5 Things To Know About The Alibaba IPO

By Jo Ling Kent | Updated September 03, 2014 AAA

FOX Business Network’s Jo Ling Kent weighs in on the Alibaba IPO. Alibaba is set to go public after Labor Day. Analysts say it could raise $20 billion and value the Chinese e-commerce giant at more than $200 billion. Here are five things to know about the company that dominates the world’s largest e-commerce market:  

1. You Think You Know Alibaba, But Do You?

Stop reading right here if you’re fluent in Alibaba.

For most people – even savvy investors – Alibaba remains a relatively unknown behemoth.

Here are the main verticals you need to know about:

  • Taobao Marketplace: China’s online shopping marketplace, which happens to be China’s most popular mobile commerce app according to Alibaba
  • TMall: China’s largest brands and retail platform that features goods sold directly from brands
  • Alibaba.com: a global wholesale marketplace online for international customers
  • 1688.com: leading online wholesale marketplace for domestic Chinese small businesses
  • Alipay: the PayPal-like service processed $623 billion of digital payments in fiscal year 2014; it’s controlled separately by founder Jack Ma and other Alibaba executives
  • Aliyun: cloud services and infrastructure. According to SEC filings, Alibaba made $102 million from cloud and infrastructure services, which is up 26% from last year. That’s not quite as fast as Amazon Web Services, but it’s impressive nonetheless
  • And many more.

Essentially, Alibaba is a eBay, PayPal, Amazon, Amazon Web Services, and many more rolled into one.

2. It's A Chinese Company And That Comes With Certain Nuances To Watch

Alibaba and its founder Jack Ma have a storybook tale. The company grew out of his small apartment in Hangzhou back in 1999 into a multi-billion dollar company today, but for some governance experts, there are red flags about how business is done both by Alibaba itself and the government.

Ma, who has an 8.9% stake in Alibaba, and some of the other 26 members of the Alibaba Partnership have made investment decisions in which personal and professional business overlapped. Ma has made some investments on behalf of the company while others involved loans funded by Alibaba.

In its filings, Alibaba says it will take some steps to limit Ma’s personal gains from the transactions. He will return any profit back to Alibaba or giving the money to a philanthropic cause.

Alibaba is also ultimately at the mercy of the Chinese government. One of its top risk factors is how the rules governing the marketplace in China could change.

One example: Alipay was suddenly spun off in 2011 into the hands of Ma after China's central bank issued regulations requiring non-bank payment companies to obtain a certain operating license. Alibaba is incorporated in the Cayman Islands and all companies without this license had to halt business by September 2011. There’s no word on when that will change. Meanwhile, Alipay is growing fast and handling payments for Alibaba as a third party.

But dramatic reworking of the rules is unlikely for now partly because some high ranking Chinese officials stand to make a bundle from the IPO and Alibaba’s success will only bring in more cash. Institutional investors who have employed the children of high ranking Chinese officials have sunk billions into Alibaba. This summer, the company disclosed that Boyu Capital, which reportedly employs as partner the grandson of former Chinese president Jiang Zemin, holds a 0.55% stake as of the end of June. CDB Capital holds 0.47%, while Citic Capital Holdings owns 1.1%. Together they hold more than $4 billion worth of Alibaba shares.

Rapid Ratings, a company that analyzes corporate financial health, says that those close ties to the government could wind up being good for investors.

"Consider that the closer the ties to the Chinese government, the more vested the interests are in China to see the Alibaba IPO be successful and their stock be seen as a bellwether for Chinese technology prowess,” Rapid Ratings CEO James Gellert tells Fox Business.

Gellert adds: “[This is] likely to affect the deal inasmuch as some portion of international retail investors may lose some interest, but they were never going to drive the IPO success anyway.”

However, some investors remain skeptical about transparency. James Sanford, portfolio manager of Sag Harbor Advisers, told the Wall Street Journal (http://online.wsj.com/articles/alibaba-founder-jack-mas-recent-deals-raise-flags-1404760656), "Just because a large number of U.S. investors accept this doesn't mean there is no problem.”

