Guys
I posted a response to a thread over on NPI which you might find interesting.
http://discussion.fool.com/shop-and-demandware-32352215.aspx?sor…
The thread is mostly about Shopify so should be of interest to many but there was also a conversation about Ali Baba on which I posted.
I know Saul has a blocker on investing in Chinese (which I quite understand), however I would put a company like BABA above and beyond the typical Chinese risk concerns.
Leaving its origins aside, I feel it has a deserving place in a Saul like portfolio and has the potential to be an AMAZON, YouTube, eBay, Netflix, Uber, Alphabet, Apple Pay and much more all rolled into one.
Its latest results blew the market away - 59% growth for a corporation with a market cap of $245bn!
BABA has a PE of 23 and its Non-Gaap diluted EPS was .74 for the quarter up 33%.
http://finance.yahoo.com/news/alibaba-group-announces-june-q…
Ant
2 Likes
HI Ant,
I think it is very important for everyone to understand that if you buy shares in Chinese companies you really do not own shares in the company. Jack Ma was able to cheat yahoo out of a portion of their shares before they became public. Just google it. Also here is an interesting article that everyone should read to understand just what you are investing in. I wish that China really did have rules of law that allowed investors to invest in their companies. Not even the SEC can really audit Chinese companies that are on any of the U.S stock exchanges. So just understand exactly what you really are invested in. Most of the time it is just a piece of paper.
http://www.dailydot.com/via/alibaba-jack-ma-global-economy/
Andy
7 Likes
Hi Andy
Yeh I totally get the risks having seen plenty of taking private action whereby the Chinese owners of the voting stock scalp the non voting foreign stock at steal as well as the host of dodgy deals that found their way onto AIM in London.
My way to minimize the risk is look at companies where I can genuinely trust the owner/manager (YZJ or NOAH), that have enough western counter party ties (CTRP) or are so big that reputationally not even PRC would want the demerit in corporate misdemeanors - which is where I would place BABA.
There’s no way the government would let China’s biggest corporation shaft the financial markets, it would make the country uninvestible. China is risky but it isn’t quite at the levels of corruption plus incompetence that India is at and the way India treats international corporations.
China’s crusade against corruption would not survive nor tolerate a BABA scandal. In a sense it has become too big to fail.
Ant
Hi Ant,
Alibaba has already shafted yahoo once. I do not understand why you would think they wouldn’t do the same to any other investors. Also their shares are not really held by the investor at all. They sold their shares under the VIE structure because under Chinese law you really can not own shares of Internet companies. To make matters worse, the VIE structure has not been actually approved by the Chinese government. It could be found illegal and then what would happen is anyone’s guess. But if you look up the VIE structure you will find that you really do not own any of Alibaba but a holding company that owns Alibaba. I wish everyone good luck if you invest in Chinese stocks but at least be aware of what you are really investing in.
Andy
6 Likes
I don’t know about all Chinese stocks, but that sort of thinking is what kept me out of Baidu when it had a market cap of $3 billion.
True enough though, Alibaba has a market cap of $250 billion, more or less, and thus has much less upside than Baidu.
The other reason I stayed out of China was because crony capitalism is so engrained in the system that a huge crash is inevitable. But such has never happened, and perhaps it will be a slow fall, and not the crash that has happened every other time cronyism played such a large role in the shaping of an economic boom.
It may just be that the surplus population in China is economically growing sufficiently to cover up and cushion the blow that otherwise would be.
There have been some great returns in Chinese stocks. I would not shy away from them because of issues such as this, unless they are genuine and material to the specific company.
Tinker
1 Like
Hi Ant, Considering that two or three years ago, when Yahoo was a 40% owner of Alibaba, the CEO gave himself the most rapidly growing subsidiary as a present, and there was nothing Yahoo could do (even though they were a 40% owner), what in the world makes you think they can’t do the same thing to you? Just wondering.
My own experience in Chinese stocks listed in the US (most recommended by MF Global Gains, which is now extinct) was that they were simply devices to enrich the CEO and his family, and stockholders were just considered suckers and sources of the funds to enrich the principals. Eleven of thirteen of these companies, as I remember turned out to be fraudulent (bought nonexistent companies from CEO’s cousin for $25 million of stockholder money, didn’t have the factories and facilities they said they had, etc.) All collapsed in price, often to pennies a share. This included several that the MF Global Gains leaders visited, and had glowing reports of how wonderful the corporate officers seemed.
