kong Stock Exchange, the other listing venue for the IPO, to similarly pass the application. The Hangzhou-based firm is so confident there will be a huge demand for its Hong Kong share sale that it does not intend to lock in cornerstone investors, a practice often needed for large deals.

China plans to boost consumption via new business models

The developments speak volumes of the appeal Ant Group has among the investor community which is cognizant of the power of the ubiquitous app Alipay is in China and beyond. At the same time, there could concerns about its growth, given that it already boasts more than a billion users, of which monthly active users stood at 711 million at June-end.

This is where a policy guideline released last week puts the worries to rest. The State Council, China’s cabinet, issued its views in an “opinion piece” on accelerating the development of new consumption types based on new forms of business. Such documents are regarded as directives from the central government, despite the consensus-seeking titling suggesting otherwise.

The infrastructure buzzwords employed, e.g. 5G networks, data centers, industrial internet, and internet of things, sound cliché. The same goes for the business areas mentioned, e.g. e-commerce, digital education, internet medical care, online entertainment, as well as smart tourism and sports. However, it’s important to note that the Chinese government has never expressed its support in these fields as explicitly in the past.

Alibaba Group and Ant Group are the leaders in several of these “new economy” consumption and stand to benefit from the government’s attention in these areas. For instance, it was specifically mentioned that enterprises in e-commerce and digital services “should be supported to go overseas” and an international logistics system “should be built at a faster pace.”

Source: State Council of the People’s Republic of China

Besides facilitating and expediting the construction of supporting infrastructure, the Chinese government would craft tax policies that support the growth of related businesses. In return, operators should ensure “behaviors, such as selling fake and forged commodities, infringing on intellectual property rights, giving misleading propaganda, engaging in pricing frauds, and leaking private information,” be more actively clamped down.

This seems like a fair deal. In fact, the internet players are understood to have already embarked on such crackdowns to instill confidence among the consumers and enterprises. They would, however, need to step up their efforts with the heightened scrutiny on the industry.

Alibaba Group to continue its monstrous growth rate

It’s hard to believe but the giant Alibaba Group is still expected to post monstrous growth for its revenue in the next couple of years, based on the projections by Wall Street analysts. This is true whether we go by the consensus estimates or the low/high end of the range.

Source: ALT Perspective (using data from Seeking Alpha Premium)

The observation is the same for the earnings, in case you are wondering, what’s the point of rapid revenue growth without corresponding profitability to show.

Source: ALT Perspective (using data from Seeking Alpha Premium)

It is likely the earlier mentioned government support roll out measures for the digital movement have not been factored by the analysts. Given that Alibaba Group is the leading internet company in China, it would be among the largest beneficiary. Wall Street would gradually reflect this in their modeling and the subsequent price target revisions should provide positive narratives to propel its share price upwards.

Last week, the American Apparel & Footwear Association (“AAFA”) named Alibaba Group its 2020 “Retail Innovator of the Year.” This might sound unbelievable for critics who deem Chinese businesses poorly due to their intellectual property protection records. However, that would be ignoring the efforts made by Alibaba in driving the digitization of the retail value chain under its New Retail strategy.

Recently, Alibaba Group unveiled a “first-of-its-kind digital factory” under its New Manufacturing strategy. Unlike the traditional approach of “made-to-stock”, the Xunxi Digital Factory is designed for “made-to-sell” production informed by consumer insights and real-time market trends aggregated from the Alibaba’s e-commerce platforms.

Technological advancement is heavily employed throughout the factory to streamline the production process. A picture tells a thousand words and a video a million. Here’s a video describing the New Manufacturing model.

Such innovations help lock-in businesses that rely on Alibaba’s e-commerce platforms and more importantly, strengthen their capabilities to capture new customers and more orders, in turn increasing the revenue for Alibaba.

“The purpose of Xunxi is not just to increase production efficiency, because that is only a part of the whole value chain. We hope to use our ‘made-in-cloud’ production to enable small and medium-sized businesses to stay competitive in the fast-moving fashion market.” – Alain Wu, CEO of Xunxi Digital Technology Company, Alibaba Group

Alibaba’s multi-faceted support to U.S. businesses to sell to China and around the world has two benefits: one is, of course, higher revenue for Alibaba, another is that the Trump administration would be careful about any action on Alibaba given the negative impact on Americans if they would to lose access to its platforms.

The naming of Alibaba Group by the Fortune magazine last week as the world’s top individual company in its annual list of businesses creating positive social impact in the world. It’s noteworthy that Alibaba is overall number two, just behind a united front of vaccine makers seeking a global solution to bring Covid-19 under control. Institutions with a mandate for environmental, social and corporate governance (“ESG”) investing and investors with similar mindset could embrace Alibaba Group and buy into its shares.

Alibaba continues to trade within its multi-year price channel

When my article Alibaba: The Road To $300 was published in May, it was met with widespread skepticism, as determined from the comments. I wrote then that the stock “appears to be on track to reach for $300 sometime in 2021, should the uptrend channel hold.” At that time, the share price was trading around $200. Supported by the bullish market, the $300 mark was nearly hit several months ahead of expectations, when the share price rose to as high as $299 on September 1.

Source: ALT Perspective (drawn on TradingView.com)

With the myriad pressures on Alibaba Group, it’s rather amazing that its share price has managed to trade near the mid-point of its uptrend channel. While it’s possible that the stock retreat to its lower support line, there’s also the potential for it to reach for the upper resistance level as it did from mid-2017 to mid-2018.

Should the multi-year trading pattern hold, the share price of Alibaba could still reach the $300 mark even if the stock languishes at the lower support line until 2022. What’s your take?

Disclosure: I am/we are long BABA, BIDU, JD, NTES, TCEHY, IQ, TCOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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