“In the short term, we expect there will be a rotation out of other Chinese companies in the internet sector and into high quality internet stocks such as Alibaba, Baidu and Tencent,” he said.
Morningstar values Alibaba at $220 billion. It is expected to list 12% of shares in the US this month, putting the IPO at $26 billion – the largest in US history (To date, the largest in the US was Visa in 2008, valued at $17.8bn. Facebook is so far the largest technology IPO in the US, raising $16 billion in 2012).
Yao expects a lot of buying from both passive and active fund managers, as Alibaba provides exposure to China’s growing middle class and its ecommerce industry, which is still relatively young.
The VIE risk
There are risks, however. Alibaba, like all Chinese internet companies listed overseas, uses the variable interest entity (VIE) financial structure, which allows foreign investors to own shares of China’s domestic companies. The VIE presents a risk because it is not a legally-robust structure.
Paul Gillis, professor of practice, Guanghua School of Management at Peking University, who has analysed the VIE, explained that the structure aims to offer control not through ownership, but through contracts with the Chinese company, which is typically owned by a Chinese individual.
The contracts try to transfer all rights and benefits of ownership to the VIE-structured company, but sometimes the owner doesn’t respect those contracts, he added.
“Most investors in Alibaba are familiar with the VIE strcuture’s risks and have figured out how to price that in,” Gillis said.
Current shareholders in Alibaba include Yahoo (20%), Softbank, state-owned funds China Investment Corp and Singapore’s Temasek, and private equity firms Boyu Capital, Silverlake, Russian venture capital firm DST Global and Yunfeng Capital, which was founded by Alibaba’s Jack Ma.
China on stage
Alibaba’s network of platforms generated gross merchandise volume of $248bn, more than Amazon and Ebay combined, according to Morningstar.
Given the size and reach of Alibaba, the IPO heralds the rise of Chinese technology giants onto the global stage, said Paul Hodes, Citibank’s head of wealth management, Asia Pacific.
“Alibaba’s IPO opens awareness globally of what’s going on in Asia,” Hodes said. “Technology is being decentralised. It’s not only in Silicon Valley, and globally, investors are being made aware of that.”
_________________________________________________________________________________
The top performing funds focused on China equities and the TMT sector have well outperformed the CSI 300 over the last three years. But Alibaba’s IPO may spark a flight to quality in the internet sector.
