By Bloomberg News
In San Francisco, Alibaba Group Holding Ltd. was asked how smartphones will change its business. In Singapore, founder Jack Ma compared the company to a wolf and a rival to a dog, while counterfeit products were on potential shareholders’ minds in London.
After fielding questions from investors around the world, the e-commerce giant intends to pick a price for its nearly $22 billion initial public offering tonight. Many fund managers are ready to buy in, their concerns offset by a low valuation and Alibaba’s ability to tap a growing consumer base in China.
“I was surprised how bullish investors were, given the risks for Alibaba,” said Cyrus Mewawalla, a managing director at CM Research in London who wrote a report on Alibaba. “In one sense, this is a dominant company and this is the time for e-commerce. But on the other hand, there have been many warning signals for this company.”
Bloomberg News reporters spoke with potential investors at roadshow stops in New York, Boston, San Francisco, Hong Kong, Singapore and London to get their thoughts on the deal. Bob Christie, a spokesman for Alibaba, declined to comment.
Hoards of investors — more than 800 in the end — snaked through the lobby of the Waldorf Astoria hotel in New York, waiting to see Alibaba management, including Ma and Vice Chairman Joseph Tsai, at the roadshow’s first event. Investors there were interested in Alibaba’s dealmaking strategy.
Alibaba has become China’s most acquisitive company this year, spending $4.6 billion on deals in industries ranging from film production to taxi-booking services. While the spree could impact profit margins as Alibaba invests in the new businesses, the company wants to broaden its user base by finding novel ways to connect with shoppers.
“There was talk about acquisitions — acquisitions in markets they don’t dominate,” said Gongwen Peng, director of quantitative research at New York-based Roosevelt Investment Group Inc., which oversees about $4.5 billion. “One driving force was penetration potential in China. There is a lot of room to capture online consumption in the future.”
In the mutual-fund mecca of Boston — home to Fidelity Investments, Wellington Management and Putnam Investments — investors were interested in Alibaba’s relationship with its payments affiliate, Alipay. In 2011, Alibaba drew complaints from shareholders Yahoo! Inc. (YHOO) and SoftBank Corp. after transferring ownership of Alipay to a company controlled byMa without informing them.
Some investors see that as a reflection of poor governance, and Alibaba’s decision to debut with a structure that allows a group of insiders to nominate a majority of the board adds to concerns that the interests of small stakeholders will be overlooked.
“There’s not good governance in China,” said Rob Lutts at Cabot Money Management Inc. in Salem, Mass., whose colleague attended the roadshow in Boston. “Our analyst came back shocked after finding out the moves Jack Ma made moving part of the company into his personal ownership before going public. That’s the kind of thing that makes you say, ‘Wow, really?’”
Cabot won’t invest in the IPO, Lutts said. Alibaba last month restructured its agreement with Alipay to increase any payout that Alibaba could receive if the payment service goes public. Yahoo and SoftBank both said they support that change.
A stop in San Francisco, the U.S. cradle of technology innovation, yielded questions about how Alibaba’s revenue will change as consumers turn to smartphones from desktop computers.
Alibaba generated revenue equivalent to 2.5 percent of the products sold on its retail sites during the three months through June, according to the IPO prospectus. Revenue earned from smartphone and tablet transactions accounted for 1.5 percent during that period, and mobile transactions accounted for one-third of Alibaba’s total in the three months through June.
Chief Financial Officer Maggie Wu told investors that as mobile usage grows, the proportion of money Alibaba makes from sales on the devices can grow, too.
“Right now, mobile is at half the regular PC take rate, but over time it can meet and maybe exceed desktop,” Isabelle Fymat, a general partner at Crosslink Capital, said at the San Francisco event, summarizing Wu’s comments. This will be driven by growth in lower-tier cities and increasing numbers of mobile users, she said.
