Given that it’s being billed as Amazon and Yahoo combined, it’s hardly surprising that the decision by the world’s biggest e-commerce company, China-based Alibaba Group Holding Ltd to IPO on one of the two New York exchanges has captured global market attention. This long awaited blockbuster IPO is expected to fetch as much as $15 billion, and while an IPO date is yet to be set, best guesses suggest it will around mid May.
Unlike its China-based Internet rival, Tencent Holdings (Hong Kong / 700) the gaming and messaging operator that listed on the Hong Exchange in 2004, Alibaba was quick to recognise the value of a US-based listing. While a prospectus may be another two weeks away, there are six investment banks book-running the deal including Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan and Morgan Stanley.
Established 14 years ago by former English teacher, Jack Ma as an online platform connecting global businesses with Chinese suppliers, Alibaba has grown into an e-commerce monster with some mind boggling valuations. In terms of the total market worth, a Reuters survey of 12 brokers gave Alibaba a value of $141 billion, based on the average call, while Australian investment bank Macquarie Group estimated a top end value of $200 billion.
Through its cloud-based operating system, Alibaba boasts more inventory than Ebay and Amazon combined and has its finger in every facet of online shopping, including three major online marketplaces, search engines, payment systems, micro-loans, delivery logistics and data collection.
In the past few years, Alibaba has been increasing its presence in China’s financial sector with the Alipay electronic payment system for e-commerce transactions expanding into micro lending and financial products, allowing users to invest in a money-market fund. In February Alibaba diversified into online financial services, and its wealth management platform, which offered investors US$943 million worth of one-year products with an expected annualised return of between 2.5% and 7%, was oversold within three minutes by two million-plus users.
With all the hallmarks of a rising tech star, Alibaba earned $792 million net income in the July-September quarter, which according to shareholder Yahoo Inc gave the company a net profit margin of 44.6%. Considering the size of China’s e-commerce market which is already bigger than the US market by some measures, the company’s upside is obvious.
Alibaba is one of a handful of Chinese cash-rich internet companies spending freely to strengthen its capabilities through mergers and acquisitions. These include $800 million for a majority stake in Hong Kong-listed ChinaVision Media Group, and the remaining half of NASDAQ listed map software maker AutoNavi to beef up its mobile internet offerings.
Despite these acquisitions, Alibaba’s deep ties to China’s troubled financial industry, and heavy exposure to a waning Chinese economy are seen as risks. Equally concerning, is its tight ownership structure with Yahoo and Japan’s Softbank Corp owning 24% and 37% respectively, while Alibaba’s founders and senior management account for 13%.
Tech investors are wary; King Digital – maker of massively popular Candy Crush – followed a similar fate to Facebook’s $16 billion offer two years ago, falling double digits on the first day of trading last week.
Given that Alibaba is likely to be bid up strongly during the bookbuild, Evan Lucas market strategist with IG says there’s a possible risk that it will fall over on initial listing day.
But regardless of what happens on day one, Lucas says local investors can still capitalise on the opportunity. IG is offering a 24-hour global “Grey Market’ where traders can actually bet on where they expect Alibaba’s market value could be at the close of the first trading day.
While there are those trading on momentum, the net position is long – with buy orders from clients pushing expectations for Alibaba’s market cap to be around $250 billion; Lucas says in the last 24 hours the call may see it go either way. According to Thomson Reuters data, based on market value of around $250 billion, Alibaba would emerge as the world’s 10th-biggest company ahead of US retail leviathan Wal-Mart Stores Inc’s $242 billion.
“The hype around Alibaba is getting people excited, but until we see a prospectus it’s hard to gauge it on fundamentals,” says Lucas. “If you assume that Alibaba will rally on issue, you can go long or if the fundamentals look overestimated – based on 23x sales and a P/E likely to be north of 40 times – which could see it drop away quickly, then go short.”
Given how thin the trades currently are, he says traders can be guaranteed they’re getting an accurate price. But with Alibaba being traded globally around the clock, Lucas warns that the market could move very quickly. Assuming there’s a spread, IG as part of the market maker will help to price out investors who want to exit their position in Alibaba at any time. Investors can close out at any time prior to the end of the first day of trade.
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