ALIBABA SURGES IN NEW YORK TRADING DEBUT AFTER U.S. IPO September 19, 2014 11:58 AM ET By Leslie Picker Share 265 Share 56 inShare 0 TICKERS IN THIS ARTICLE NAME LAST CHNG % CHNG JD 28.11 -1.45 -4.92 JD Alibaba Group Holding Ltd. surged in its U.S. trading debut, after the company raised a record-breaking $21.8 billion in an initial public offering. The Chinese company’s shares rose 38 percent to $94 apiece as of 11:53 a.m. in New York, after the IPO was priced at $68. The e-commerce company, which started in 1999 with $60,000 cobbled together by founder Jack Ma, is now valued at $231.7 billion. That makes it larger than Amazon Inc. and EBay Inc. combined, and more valuable than all but 9 companies in the Standard & Poor’s 500 Index. Ma, a former English teacher who started the company in his Hangzhou apartment, drew crowds of money managers to meetings held around the world as the company pitched itself to investors this month. Alibaba has profited from China’s burgeoning consumer class by dominating the e-commerce industry in the country of 1.36 billion people. Related: 3 Photos That Help Explain the Frenzy Over Alibabas IPO Jack Ma Planning Personal Roadshow With Clinton to Immelt Alibaba Sentiment Adds $3.1 Billion for Top Tech Tycoons Ma is now China’s richest man, with an estimated net worth of $21.9 billion, according to the Bloomberg Billionaires Index. He will own about 7.8 percent of the Alibaba after the IPO, company filings indicate. LARGE FUNDS At recent meetings, Alibaba’s founder focused on the company’s ambitions outside of both the e-commerce field and its home base, describing it as an “Internet company that happens to be from China.” Alibaba made the support of big institutional investors a priority during the IPO, in an effort to put shares in the hands of long-term investors. Half of the shares sold went to just 25 accounts, a highly concentrated group in an IPO, people with knowledge of the matter said, asking not to be identified as the books are private. “In the short run, it’ll outperform the market due to the demand from investors who didn’t have a chance to get into the company at the IPO, and also the IPO underwriters will work to provide stability if needed,” said Josef Schuster, the founder of IPOX Schuster LLC in Chicago. “It has got very strong momentum in the market.” China’s Fraught IPOs Alibaba’s ability to close a deal of this size is also owed to an almost non-stop rally in shares in the U.S. -- where about $15 trillion has been added to the value of equities amid three rounds of monetary stimulus from the Federal Reserve, an expanding economy and record profits. The share sale is already the largest by any company in the U.S., and could break the global record -- currently held by Agricultural Bank of China Ltd.’s $22 billion IPO in 2010 -- if underwriters issue more shares. MARKET TIMING “They want to get in now before the market is no longer excited,” said Kevin Headland, director of the portfolio advisory group at Manulife Asset Management Ltd. in Toronto. Headland, whose firm manages $281 billion, plans not to invest in the shares right away. “It’s prudent to sit back and evaluate a company instead of getting caught up in the excitement,” he said. The IPO -- anticipated for years -- hasn’t been achieved without setbacks for Alibaba. The company would have preferred to debut in Hong Kong, though listing rules in the city don’t allow its governance structure. A small group of insiders at Alibaba control the company’s board, the kind of arrangement that’s permitted in the U.S., where founders of technology companies often maintain control through dual-class shareholdings. COUNTERFEIT GOODS As Alibaba executives met investors this month, they were queried about issues ranging from how the company plans to prevent selling counterfeit objects on its marketplaces to Alibaba’s relationship with its payments affiliate -- Alipay -- which is now effectively controlled by Ma. None of those factors were enough to substantially weaken demand for its shares, with Alibaba’s growth prospects too compelling for many to ignore. The concerns may have kept the company and its advisers from pushing the price too high, like Facebook Inc. did when it debuted in 2012. Facebook’s shares plunged in the months after its IPO before eventually recovering. “Perhaps learning lessons from Facebook’s