Saul
5 Likes
Yeh they shafted Yahoo but that was from a while back when CNOC, China Mobile and Baidu were the largest corps. China doesn’t pay attention to the law but they do pay attention to face and reputation. They would not want a prominent corporate disaster on their hands legal or otherwise.
I’m not putting my entire savings into Ali Baba and there are risks but they are worth a stake as far as I am concerned.
Ant
Hi Tinker,
There have been some great returns in Chinese stocks. I would not shy away from them because of issues such as this, unless they are genuine and material to the specific company.
That is true but there also have been some spectacular losses in Chinese companies. I was a member of Global Gains. The analysts went to China and studied each and every Chinese company that they recommended and still had a terrible record. They were very smart people and they couldn’t get it right. So I made a rule never to invest in Chinese companies. I am comfortable missing out on the few Baidu’s because I also miss out on all the YONG’s.
Everyone has to develop their own rules and I wouldn’t tell anyone to follow mine but I would tell them to be cautious while investing in Chinese companies. Also go and read what Jack Ma did to yahoo and see if he is someone you want to trust.
Andy
One of my best investments ever was in a Chinese stock, KNDI. Over a period of almost four and a half year it produced an Internal Rate of Return (IRR) of 43%.
http://softwaretimes.com/files/investing+kandi+technologi.ht…
Start: December 2010
End: May 2015
Trades: 46 (stocks and options)
http://softwaretimes.com/pics/kndi-08-14-2016.gif
Denny Schlesinger
By the way Andy I did Google the Yahoo story (how ironic). I think in some ways it is quite complicated and personal…
http://www.forbes.com/forbes/2011/0411/features-jack-ma-alib…
In other ways it is a factor of 2 things:
- Doing business in China is cronyism and protectionist - actually to the benefit of investors in Chinese plays but certainly nothing you can blame Ma for
- The difference in voting and non voting stock - which you also get in Europe and America and presents a known risk.
What I would also say is that Facebook and Zuckerberg did the same thing to Savarin and he did much worse ripping off the idea from the Harvard brats in the first place. I don’t think America is the paragon of behavior in that respect (it is a paragon of business from a regulatory perspective though). What happened with Ma and ALIBABA happened with Zuckerberg and Facebook.
Ant
1 Like
What I would also say is that Facebook and Zuckerberg did the same thing to Savarin and he did much worse ripping off the idea from the Harvard brats in the first place. I don’t think America is the paragon of behavior in that respect (it is a paragon of business from a regulatory perspective though). What happened with Ma and ALIBABA happened with Zuckerberg and Facebook.
That is a very good point Ant and I own Fb. Maybe I need to revisit my rules.
Andy
1 Like
2) The difference in voting and non voting stock - which you also get in Europe and America and presents a known risk.
If you google google you’ll find that they sell you shares with fewer votes that insiders have. If they want my money but not my vote they can sell me bonds with a high interest yield.
The concentration of our stock ownership limits our stockholders’ ability to influence corporate matters.
Our Class B common stock has 10 votes per share, our Class A common stock has one vote per share, and our Class C capital stock has no voting rights. As of December 31, 2015, Larry, Sergey, and Eric beneficially owned approximately 92.5% of our outstanding Class B common stock, which represented approximately 58.5% of the voting power of our outstanding capital stock. Larry, Sergey, and Eric therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets, for the foreseeable future. In addition, because our Class C capital stock carries no voting rights (except as required by applicable law), the issuance of the Class C capital stock, including in future stock-based acquisition transactions and to fund employee equity incentive programs, could prolong the duration of Larry and Sergey’s current relative ownership of our voting power and their ability to elect all of our directors and to determine the outcome of most matters submitted to a vote of our stockholders. Together with Eric, they would also continue to be able to control any required stockholder vote with respect to certain change in control transactions involving Alphabet (including an acquisition of Alphabet by another company).
This concentrated control limits or severely restricts our stockholders’ ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. As a result, the market price of our Class A common stock and our Class C capital stock could be adversely affected.
https://www.sec.gov/Archives/edgar/data/1288776/000165204416…
Screw you Larry, Sergey, and Eric!
Denny Schlesinger
3 Likes
2) The difference in voting and non voting stock - which you also get in Europe and America and presents a known risk.
If you google google you’ll find that they sell you shares with fewer votes that insiders have. If they want my money but not my vote they can sell me bonds with a high interest yield.
Good point Denny. That is a trade off I have been willing to make in the UK. Schroders A and Scroders B common stock (with different voting rights) come with different yields . I will take another % point in yield to make up for the difference in voting rights. Given that you can’t trust the bankers anyhow and my stake won’t be material, I might as well take the higher yield on offer.
Ant
