ALIBABA: A Grand Bazaar & a Sweet Dream for the Future

29 September 2014


On the 18th September 2014, the Alibaba Group became the world’s largest IPO, raising in total US$25 billion. With an opening price of US$68 per share, by the end of the first day’s trading the stock had settled at just below US$90 per share.

In comparative terms, Alibaba’s IPO surpassed the 2010 offering from the Agricultural Bank of China on the Hong Kong exchange ($22.1 billion), and is significantly above the previous largest IPO in the United States ($19.7 billion raised by VISA in 2008). With a market capitalisation above $220 billion, the stock market currently values Alibaba above both Facebook and Amazon.

So…what is Alibaba? Where have you been, right?

Alibaba is essentially a holding company. Looking at the group globally as one combined entity it is often described as the combination of a market place, a search engine, a social media platform, a blogging site, and a bank – all rolled into one. In reality it is the quintessential “Grand Bazaar”.

Operating in China, Alibaba is the most popular destination for online shopping in the world’s largest and fastest growing e-commerce market. In 2013, transactions flowing through its online sites totalled $248 billion. In comparative terms this is more than the combined value of transactions flowing through both eBay (often viewed as the company most like Alibaba) and Amazon combined. Its dominance of Chinese markets should not be underestimated. The total value of online e-trading in China in 2013, totalled $295 billion. Therefore over 80% of the total online trading belonged to Alibaba.

Market Globalisation

The success of the Alibaba IPO underscores that the integration of economies worldwide continues at an unabated rate. It also signifies the success of Chinese entities in sourcing finance on international arenas. Prior to the Alibaba IPO, Chinese companies have successfully sourced finance in the United States for over 200 business entities. Beyond this, every week, all of us buy and consume large quantities of products originating from China. China is no longer a communist state. It has successfully integrated itself into the capitalist system, and it has done this under the radar of most people’s attention.

A Great Investment?

Those that got in at the ground level on the IPO and sold during the first day of Trading would have seen a 38% gain on their initial investment. Perhaps this is no more than an indication that getting in on the ground level of an IPO is a sure fire way to make a quick profit, at least in most cases.

Those holding on to their Alibaba stock face a dilemma. A bullish view suggests that by 2017 China’s e-commerce market will have increased from $295 billion to over $700 billion.

This may be an unrealistic assumption when one considers that the average annual wage in China’s urban areas is still only $2,600. Viewed as a Bear, the Chinese economic revolution has succeeded in creating many rich people like Alibaba’s owners, but it has still not seen the benefits of that revolution trickle down to the poor. Perhaps those benefits will never trickle down. Whatever view you take it is clear that China’s economy is showing signs of slowing down, and at $90 per share Alibaba is trading at over 40 times analyst’s expectations of its consolidated 2015 earnings.

A Lesson for Trinidad and Caricom?

Alibaba is not a technologically innovative company. It hasn’t created any breakthrough technology to connect the world to a global market place. It hasn’t created any new or exciting products. There are no IPODS, electric cars, microwave ovens or inventions that have significantly changed and improved people’s lifestyles. All Alibaba has done is successfully leveraged the existing technology of the internet, got into Chinese markets first, and created its own momentum. Others may enter but they are unlikely to catch up.

Look at Taobao.com, Alibaba’s consumer to consumer site. This company is a “Grand Bazaar” of over 760 million products, sold by over 7 million individual sellers. Its mere existence has allowed aspiring and enterprising individuals with little or no start-up capital to sell products into China’s huge marketplace.

A similar model operating in Caricom could help to connect small businesses into a rapidly developing Caribbean market place. Even the Government would benefit. Imagine that in Trinidad & Tobago, successive Government have struggled to find a mechanism to capture tax from the vast majority of cottage industries and small businesses that continue to exist and operate outside of “the system”. Surely it would be simpler to encourage the growth in internet trading and capture tax on the revenues earned from online trading activities.

It took a former teacher with vision to “open-sesame” Chinese markets. Maybe, just maybe, it could happen here too. That’s a great dream for the future.

If you are interested in investing in shares, are interested in future IPOs, or wish to discuss other investment opportunities with a member of our team please contact info@nullfirstlinesecurities.com or call for Mrs. Ihsan Slater at 868.628.1175. We look forward to hearing from you.

 Next Week by Mike: Cheniere Energy, a Houston-based energy company engaged in the LNG business.

Mike Sims FCA, LL.B

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