I had a spot on CNBC Squawk Box this morning at 7:40AM New York time. Hey, wait a minute, That’s 4:40AM here in California! You can see a short video of the spot by clicking here without having to wake up in the middle of the night to do it. 🙂
Before every show I prepare a set of talking points so that the producer can use to brief the anchors before the show. Here are the talking points for today’s show. I was be on with a fellow named Gordon Chang, who has much stronger views (and more knowledge) on Alibaba than I do. I include his remarks below FYI.
JR talking points below:
-I met Jack Ma years ago when he was first starting Alibaba. He is a real character and a has a personality big enough to hold an audience in a state of trance. (Usually, investing with a spell-binding evangelist entrepreneur is not a very good idea.)
-Jack has built an extraordinary business (as Gordon says, 80% market share is a virtual monopoly). In China, anyone who accomplishes this has friends in high places. (This is not a good reason to invest either).
-I’m less worried about China’s overall growth than Gordon. Chinese urban incomes are growing about 10% per year in nominal terms. Minus 3% inflation that means 7% real growth. Gordon’s 80% market share point makes sense to me but China is still in the period of changing the structure of the economy from rural to urban and from industry to service sector jobs. And most Chinese do not yet have the ability to buy and sell things on line. That means e-commerce should grow faster than GDP for a time. (A positive point for Alibaba)
-It is definitely true that rich guys in China are working hard to get a portion of their wealth out of China, even in the face of capital controls and an inconvertible currency that make it difficult to do so. But they are not the customers of Alibaba–the growing middle class consumers. I also do not think the economy or the property market will explode any time soon.
-I have no knowledge of the legal issues Gordon raises. If true they are deal killers.
-After all that, I agree with Gordon but for a different reason. I have been investing long enough (i.e., I have lost money so many different ways) that I have my own set of unbreakable rules. My number one rule is:
NEVER INVEST IN SOMETHING YOU DON’T UNDERSTAND
I don’t understand IPO valuations, especially intangible ones. I do understand enough about China that I think it is a game best left to local investors. Between Gordon’s points and the not-ready-for-prime-time state of China’s investment institutions (rule of law, courts, property rights, opaque financial statements, insider control and trading,…) I would strongly advise MOST U.S. investors to stand back and watch the show but not throw any of their hard-earned money into the pot.
Gordon’s talking points are below for reference.
1) Alibaba is about 80% of ecommerce in China – it doesn’t give them much room for growth. the other thing that isn’t good is consumption is starting to meet resistance… we can see that in poor export numbers, number of losses in stores.. chinese economy is in a difficult position right now.. the chinese consumption is stagnant.. you look at all sorts of metrics – import is an important indicator of consumption – you’ve had negative numbers for 2 straight months – you’ve had unimpressive same store sale growths – you have employment numbers which are unimpressive
2) interesting that Jack Ma talked about alibaba’s growth in Europe & the US which really means it’s not in China.. the question is why is it any better than amazon or anything else? I don’t think that it is..
3) I suspect it will get some sort of push after the offering but I think it could be a disaster… – china is growing about 1-2% right now in reality so the question is how far can they grow in their own market?
4) the structure that alibaba uses to go to market is essentially illegal.. the chinese supreme court 2 years ago found a very similar structure (UNICOM) that alibaba is using is illegal under chinese law… this is not a theoretical concern especially with china turning anti-foreign.. not inconceivable that chinese investors wake up and hear that the courts rule the structure is illegal- look at unicom … foreign investors are on notice…
5) property meltdowns in china, accumulating massive debts and the big story out of china is barclays is saying that 47% of china’s wealthy plan to leave china in 5 years … talk to any high end real estate broker and they will say the money is coming in from russia & china
6) if you really do believe in the e-commerce market in china you would be buying tencent – listed in hong kong – much better company, better managed – they don’t think they’re rock stars — Jack Ma is arrogant… I think he’s a pirate
7) If you look at alipay Jack Ma ejected yahoo b/c he said the structure yahoo used was illegal so he himself used the illegality of the structure he set up to take yahoo out of a very profitable business – he tried to do it secretly.. this is a pirate – none of this is secret.. the question is why are people so interested? risks are enormous.. I find it mystifying …
8) I think this is a story where risk is unappreciated – people know the risk and sort of assume because China hasn’t assumed it to be illegal it’s going to be ok but when you look at unicom and you look at what Jack Ma did with alipay and yahoo there is an unacceptable amount of risk