Joseph Ciolli
US FUND managers studying an investment in Alibaba Group are worried about everything from corporate governance to bull market fatigue. They are buying anyway, afraid of missing a bargain.
Thornburg Investment Management sees Alibaba trading at a discount to internet stocks and is planning to buy shares through the initial public offering (IPO). Clough Capital Partners left road show meetings convinced of the company’s growth potential. Krane Funds Advisors is so optimistic about demand that it created an exchange-traded fund last year with plans to buy shares in China’s biggest e-commerce company when it goes public.
In interviews with more than a dozen fund managers with about $400 billion (R4 trillion) under management, about half of those that routinely participate in IPOs said they would buy shares. The results mirror a poll of securities professionals by the brokerage ConvergEx Group, which found 49 percent of respondents were interested in owning the stock, a level it said represented “remarkable” enthusiasm.
“We look at it as a multi-year growth story and also compare it to peers, which also have high valuations for similar growth targets,” Eric Brock, a portfolio manager at Clough Capital, said. “I’d be comfortable with the shares pricing even a bit above the higher targeted range.”
Alibaba plans to set a final price for the shares today after raising the projected price range to a minimum of $66, which had previously been the proposed maximum. The firm runs a group of internet-based e-commerce businesses that completed $248bn in transactions last year and a payment application called Alipay.
The IPO could top Agricultural Bank of China’s more than $22bn sale in 2010 as the world’s biggest. Its size has the potential to increase should Alibaba price shares above the range, which it can do without additional filings.
Alibaba is seeking a market value of up to $167.6bn, or 29 times four analyst estimates for earnings in the year to March next year. Analysts expect Alibaba’s net income to rise more than 50 percent this financial year from the previous 12 months.
“Valuation is attractive,” Di Zhou at Thornburg Investment Management in New Mexico said on Monday. “They’re telling a real good story about e-commerce. At least they should deserve the same multiple as their peers.”
Baidu, China’s biggest search engine, trades at about 34 times estimates of this year’s earnings, while Tencent Holdings, the largest publicly traded Chinese internet company, is around 37 times. Amazon.com fetches almost 135 times forecast 2014 earnings.
Justin Dini, a spokesman for Alibaba at Brunswick Group, declined to comment.
Chinese internet and e-commerce firms that trade in Hong Kong and New York command a median of 43 times estimated earnings, data show.
Another lure is profitability. Alibaba’s earnings before interest, tax, depreciation and amortisation (Ebitda) amount to 59 percent of revenue, the most out of 10 comparable companies, according to Wedbush Securities. That group includes Google, Facebook, Amazon.com, Baidu and Tencent, among others. By contrast, Twitter and Chinese e-retailer JD.com have negative Ebitda margins.
“This is a mature company that’s been in existence for 15 years but it’s still experiencing tremendous growth,” Brendan Ahern, the managing director at Krane Funds Advisors, said on Monday. It was “going to benefit from macro tailwinds helping all companies in the space, especially with the continued adoption of the internet and rise of domestic consumption in China”, he said.
Chinese internet users have grown to 632 million, greater than the population of any other country except India, and could exceed 850 million by next year, according to government data. McKinsey predicts online retailing in the world’s second-largest economy will reach $395bn next year, triple its 2011 level.
Alibaba’s offering will be the biggest public debut since Facebook, whose shares fell more than 50 percent in the four months after its IPO. Investors who sold at the bottom missed out as the stock quadrupled, pushing the market value to almost $200bn and making it the 14th largest company in the Standard & Poor’s (S&P) 500.
Facebook went public on May 2012, when the S&P 500 was hovering around 1 300, more than 200 points away from its previous high. The benchmark gauge for American equity has rallied more than 50 percent since then.
That alone was giving some investors pause, said Kevin Headland, a director at Manulife Asset Management in Toronto.
“People are talking about how this might be the 1999 tech bubble all over again when everything launched an IPO,” Headland said. “I don’t think this is happening, these are actual solid companies. Alibaba’s been around for a while.”
Other potential buyers left the road show with questions about corporate governance. For example, they sought more information about Alibaba’s relationship with Alipay .
Investors said they were also trying to get accustomed to Alibaba’s management structure, which gives 30 individuals the ability to nominate a majority of the board. – Bloomberg