3. But It's Not Just A Chinese Company, Alibaba Is Spreading Its Influence Globally. Here's Why.

Although Alibaba makes its bread and butter from the fast-growing consumer market in China, it has invested a huge amount of money into the U.S. market this year. It recently opened 11 Main, an e-commerce platform for high-end boutique products like clothing, home goods and jewelry.

Alibaba is writing big checks for stakes in American start-ups focused on mobile and e-commerce. Back in March, Alibaba led a $215 million round in messaging app Tango. It bought into Lyft with Andreessen Horowitz in a $250 million round. Alibaba also took part in a $170 million funding round for Fanatics, an online sports memorabilia retailer. Most recently, Alibaba invested $120 million in video game start up Kabam and gained a seat on its board. Kabam tells Fox Business it's worth more than $1 billion as a result. That doesn't even include Shoprunner and other companies it invested in last year.

Tired yet? Alibaba is far from done. It has reportedly pursued Snapchat.

And it is doing big deals in Europe and Latin America. Alibaba announced last month it is partnering with Brazil’s state-owned postal services company, Correios, to allow small businesses to use its electronic payment system Alipay to sell products in China.   In Italy and France, Alibaba inked deals with each government for easier sales on TMall. And don’t forget the $250 million stake in Singapore Post. The list goes on and on.

In return, these companies get direct access into the Chinese market. That's not too shabby, considering most of them are focused on mobile and e-commerce. The fact that 40% of smartphone purchases were China-bound in the first quarter of 2014, according to IDC, helps too.

4. Alibaba's Competition Inside China Is Mounting Fast

Alibaba is watching its back as rivals gain ground. Although the company says it processed 76.4% of China’s total mobile retail gross merchandise volume in the quarter ending March 31, 2014, competitors are coming fast and hard.  

Social media and online gaming firm Tencent is gaining ground thanks to the wildly popular WeChat mobile messaging app. China’s second biggest e-commerce company JD.com is benefiting directly from that exposure after Tencent announced a 15% stake in JD this year. Analysts say this is the first time Alibaba has faced a serious competitor.

As of May, WeChat had 396 million monthly active users who are mostly inside China. That’s pretty staggering considering Whatsapp has 465 million globally.

5. Entire Villages In China Subsist On Business Done On Alibaba

Some know that Alibaba generates a huge amount of business through its e-commerce platforms, Taobao and TMall. But many may not realize that there are entire towns across China survive solely on doing business on Alibaba platforms. They're called "Taobao Villages." Back in 2010, I visited Qingyanliu in Zhejiang province, which a few years prior was a quiet village of about 1,000 farmers.

Fast forward a few years and nearly every single person in the area had set up Taobao shops online to buy and sell everything from housewares to clothing to cars. The scene in the center of the action was astounding. Trucks small and large wove in and out all day and night with deliveries as shop owners couldn't pack boxes fast enough to ship across China.

Combine that with the fact that the vast majority of Chinese people don’t live near a mall or major shopping center. The traditions of in-person retail shopping is relatively weak for a variety of historical and economic reasons. Compare that to American shoppers, who have a strong culture of browsing stores and malls. In the US, e-commerce sales in the first quarter of 2014 accounted for only 6.2% of total sales, according to the Census Bureau. It grew a mere 2.8% year over year. In China, e-commerce sales made up 7.9% of total sales, according to iResearch.

Between Alibaba’s Taobao, TMall and group buying site Juhuasuan, there were 255 million active buyers and 8 million active sellers in the 2014 fiscal year. Across all Alibaba sites, 12.7 billion transactions were processed in 2013. That adds up to 34 million transactions on average per day. The e-commerce market in China will hit $713 billion, according to iResearch. No wonder “Taobao Villages” are bustling.

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