In Hong Kong, the roadshow stop that’s closest to Alibaba’s Hangzhou, China, headquarters, Ma stressed his global ambitions, telling reporters at the Ritz-Carlton hotel that he wants to “greatly” expand in Europe, the U.S. and Asia.
“We are not a company from China; we are an Internet company that happens to be in China,” he said.
Alibaba is already the top shopping site in Russia and Brazil — markets where it currently has no employees — Ma told fund managers, according to two people who attended the meeting. Alibaba rose to the top in those countries even as it’s been hampered by slow shipping rates — sometimes in excess of 20 days — underscoring the potential for growth.
Still, sales from China dwarf those from outside: $2.15 billion in revenue came from commerce in the country in the most recent quarter, compared with $237 million internationally.
“They’ll have to demonstrate the ability to deliver outside of China, and that will be an uphill battle,” said Scott Kessler, Internet analyst at S&P Capital IQ in New York. “We’re skeptical of the company’s ability to be able to that.”
With Alibaba increasingly brushing up against companies like Tencent Holdings Ltd., the operator of China’s most-popular messaging service, investors in Singapore asked about competition.
Tencent, set to be dethroned as Asia’s largest Internet company by market value once Alibaba goes public, hasn’t conceded that spot quietly, taking on Alibaba in almost every business related to the Web, including e-commerce. Another rival is JD.com Inc., the Chinese retailer with a business model similar to Amazon.com Inc. that went public in May.
Ma downplayed the competitive threat from Tencent, calling it a strong Internet company that’s weak in e-commerce, said fund manager Tony Chu, who attended the Singapore gathering. According to Chu, Ma used the analogy of a wolf and a dog when comparing Alibaba with a competitor he didn’t identify: It’s hard to distinguish between the two, but a wolf knows he’s different from a dog. JD.com’s corporate mascot is a dog.
“There are a lot of e-commerce companies out there, but you have to differentiate which is the better one,” said Chu, a portfolio manager at RS Investments, which manages $24 billion. Ma sees “Alibaba as providing a platform, an ecosystem for e-commerce companies. It’s a very smart way to describe it.”
More than 200 people showed up at the event in London yesterday, and investors queried management about risks related to counterfeit items sold on Alibaba’s platforms.
Taobao Marketplace, which links individual buyers and sellers, was taken off the U.S. government’s Notorious Markets list in 2012 after significantly decreasing the sale of infringing products. Alibaba subsequently removed 114 million allegedly infringing listings from January to October last year, according to a 2014 report it submitted to the Office of the U.S. Trade Representative.
“To say that counterfeiting is a problem in China is an understatement,” said Jeff Sica, president of Sica Wealth Management LLC, which oversees more than $1 billion in assets in Morristown, New Jersey. “Alibaba has to manage several million vendor relationships. Minimizing counterfeiting is extremely difficult.”
Tsai told investors in London that the company has a dedicated staff of 1,000 people guarding against counterfeiting, and Alibaba’s prospectus shows the company’s measures include an online complaint platform and communication with government authorities to get rid of counterfeit items.
Alibaba is asking investors to value it as high as $167.6 billion, or 29 times estimated earnings in the year through March. That’s still below Tencent, Baidu Inc. and Amazon.
Also encouraging investors is Alibaba’s profitability. Margins on earnings before interest, taxes, depreciation and amortization are the most out of 10 comparable companies, according to Wedbush Securities Inc. That group includes Google Inc., Facebook Inc., Amazon, Baidu and Tencent.
“This is an extremely profitable company but it’s still buyer beware,” said Aswath Damodaran, a valuation professor at New York University’s Stern School of Business. “People have to be careful about not buying into the hype.”
The shares, listed on the New York Stock Exchange under the symbol BABA, will begin trading tomorrow.
To contact Bloomberg News staff for this story: Leslie Picker in New York at [email protected]; Fox Hu in Hong Kong at [email protected]; Joyce Koh in Singapore at [email protected]; Lulu Yilun Chen in Hong Kong at [email protected]