Dotcom that pays dividends

Jack Ma explains his dividend policy

Those that remember the heady days of dotcom investing, will also remember “cash burn” – a term invented to assuage befuddled shareholders and give some accounting logic to a process in which web firms lost money each month. Most dotcoms cash burned their way to “flameout” (that is, went bust).

So it is with a certain relish that the 21CN Business Herald reports this week: “Finally, the internet is not only a money-burner.”

The reason? Hong Kong-listed Alibaba has announced that it will issue a special dividend of HK$1.01 billion ($130.3 million) to shareholders. The news saw the firm’s share price surge 7.23% the following day.

Alibaba – its principal business is an online marketplace connecting exporters in China with foreign buyers – has been a phenomenal success story and it now has almost 100,000 paid-up corporate members. In spite of the global slowdown – and the squeeze on Chinese exporters – the number of ‘China suppliers’ actually grew 137% in the first half to 70,453 – achieving the company’s three year goal in just three quarters.

Operating income was up 21% in the first half, although net profit – at Rmb514.1 million – was down.

However, given the company’s record of profits and its Rmb7.1 billion of cash holdings (and zero debt), few doubt that Alibaba could afford to pay its dividend – the largest ever paid by a Chinese internet firm.

For the firm’s founder and chairman, Jack Ma, the dividend is a sweet vindication. He founded the company with just Rmb500,000 in Hangzhou a decade ago. His business-to-business marketplace was the first internet business model not to directly replicate an existing US one.

And it was hardgoing at first. “When Alibaba was started in 1999 – and through to 2001 – it barely gained a penny of income,” recalls Ma. “What encouraged us to persevere were a large number of letters from our customers thanking us. Because Alibaba found new customers, because Alibaba has hope and confidence, these letters supported us till now.”

Investments from Softbank, and later Yahoo, helped the firm grow, and in late 2007 it listed in Hong Kong. But Ma’s ambitions show no signs of subsiding. In a natural progression he has moved into electronic payments with an Alipay service, which now has 200 million users (for more on Ma’s strategy in financial services see WiC13).

Most eyes are now on Ma’s move from B2B into online consumer retail. The website Taobao is “China’s newest internet darling” according to the New York Times and matches buyers (consumers) with sellers (entrepreneurs who source goods from local factories). It has 120 million users and is expected to see sales this year in excess of $19 billion – putting it in the same bracket as Amazon.

The New York Times quotes a graduate student in Shanghai who says: “I can’t live without Taobao. I found a dress at a store in Shanghai. It’s a Hong Kong brand that sells for $175. But it was on Taobao for $33.”

Relying on advertising sales rather than transaction fees, Taobao’s path to profit is the bigger question. But Ma seems to be following a similar strategy to the early days of Alibaba.com. As his lieutenant at Taobao, Jonathan Lu says: “Our vision is to build a consumer’s paradise, where people can shop online and have fun. If you make the company better and better, profits will naturally follow.”

Founded in 2003, Taobao now has an 80% share of the e-commerce market and is referred to by some as the online Walmart. And Ma’s goal? Within 10 years Taobao’s trading volume will exceed Walmart’s.

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