IPO, Alibaba’s current pricing range strikes us as conservative, and we do not believe the valuation fully reflects the features that make the wide-moat Alibaba investment story unique,” Morningstar Inc. analyst R.J. Hottovy wrote in a note to clients. Morningstar has a fair value estimate of $90 per share on the company. Alibaba’s profits also make it a standout among technology IPOs. Twitter Inc. raised more than $2 billion last year, and Chinese rival JD.Com Inc., which has achieved a $40 billion valuation, raised about $2 billion in May -- both without any annual earnings. Alibaba by comparison turns about half of its sales into income. SUSTAINABLE MODEL At $68 a share, Alibaba is valued at 29 times expected earnings for the year through March -- below multiples fetched by Chinese and U.S. rivals including Tencent, Baidu Inc., and Amazon Analysts forecast that Alibaba’s earnings will grow 50 percent in fiscal 2015 from the previous 12 months. “This isn’t a situation where you’d see a high-growth company fall down to earth -- it’s a very sustainable business model,” said Eric Brock, a portfolio manager at Clough Capital Partners, which oversees more than $4.5 billion in assets including the Clough China Fund. Alibaba provides various marketplaces for buyers and sellers as well as services that help them conduct their businesses. Taobao Marketplace, started in 2003, enables millions of individuals and small businesses to sell products. Tmall provides a virtual shopping mall, with retailers and brands offering products, and Juhuasuan operates a flash-sales model. Alibaba itself will raise about $8.4 billion from the sale, while another $867 million of the proceeds will go to Ma, IPO filings show. YAHOO’S WINDFALL Yahoo, which poured about $1 billion into Alibaba nine years ago, planned to sell 121.7 million of its shares in the IPO, the filings show, raising about $8.3 billion at the offering price. That will trim its stake to 16.3 percent from 22.4 percent. Japan’s SoftBank Corp., Alibaba’s largest shareholder, didn’t plan to sell shares and will have a 32.4 percent stake after the offering, according to the prospectus. Mainland Internet users have grown to 632 million and could exceed 850 million by 2015, according to government data. Alibaba has been seen as a proxy for this growth with its 279 million active buyers in the year through June, according to its prospectus. This scale has enabled the company to generate revenue of $8.46 billion in the year through March. CHINA RISK Profit in the first quarter surged as advertisers boosted spending on the Tmall and Taobao platforms. Net income almost tripled to $1.99 billion, or 84 cents a share, in the three months ended June 30. Alibaba’s home also raises risks for investors. Like many Chinese companies, Alibaba will rely on a legal structure known as a variable interest entity, or VIE, required by the Chinese government for foreign ownership of certain industries, including Internet companies. While Alibaba gets most of its revenue from wholly foreign-owned enterprises, if China revokes its VIE license, U.S. investors could be affected, filings show. “I remain concerned about the dangers that these structures pose,” Senator Robert Casey, a Democrat from Pennsylvania, said in a letter to the U.S. Securities and Exchange Commission this week. STAYING OUT Some investors chose not to invest in the IPO, even though they’re enthusiastic about Alibaba’s prospects. Don Gimbel, global portfolio manager at Geneva Advisors LLC in Chicago, said he would sit out the debut to see how investors react once the shares begin to trade. “I don’t know how to value it at this point of time and that’s why I want to wait and see what the market says,” he said in an interview before the price was determined. “To say Mr. Ma is a great salesman is the understatement of the year. He’s got a great product and I think the diversification Alibaba is able to achieve because of its uniqueness in China is spectacular.” Alibaba is listed under the symbol BABA. To contact the reporter on this story: Leslie Picker in New York at [email protected] To contact the editors responsible for this story: Mohammed Hadi at [email protected] Elizabeth Wollman Copyright 2014 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Posted on: Fri, 19 Sep 2014 18:18:31 +0000
Trending Topics
Recently Viewed Topics
© 2015