Alibaba.com minorities should hold out for more

February 27, 2012

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Alibaba.com’s minority shareholders should beware giving their treasures away too cheaply. The Chinese e-commerce provider’s founder, Jack Ma, is offering to buy back their shares at just a third the valuation at which Alibaba.com went public in 2007. Considering the company’s solid growth potential, and the market values of its main rivals, small investors should not yet open sesame.

The group floated in Hong Kong for 100 times its historical earnings just over four years ago, and the shares tripled on their first day of trading. That was excessive, but so was the correction that followed. The shares traded as low as 18 times historic earnings in 2011, despite earnings growing on average 33 percent a year in the past two years. Amazon, the U.S. e-commerce giant, trades at 134 times. In China’s own stock market, smaller rival Toocle sports a price-to-earnings multiple of 65 times – twice what Ma has put on the table in this deal.

The company is arguably on a more solid footing than before. After a spike in fraud numbers which led to the departure of its former chief executive in 2011, Alibaba has tightened rules that resulted in a decrease in the number of paying members. That’s a necessary price to pay to weed out low quality suppliers. And it hasn’t hurt the overall direction of the business. Alibaba.com’s revenue has tripled since 2007.

Hong Kong investors haven’t been pricing in Alibaba.com’s full potential. The company is in the middle of a business model change, set to become less dependent on the volatile export market by focusing more on the domestic e-commerce space. Its sister company Taobao already dominates the consumer-to-consumer segment inside China. Alibaba.com should be able to create decent synergies if it can replicate its business-to-business success outside China in its home market.

Ma himself bought around HK$200 million of Alibaba.com stock in late 2010, when the shares were roughly where they are now. No wonder he is buying again. Alibaba.com’s market cap is just a tenth of that of Amazon’s, even though its 2011 net income was half as much. Investors have good reason to hold out for more.

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