The outspoken and controversial founder of Alibaba (BABA, Financial), Jack Ma, has given up a substantial portion of control in Ant Group. Ma previously owned 53.46% of the company indirectly through two holding companies, which he will give up a substantial portion of control in. This means Ma will only own 6.2% of Ant Group and will no longer be the “controlling person.”
Alibaba's stock price rose on the news, and the stock also benefitted from other positive news surrounding Hong Kong and U.S.-China relations.
Why is this important for Alibaba?
Alibaba owns ~33% of Ant Group, or Ant Financial, which operates the popular Alipay app used by millions of Chinese consumers.
In November 2020, Ant Group was set for a huge $37 billion IPO which would have been the largest of the year. However, this IPO was cancelled last minute, which decimated the stock price of Alibaba. This cancellation came after a controverisal speech in which Ma criticized the entire Chinese financial system. Ma then disappeared from the public eye for a while and Alibaba was hit with a $2.7 billion fine for "monopoly practices." While this is pocket change for Alibaba, the bigger red flag was that there was no more news of Ant Group potentially going public.
Given that the government seemed very concerned about Ma's controlling interest in the company, his distancing from Ant Group is a positive and could pave the way for a future IPO, which would benefit Alibaba.
The new structure
Ant Group released details of the old and new (more complex) corporate structure. As mentioned prior, Ma previously owned 34% of two holding companies that owned Ant Group, Junhan Equity Investment Partnership and Junao Equity Investment Partnership. These companies in turn owned 53.46% of Ant Group. As Ma had the largest holding, he was the controlling person, which is something Bejing (and most other governments) disapprove of for a company with so much power over the financial system. Ma had even started to compete with some state-owned banks, which may be fine for companies but not so much for companies controlled by a single person.
Source: Ant Group report
The new structure has Ma and nine other individuals owning a 20% stake in the Xingtao Enterprise holding company, which owns 31.04% of Ant Group. Basically, this means Ma only owns around 6% of Ant Group and is a minor shareholder.
Source: Ant Group report
This new structure is expected to enhance corporate governance, as each of the 10 stakeholders will exercise voting rights independently. In a statement, Ant Group stated that the adjustment will “enhance the stability” of its corporate structure and pave the way for sustainable long-term development.
More positive news
There has also been more positive news for Ant Group and Alibaba. Chinese regulators have recently approved a capital expansion for Ant Group. The company is now able to raise a substantial $1.5 billion extra for its consumer finance segment, according to an Associated Press report.
This approval was given by the China Banking and Insurance Regulatory Commission (CBIRC) based in the city of Chongqing. The notice stated that Ant Group has been approved to increase its capital from $1.16 billion (8 billion yuan) to $2.7 billion (18.5 billion yuan).
This capital expansion is positive given over one year ago, the company tried to raise $3.2 billion (22 billion yuan) from China-based Cinda Asset Management (CCGDF, Financial), which fell through. The investment firm, which is a state-owned distressed loan manager, originally agreed to acquire 20% of Ant Group before pulling out.
In related news, at a Beijing economic labor conference, the Chinese government has indicated support for technology companies to create more jobs and boost economic prosperity. This is positive news for Alibaba and could signal the tech crackdown is nearly over.
In addition, there has been some positive changes in the Chinese government that favor better U.S.-China relations, which is positive news for Alibaba and Chinese stocks. Beijing has recently announced its new foreign minister Qin Gang, who was the former ambassador of China to the U.S. Qin seems to be very pro U.S.-China relations.
In a previous article on Pinduoduo (PDD, Financial) from late December, I reported that the U.S. public accounting board was given access the financial statements and accounts of ~200 New York stock exchange-listed Chinese companies for the first time ever. U.S. regulators traveled to Hong Kong to investigate two major blue chip accounting firms, KPMG Huazhen LLP and PricewaterhouseCoopers. Although the final report hasn’t been released yet, the cooperation of the Chinese accounting firms was a positive step towards decreasing the risk posed by the U.S. "Holding Foreign Companies Accountable Act," which threatens to delist foreign stocks from U.S. exchanges unless certain conditions are met.
Financial review
Alibaba reported mixed financials for its second quarter of fiscal year 2023. Its revenue was $28.95 billion, which rose by just 3% year over year. This slow growth was mostly driven by lower consumer transactions in China’s domestic market, which looks to have been driven by a hard Covid lockdown policy.
A positive is Alibaba’s “to home” segment, which includes a variety of applications from food delivery (ele.me) to travel (Fliggy), reported positive engagement. Overall revenue for this segment increased by a solid 21% year over year to $1.8 billion.
Alibaba also reported adjusted earnings per share of $1.81 in the quarter, which surpassed analyst expectations by $0.10.
Valuation
Alibaba trades at an adjusted price-earnings ratio of 14, which is 40% cheaper than its five-year average. Its price-sales ratio is 2.37, which is 66% cheaper than its five-year average.
The GF Value chart indicates a fair value of $292.52 per share for the stock and rates it as significantly undervalued.
Final thoughts
Alibaba is one of the biggest e-commerce companies in the world. The company has a dominant market share in Chinese e-commerce and a thriving Cloud business. The business has faced a series of major headwinds over the past few years, which has been mainly driven by geopolitical issues. However, the recent news is a positive sign, and the tide seems to be turning in favor for Chinese stocks. There are still risks, but Alibaba and Ant Group seem poised for recovery going forward.
