Brushing up for Alibaba IPO

Coming just two weeks after China's decision to effectively restrict Hong Kong citizens' voting rights, Jack Ma Yun and his colleagues will be trying to convince fund managers to accept Alibaba's own opaque and autocratic corporate governance structure. If a retail or institutional investor can live with the potential downside of Alibaba's corporate governance and focus on its growth story, then the next issue is how to trade this stock. History shows that a board with unassailable power doesn't encourage transparency; it breeds arrogance and creates more temptations to remain opaque about its activities. Nonetheless, if IPO subscribers can overcome their reservations then they concentrate on what might drive Alibaba's future share price. Investors need to understand that at least half the time and energy of a Chinese senior manager is devoted to maintaining government relationships that are vital to the company's success. This is the only way to manage the risks of changing government policies that are described in the prospectus. But, now that Alibaba's board has achieved unassailable control, they should theoretically feel comfortable and secure enough to concentrate on achieving the massive growth they promised. However, a recent investigative feature by the FT revealed that Alibaba's sales figures may be significantly distorted by the act of "brushing" - where fake sales can account for 10 per cent to 25 per cent of online sales. They challenge the accuracy of key operational information published by Alibaba before its expected listing. Since Alibaba's Tmall and Taobao sites account for about 80 per cent of the overall online retail volume in China, "brushing" also casts scepticism on China's official e-commerce statistics. Ignore this crucial distortion as if the entire industry is reporting fake numbers, then the inaccuracy is equally consistent among all participants. Trying to calculate Alibaba's value is a futile exercise. Vague data and broad assumptions frustrate conventional analysis and methods. The real answer is that Alibaba is worth what investors will pay and how much Alibaba is willing to discount to attract them. The pricing will come down to a poll of supply and demand. Chinese investors tend to see a listing as a bonanza opportunity to dump stock According to Thomson Reuters data, the price-earnings growth ratios (forward PE multiple of profitable internet companies by expected earnings growth rate) for US dotcoms compared to their Chinese counterparts are 1.3 against 0.9. This represents a big 31 per cent discount. Concerns about corporate governance and scepticism over sales figures can fade away if the price is right and there is a trading profit to be made. IPO investors also need to understand that Chinese investors tend to see a listing as a bonanza opportunity to dump stock. Many don't trust stock markets and shun volatility. Achieving cash liquidity is a paramount objective. A recent New York Times article revealed the identities of some of the important mainland families and party members who are Alibaba shareholders. However, the most important and unanswered question from The New York Times' investigation is: who really owns or controls Alibaba? Who are potentially the biggest sellers? The Times described a web of prominent and powerful mainland Chinese shareholders that could be influential in supporting its business. It was strange that during its pre-IPO news blackout period Alibaba tersely rebutted the newspaper on Weibo. Alibaba didn't seem to realise that the Times website is banned in China so Weibo's mainland followers didn't know the reasons behind its strident denials. These insiders will profit immensely and surely their wealth management advisers will tell them to sell down at least half their positions to diversify. Near and long-term selling pressure from these existing, pre-IPO shareholders is probably high, in addition to the need for private equity funds, Yahoo and SoftBank to exit. The only way so many parties can sell stock in an orderly fashion is through strong buying interest and liquidity. And that can only happen if Alibaba can post strong earnings and positive results guidance, along with steady share price appreciation and trading volume expansion for two or three years after the IPO. Even though Facebook shares were mispriced and sharply fell after its IPO, they have more than doubled since then. Alibaba needs to accomplish this for different reasons. Peter Guy is a financial writer and former international banker

Brushing up for Alibaba IPO

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Influential mainlanders holding Alibaba stock may be looking to diversify after the IPO, putting more pressure on the board to buoy the share price

Influential mainlanders holding Alibaba stock may be looking to diversify after the IPO, putting more pressure on the board to buoy the share price