Store of value

Doing deals is thirsty work

Life must be tough for equity analysts covering Alibaba. Even when everyone else is on their summer holidays, the Chinese internet giant continues to churn out potentially industry-transforming deals.

To date, August has been no exception. So far, Alibaba has formed a strategic alliance with retailing titan Suning, and become its second largest shareholder. It partnered with archrival Tencent to invest in a smart TV concept pioneered by powerful state investment group China Media Capital. And it also joined forces with arms maker Norinco to develop applications for the country’s satellite navigation system. However, the news flow has failed to boost Alibaba’s share price, which continues to slide closer to its September 2014 IPO price of $68. The hype surrounding its US floatation has been fizzling out. Declining revenue growth rates, intensifying competition with Chinese e-commerce firms and the impact of the recent renminbi devaluation (which makes imports more expensive – an issue fo Alibaba as it rolls out programmes to bring overseas goods to Chinese buyers) have all weighed on its stock price.

As of Thursday Alibaba was trading at about $73, down 39% from a $120 high in November 2014. Over the short-term it may yet fall further thanks to short-selling pressure ahead of the expiry of a lock-up governing roughly one billion shares, or about 40% of its issued share capital.

Major shareholders including Yahoo, Softbank, Jack Ma and Joe Tsai all came under a one-year lock-up when Alibaba went public. The share price will now be more volatile than usual as investors bet whether any of the major shareholders will opt to sell down (or out). Earlier this month, it was revealed that George Soros had cut his stake from a holding worth $370 million in March to below $5 million by the end of June.

Alibaba’s recently announced quarterly results have not helped. Revenues came in below expectations at $3.3 billion. This represented year-on-year growth of 28%, a far cry from the 50% to 70% rates Alibaba was achieving in previous years.

The decline was partly related to one-offs such as a suspension of online lottery sales. But it also reflected a user migration from PC to mobile, as the latter currently nets Alibaba lower ad revenues (and mobile use is expected to surpass PC use within the next two quarters).

JD.com, the country’s second biggest e-commerce platform, is also posing a greater threat. According to iResearch, Alibaba had a 58.6% B2C market share in the first quarter compared to JD.com’s 22.8%. However, whereas Alibaba’s market share is flat year-on-year, JD.com’s has risen from 19.2%. JD.com is still not profitable because it runs a more capital-intensive business model similar to Amazon’s (controlling its own inventory via an extensive warehouse network). But it is on a faster growth trajectory than Alibaba, with second quarter revenues up 61% year-on-year. The biggest increase was in apparel, up 150% over the same period last year.

Now Alibaba is fighting back. Last month it persuaded Japanese clothing giant Uniqlo to ditch JD.com in return for an exclusive partnership. Local newspapers also report that it has signed up 20 more Western brands including Zara and Timberland on similar agreements.

Both companies are also moving more aggressively into fresh grocery deliveries. Alibaba has just begun same-day deliveries to Beijing and Shanghai, while in early August JD.com purchased a 10% stake in the country’s fifth biggest supermarket chain Yonghui.

In a clear dig at Alibaba’s problems with counterfeit goods, JD.com’s boss recently said his company’s strength lies in its “product authenticity”. That said, the share price took a swift 21% dive after the Alibaba-Suning partnership was unveiled.

In a combined $6.6 billion deal, Alibaba became Suning’s second largest shareholder behind founder Zhang Jindong, while Suning purchased 1.09% of Alibaba. Instead of building out a physical distribution network, Alibaba will now leverage Suning’s 1,637 stores and 2,721 delivery stations (JD.com has 4,142 delivery stations). It will also benefit from Suning’s strength in home appliances (one of JD.com’s key areas).

In return, Suning is accelerating its transformation from China’s largest offline retailer to an O2O (offline to online) model, a process that began in 2013.

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