BABA: Portfolio Manager Summary

Alibaba is a bet on the growth of commerce in China, not just online commerce but a broad definition of commercial activity. Alibaba is now deeply entrenched in China’s business future. As the economy there develops, the Internet will be at the core of that growth, as opposed to commerce in more developed economies where the Internet is still something of an add-on or competitor to traditional commercial channels. If you think the prospects for this look good, and I do, then Alibaba is likely to prove a good investment.

That being said, Alibaba is a massive, complex organization and we think a few key elements of it need to be laid out clearly. Most people reading this will already be familiar with Alibaba’s overall structure and history. The company operates dozens of websites and physical businesses. The flagship product are the company’s suite of retail marketplaces which allow consumers to buy goods from the company’s merchant ‘partners’. This is analogous to Amazon’s third-party merchants, with the important distinction that Alibaba does not sell any goods directly.

In many senses, Alibaba is a textbook example of having a first mover advantage. From humble beginnings, they now touch on nearly every piece of online commerce in China. And their recent investments position them to expand into areas of physical goods and services.

Alibaba is best viewed as a ‘platform’. Meaning they have a core group of customers and users, and can generate serious growth through the ability to drive additional revenue streams from that base. This is why the Street is watching ‘monetization’ figures closely, revenue and gross merchandise value for each customer.

One of the key elements of that is their ability to effectively provide credit in the form of ‘generous’ working capital to their merchant partners. In China’s complex financial markets, this advantage is both hugely important and hard to fully grasp. Investors, should view Alibaba not only as a web commerce company but as a quasi-financial institution. We add that ‘quasi’ hedge because portions of the company’s financial offerings are not accessible to foreign investors, but the investment vehicle can still benefit from them.

That bit of complexity leads directly to the very important subject of risks. The most obvious ones are political risk around foreign ownership of China’s Internet companies, which for Alibaba manifests in a convoluted ownership structure. Investors have gotten accustomed to these “VIE” structures (Variable Investment Entity), but that should not diminish the risks associated with them. There is a fair degree of ‘faith’ involved in holding Alibaba shares. Second, the size and complexity of the company’s operations defy ready analysis. We expect noisy data flows for some time as investors piece together reliable data points for the company. Even a cursory reading of the company’s filings should make it clear that there are pieces of Alibaba that will never be fully understood by outsiders. Not least of these will be getting a full grasp of the financing and credit side of the company which we believe is an important part of its competitive position.

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