Alibaba can withstand China’s scrutiny, says VanEck’s Semple

Last week, the People’s Bank of China (PBOC) announced it had opened an anti-monopoly investigation. Analysts believe he is investigating whether Alibaba is forcing sellers on its platform to sell exclusively there and not through competitors, a practice known as “pick one of two.”

Regulators are also looking at Ant Group, a fintech company owned for a third by Alibaba. They’re looking at whether to treat Ant plus like a bank and regulate it that way. Ant recently canceled what was to be the largest initial public offering ever.

Alibaba stock has gained nearly 10% this year, compared to 16.3% in the S&P 500 index.

David Semple, $ 2.6 billion portfolio manager

VanEck Emerging Markets Fund

(GBFAX), says Alibaba can beat others on product and service quality, even if regulators cut off its wings.

He recently spoke to Barron’s about his views on Alibaba and other Chinese e-commerce stocks, and other investment ideas. A modified version of the conversation follows.

Barron’s: What are Chinese regulators watching?

David Semple: It is like many other sectors in China where regulatory development has not kept pace with economic development. Essentially, entrepreneurship invades the gray areas and then catching up is more of a black line. Some people will be on the wrong side of this; some practices will be on the wrong side, and that’s what they’re putting away.

It was a bit of an open secret in the industry that certain practices pushed the boundaries, and I think that may be what is being targeted. It is more about the best development of the industry and the protection of consumers.

I don’t think it’s irrelevant that Jack Ma was visible until fairly recently and is now invisible. Obviously, a lot of the development of fintech were areas where the PBOC was uncomfortable but needed a bit more political influence to really start stepping in and regulating better. People are very concerned about the implementation of these regulations and the spotlight. But things will work out. There are some fantastic opportunities. This does not take away from the underlying structural growth of many of these companies.

For Alibaba, it doesn’t matter how you attack it. There is value in that. It’s just a matter of time over how long it will take before this is reflected in the share price. We still think it’s a great basic ecommerce business and putting a reasonable multiple on it means everything else is free. This is the value. Will it perform well over the next two months? I do not know. But we see a lot of value.

Was there a catalyst to get regulators to act now? Was it the IPO of the Ant group?

It would be pure speculation on my part. I do not know. The IPO of ants is distinct. Never underestimate the special interests of China. The banking sector is almost exclusively owned by the state, and they would be reasonably happy to cut its wings. The harsh reality is that, objectively, it didn’t seem to be playing out on an equal footing. That’s why there was this decline.

Alibaba is not the only company with exclusivity agreements, we were told.

No. Other people do it elsewhere in other countries in other situations. But I think in the long run it just means that the growth delta is a little less. (Alibaba) can beat on the quality of service. It’s quite competitive. That’s the irony of it. The simple competitiveness of this system led to anti-monopoly regulation. Newcomers – JD.com and PDD – if they could, you bet your bottom dollar they will too.

Are regulators just targeting Alibaba, then?

The standard practice that I have observed in a lot of these cases anyway is like the Chinese saying, where you throw a pebble in a pond and everyone notices the ripples. In other words, there is an example to be made here and everyone should sit down and take note of it. I don’t think it’s specifically related to Jack, but if the collateral benefit is to hold him back, that’s an added benefit. But this applies to the whole industry.

But you have to be careful. Because it has been a wonderful laboratory for innovation on a global scale. In a country keen to prove its competence in innovation, this is an area that it can clearly designate. So there is definitely a balance.

What effect does this have on other Chinese internet stocks?

Obviously, contenders benefit if you think Alibaba is going to have its wings cut. JD and PDD are the two obvious ones. There were concerns that this would affect local service companies, for example

Meituan Dianping

(3690.Hong Kong). They are the leaders in local services (like food delivery), and they compete directly with Ele.me, which is Alibaba’s local service company. And Meituan partly belongs to

Tencent Holdings

(700: Hong Kong).

Watching the game, it became clear to me that Tencent’s tentacles are everywhere or rather the penguin’s footprints are everywhere. There are a lot of potential areas that could be under the microscope.

The IPO Ant is a great IPO, but not a great investment.

Why do you say that?

The hype, the excitement. The IPO until it didn’t work was going to be fine. Everyone was super excited about it, everyone was scrambling for the stock. But the monetization aspect of fintech is harder than people think, especially if fintech guys have to follow the same set of rules.

Where are you looking elsewhere in the world?

For e-commerce? Clearly India is a big business, but the ability to directly participate in it is very limited because those facing pure India are private or part of big business. Poland,

Allegro

(ALE.POLAND) is a simple stand-alone e-commerce company. In Russia,

Ozon Holdings

(OZON) listed. Again, this is a pretty straightforward stand-alone ecommerce business.

Then there’s what’s happening in Southeast Asia and who’s going to win there. Shopee [the ecommerce business that is part of online marketplace

Sea

(SE)] is Singapore-based and most of its profitability comes from Taiwan, but their footprint is across Southeast Asia. What’s impressive is how successful they have been in Taiwan. But there are a number of unicorns [in Southeast Asia] who are involved in e-commerce and local services, especially Lazada, which is partly owned by Alibaba.

SEA is a great company. The concern we have is that the gaming industry is built on a very small set of games. And then there is the evaluation. SEA worked great, grew very quickly, but at 10 times the value of the company relative to sales, right? Who knows. Have a huge weight in the sense that it concerns me.

What about outside of e-commerce? Actions to watch?

We love BTPS, [which is 70% owned by

BTPN

] in Indonesia. It’s a women-based group loan model, so they lend to groups of women. They are all jointly responsible for the loans, so you are only going to meet with your friends who are reliable. It is only for productive uses. So if you want to set up a booth that’s what you get loans for. With that comes a lot of financial education. It’s very empowering for these women. It has been a great stock for us. During the pandemic, the share price halved, but it immediately recovered.

One of our long-term holdings is in South Africa,

Transaction capital

(TCP), a company that lends to taxi minibus operators. This is how people get around South Africa if they cannot afford Uber, taxis or cars. If you are in a town and need to get to work, you are looking for one of these taxis. They are individual owners. These guys lend them. They track where the buses are to find out where the guarantees are and if there is a problem. Is the operator ill or is the cabin broken down? They will get help or fix it. It’s very empowering. It was a very positive experience for us to be invested in this company.

Write to Liz Moyer at [email protected]