Alibaba: A Chinese giant emerges

The listing of Alibaba on the stock exchange in New York could be the largest technology debut in history, writes Alexei Oreskovic.

Alibaba: A Chinese giant emerges

IT’S BEING touted as possibly the largest technology debut in history and has given investors the first glimpse of the scale and growth of Alibaba — the Chinese e-commerce juggernaut.

Alibaba Group Holding Ltd, which powers 80% of all online commerce in the world’s second-largest economy, is expected to raise more than $15bn when it lists in New York stock later this year, and could top the $16bn pulled in by Facebook when it listed in 2012.

The bulk of the proceeds will go to Yahoo — which bought a 40% stake in Alibaba in 2005 for $1bn and which must sell more than a third of its current 22.6% stake through the IPO. Alibaba also plans to sell new shares, people familiar with the plans have said, to bulk up a cash war chest depleted by a rash of recent acquisitions.

While the Alibaba brand is less well known than Amazon and Facebook, the Chinese company’s listing has stirred the most excitement in Silicon Valley and Wall Street since Facebook’s record IPO. Alibaba will become the largest Chinese corporation to list in the US — on either the New York Stock Exchange or the Nasdaq.

Alibaba will debut later this year in a market where high-flying tech stocks like Twitter and Amazon have fallen in recent weeks in a sell-off that has divided analysts and investors, reviving doubts about soaring tech valuations. Still, estimates of Alibaba’s market value have soared in recent months, to even beyond $200 billion.

Alibaba handled more than 1.5 trillion yuan -— about $248bn — of transactions for 231m active users across its three main Chinese online marketplaces in 2013, more than Amazon and eBay combined. It did so with 20,884 full-time workers, fewer than eBay.

“If it’s able to transport that kind of power to outside China, it has the potential to become a true global e-commerce powerhouse,” said Roger Entner, lead analyst and founder of Recon Analytics.

Alibaba did not give any hints in its IPO prospectus about potential plans for the US e-commerce market.

Analysts said it was unlikely Alibaba would adopt the model favoured by Amazon, which sells goods directly to consumers using a network of warehouses.

Alibaba, founded 15 years ago in a one-room apartment in Hangzhou and controlled by a 28-member partnership, boasts of building a company that will last “at least 102 years”.

After the IPO, Alibaba said, the partnership will have the exclusive right to nominate a simple majority of the members of its board of directors.

Alibaba operates an online messaging service as well as a cloud computing business, but more than 80% of its revenue comes from its Taobao, Tmall and Juhuasuan online marketplaces.

Top items sold on Taobao include prepaid phone and game cards as well as lottery tickets, home furniture and baby products. Total revenue increased 62% to 18.75bn yuan ($3.01bn) in October-December of 2013 from a year earlier, while net income more than doubled to 8.27bn yuan, according to the prospectus.

Some analysts say Alibaba’s rapid pace of revenue growth may be unsustainable.

“They got into the e-commerce space when there weren’t any other players in China,” said Forrester analyst Kelland Willis, adding Alibaba has been “losing market share year over year.”

By 2020, online retail sales in China will reach $420-$650bn, as much as the US, Japanese, UK, German and French markets combined, according to a recent analysis by McKinsey Global Institute.

Alibaba said China’s mobile internet arena, where it is battling Tencent Holdings for supremacy, is the next growth industry. China will have an estimated 750 million mobile Internet users by 2017, according to data from China-based consultancy iResearch.

Roughly one-fifth of all purchases in the last quarter of 2013 were made on mobile devices, up from 7.4% a year earlier. But Alibaba added that for now these sales were less profitable than those made on its website.

Already this year, Ma has been involved in acquisitions worth more than $3.5bn — buying a stake in department store operator Intime; a majority shareholding in movie producer ChinaVision Media; control of online mapping firm Autonavi; a stake in China’s Wasu Media Holding Co Ltd for online content and internet TV; and a stake in Youku Tudou Inc, an online video business akin to Google Inc’s YouTube.

Alibaba is also launching a US e-commerce website, 11 Main, and has taken stakes in US retail site ShopRunner Inc, Lyft, a US ridesharing service, and 1stdibs, an online market place for antiques and luxuries.

Also this year, company founder Jack Ma has set up a charitable trust estimated to be worth $3 billion, potentially Asia’s biggest, focusing on the environment and health.

“It’s impossible for me to be a doctor, but I can have my own way to save lives,” Xinhua quoted Ma as saying.

Former English schoolteacher Ma owns 8.9% of Alibaba. Joseph Tsai, a co-founder and executive vice-chairman, is the only other individual with a disclosed shareholding, of 3.6%. Yahoo and SoftBank, respectively, own 22.6% and 34.4% of Alibaba on a fully diluted basis.

The proposed IPO of $1bn in the filing is an estimate for calculating exchange registration fees.

Alibaba estimated its fair value as of this month could reach $50 per share, an increase of more than six times from the $8 a share value estimated in June 2011, according to the prospectus.

This calculation helps determine employee compensation and does not necessarily represent a likely IPO price.

At the most recent fair value estimate, Yahoo’s stake in Alibaba is worth $26.2bn and SoftBank’s almost $40bn. Ma’s stake would be worth $10.3bn.

The fair value estimate puts Alibaba’s size at $116.1bn, well below the $152bn average from 25 analysts in a Reuters survey.

Alibaba’s decision to list in the United States was a blow to the Hong Kong stock exchange, which was initially its preferred IPO venue, but the city’s regulators balked at any potential violation of the “one-share-one-vote principle.”

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