Legendary value investor Mohnish Pabrai (Trades, Portfolio) has sold 77% of his Alibaba (BABA, Financial) stock after previously being extremely bullish on the name, both publicly in interviews and with his buying power.
Pabrai started buying shares of the Chinese e-commerce giant back in 2021, at an average buy price of between $222 and $245. As a long-term value investor (inspired by Warren Buffett (Trades, Portfolio)), it is very strange to see him sell a stock just a few months after initiating a position.
The stock has declined approximately 32% from Pabrai's average buy point due to regulatory headwinds. However, as a deep value investor, that is no reason to sell in and of itself; if anything, it would be a reason to buy more shares. As Buffett says, "Be greedy when others are fearful."
So why has Pabrai been selling Alibaba? Here is what I've dug up on this subject.
Chinese big tech regulation
The Chinese government have recently been putting pressure on big tech companies in China. They dislike these companies having so much data and being able to sell it to whoever they choose, which they deem to be a national security risk. To this end, the IPO of Ant Financial, a subsidiary of Alibaba, was cancelled in 2020.
Jack Ma, the founder of Alibaba, even went missing for three months after a controversial speech criticizing the Chinese regulatory system.
Then, in April 2021, the Chinese government slapped Alibaba with a $2.8 billion fine in an anti-monopoly probe. This was a much lighter penalty than many had been fearing, but it still has investors on edge.
It's not just Alibaba, though. Chinese regulators have fined 12 companies, including Tencent (HKSE:00700, Financial) and Baidu (BIDU, Financial), over monopoly rule violations. Then we had the “Uber (UBER, Financial) of China,” Didi (DIDI, Financial), which was banned from signing up new customers while regulators carried out a data security investigation. This was just days after the IPO, which caused the stock to lose 76% of its value.
Personally, I think these issues were a contributing factor, but not the only factor in Pabrai's decision to sell Alibaba. Here is why: many of these issues such as Ant Financial's IPO being suspended occurred in 2020, prior to Pabrai buying the stock. He was well aware of these issues, and as a value investor, likely saw the volatility as an opportunity to buy the stock at a discount.
Tax harvesting
In an interview with “Everything Money," one reason Pabrai stated for selling the stock was to harvest his tax losses after the stock declined from his buy price. Tax harvesting is when you sell a stock at a loss to offset any capital gains tax you may have had to pay on another asset. In most countries, this is perfectly legal as long as you don’t buy back the stock straight away. Usually, you must wait at least 30 days before buying back the stock; this is called the “Wash Sale Rule."
Buying Tencent
Pabrai has previously been extremely bullish on Tencent stock in interviews. He once stated, "Given the superiority of the Tencent model, it wouldn’t surprise me if Tencent is the most valuable business on the planet.”
He then spoke of the founder Pony Ma and the “Two Bazooka” business model:
- An army of software engineers (65% Return)
- Digital Warren Buffett (Trades, Portfolio)s (35% Return)
The “Army of software engineers,” according to Pabrai, generates a 65% return on capital. This cash flow is then invested by the “Digital Warren Buffett (Trades, Portfolio)s,” referring to Tencent's Venture Capital business, at a 35% return.
Tencent has large investments in a variety of incredible tech companies. Here is a short list of some of them:
- Tesla (TSLA, Financial)
- NIO (NIO, Financial)
- JD.COM (JD, Financial) (“Amazon of China”)
- Pinduoduo (PDD, Financial) (e-commerce giant)
- Sea Ltd (SE, Financial) (Asian gaming giant)
- Spotify (SPOT, Financial)
- Snap (SNAP, Financial)
Now, you may notice that despite Pabrai claiming to have invested into the stock, this stock doesn’t show up in his SEC filings. This is because he has claimed to have invested in it indirectly via Prosus (XAMS:PRX, Financial).
Prosus is the Dutch multinational conglomerate company which is a division of Naspers (JSE:NPN, Financial). Naspers is a South African investment firm which was one of the original investors in Tencent.
Back in 2001, Naspers invested in Tencent by buying close to 45% of its shares for just $35 million. The company now owns 30% of Tencent, and from there, it last reported that the net asset value (NAV) of this is worth $164 billion.
Thus, in 20 years, the company has made a rate of return of approximately 500,000% cumulatively, or 53% compounded annually! According to their recent NAV report, Prosus is trading at a 32% discount to their NAV.
Naspers CEO Bob van Dijk is also reported to have bought an extra 122,750 ordinary shares at a cost of 8.9 million Euros ($10.09 million) in Prosus.
For some reason (mostly likely the Chinese stock delisting issues), Pabrai seems to have deemed it safer to invest in Tencent via Prosus than directly on the over-the-counter exchange.
Although both Tencent and Prosus are trading at a discount of around 30% to NAV, some investors are still demanding a higher discount to offset the risk of increased regulations and the complex structure of the investment.
