The Queen of the Internet is Chinese
After its IPO, Alibaba is worth more than Facebook.
- Tuesday, 03 February 2015
Alibaba Group, a giant e-commerce company serving some 300 million customers a year and with 80% of the online market in China, has landed the biggest initial public offering in the world. In September 2014, the company placed $25 billion (€20bn) in new shares. As the first day of trading ended, Alibaba was valued overall at $231 billion (€186bn), $29 billion(€23bn) more than Facebook.
The share listing made Jack Ma, a soft-spoken, no-nonsense, ex-English teacher who founded the company in 1999 in his apartment, the richest man in China and a hero for would-be online entrepreneurs all over the world.
Interestingly, Alibaba didn’t list in Shanghai. It chose the New York Stock Exchange instead. Alibaba is by far the biggest example, but its choice to list outside mainland China was not unusual. Direct competitor Baidu, China’s Google, went public on NASDAQ in 2005 while Tencent, owner of the WeChat social media app, listed in the more familiar venue of Hong Kong in 2004. Many other Chinese companies have sought listing abroad before, and many others will follow, galvanised by the success of a Chinese mega-corporation ‘beating the US at capitalism’. Investors who couldn’t get their hands on Alibaba shares can be certain other offers are on the way: after Chinese regulators, worried that the market was saturating, shut the door to new listings for more than a year back in 2012, the queue at home is still anything but cleared and foreign stock markets are an attractive option.
So far, Alibaba’s adventure in the stock market, fuelled by investors’ relentless love for the Internet and growing Asian consumer markets, has been a huge success. Priced at $68 (€55) a share, the shares closed their first day 38% higher. By the end of October, its market value surpassed that of Wal-Mart, the world’s biggest retailer. Last November, on Singles Day, a sort of Chinese Black Friday where people buy gifts for themselves, the company pulled in a record $9.3 billion (€7.5bn) sales and the stock flew to around $118 (€95) a share, almost doubling its share price in the space of two months.
That’s impressive, but investors with a long memory will recall that in the past Chinese companies trying their luck on international markets hit more than a few bumps along the road.
The trickle into foreign equity markets started in the early ’90s, becoming a flood around 2005. Old and new-economy Chinese firms featured in scores on the New York Stock Exchange, on its tech sister NASDAQ, in London, Singapore, Toronto and even Frankfurt. Chinese entrepreneurs liked the liquidity and the possibility to tap deeper Western pockets, and investors loved the tumultuous growth story and expanding market. Stock exchanges around the world competed to attract the promising capitalists on their shores.
Then, in 2008, a wave of accounting scandals swept the Singapore Exchange. Some of the over 170 Chinese companies listed there had bolstered their numbers. Many went under, overwhelmed by debt. Some top executives offed with the companies’ coffers. Sadly for defrauded investors, it emerged that due to the tangled structure of many of these companies, funds located in mainland China were extremely difficult to seize – and complacent local authorities often turned a blind eye. In 2011, a financial bomb exploded in Canada. China’s Sino-Forest Corporation, a multibillion wood products company, unravelled amid accusation of inflating their books, in one of the highest-profile frauds in history. Cases of fictitious accounts and poor corporate governance within Chinese firms listed around the world became commonplace.
Among US equity investors, a series of corporate scandals and crime accusations from activist hedge funds tarnished the reputation of China’s firms, to the point that the US market was practically off-limits for Chinese entrants in 2012.
In Europe, Deutsche Boerse had actively encouraged Chinese companies to list in Frankfurt for years. It didn’t go well, and a few bizarre developments last year proved particularly embarrassing. The chief executive officer of one company went missing. The company abruptly filed for bankruptcy days later. Shortly thereafter another firm, Ultrasonic, was forced to admit its top executives based in China had vanished, together with all the cash...
As usually happens on the markets, the situation slowly improved, and operators learned from their mistakes. Chinese firms, wanting to be taken seriously, have progressed in setting up healthier corporate governance systems. Chinese market regulators tightened their controls, as the country’s government, keen on enhancing economic influence and soft power abroad, wanted to avoid being embarrassed by its rogue capitalists.
Foreign stock exchanges implemented stricter listing and oversight rules in an effort to attract the healthiest Chinese firms. Singapore tightened listing standards to avoid another market rout. In the US equity market, a crackdown on Chinese companies spurred a wave of delistings, arguably leaving only the more transparent firms who had nothing to fear from tighter regulatory scrutiny.
Today, the Australian Stock Exchange, regarded as one of the most rigorous in the world, welcomes Chinese companies. The latter seek to list in Sydney to gain a badge of respectability and a reputation for clean accounting practices. As the Western world treads water with sluggish economic growth and depressed consumer spending, it becomes increasingly hard to resist the lure of China’s huge, growing market. Some Chinese companies still might not win prizes for best corporate governance, but to Western investors, the reward of finding a new Alibaba can be worth the risk.