Pando

One grueling year post-IPO, Alibaba needs transparency more than ever

By Kevin Kelleher , written on September 21, 2015

From The China Desk

Saturday marked the one-year anniversary of Alibaba's IPO, and if you didn't hear a lot of cheering it's probably because there hasn't been too much to celebrate lately.

The difference between the hype surrounding Alibaba's IPO a year ago and its stock last week is like night and day. Remember when Alibaba began trading on the New York Stock Exchange? It was a pretty big deal. The stock raised $25 billion, including its “green shoe” allotment, or more than twice what the other 54 tech IPOs raised in aggregate during 2014. Alibaba's IPO became the biggest in history.

Alibaba priced its offering at $68 a share and watched the price rise to $93 a share on its first day. That was just the start. In November, the stock rose as high as $120 a share. During this time, a debate emerged about just what investors owned when they owned Alibaba. Some saw the future of global retail. Others saw a company that was too opaque and complex in structure to attract careful investors.

In truth, Alibaba has always been both. Jack Ma built an ecommerce infrastructure in far-flung areas where no robust commercial infrastructure had ever existed. And he did it without saddling the company's financial statements with heavy logistics and distribution costs, relying instead on partnerships with and minority investments in companies that handled the high-margin parts of commerce.

It's a remarkable achievement, but it was all done in a way that raised concerns about the company's governance and management. Alibaba has disclosed a lot of details about many of them: Its “variable interest entity” structure, the unique use of the Alibaba Partnership of insiders to run the company and nominate directors, and the early move – controversial with pre-IPO investors like Yahoo – to split off the Alipay payment subsidiary from the Alibaba Group and put it under Ma's control. 

Alibaba's rationale for these moves often boils down to compliance with Chinese regulations or preserving the culture of Alibaba. And yet if you wade through the legalese explaining them you may feel, as I inevitably do, your head grow heavy and your stomach get just a little bit queasy. Why are things this complicated, this obscure? You may even start to think that the biggest thing between Alibaba and a greater degree of love from shareholders is its chronic allergy to transparency.

That may help explain Alibaba's descent from its peak of $120 last fall to the $58 a share nadir it hit in August (the stock closed Friday at $65.75). All along the way, a debate has raged between bulls who expect Alibaba to head higher and bears who see it going lower. And the debate rages still. A week ago, Barron's weighed in with a 3,000-word, pull-no-punches takedown of Alibaba, summarizing in detail the governance concerns that have dogged it for the past year but adding some new twists to argue Alibaba should be priced at half its current level.

Alibaba struck back with a 2,000-word, point-by-point rebuttal. Some of its points were on mark (Barrons corrected one error about online spending in the US), but others seemed to be matters of argument between bulls and bears. And most of the counterarguments were couched in vague terms. Alibaba, for example, disputed Barron's assertion it's losing market share to rivals, but offered no numbers to justify its case. On the lingering issue of counterfeit goods sold on Alibaba's marketplace, the company offered some numbers:

In 2014, Alibaba worked with Chinese authorities in over 1,000 counterfeiting cases. As a result of this collaboration, 400 suspects from 18 counterfeiting rings were arrested, while 200 brick and mortar stores, factories and warehouses involved in the production and sale of counterfeits were closed.

This sounds impressive but anecdotal. It's hard to tell what kind of impact it's having in a marketplace with more than 10 million active sellers. And while I don't doubt Alibaba's sincerity in fighting counterfeiters – early on, eBay fought hard to combat fraud, knowing its future was on the line – my overall point is that the lack of transparency at Alibaba is only hurting it one year into its life as a public company.

Alibaba's response chided Barron's for not understanding aspects of the company, such as its logistics operations and ecommerce strategy. And while Alibaba has disclosed enough to meet the minimum standards of US securities laws, it clearly hasn't disclosed enough to persuade investors that its plans for growth remain on track. Because it's this lack of transparency that is weighing down the stock's price.

This is even more important as more global investors are starting to question the health of China's overall economy. China's government says the economy is growing around 7 percent but many economists believe that figure is inflated, with the true rate closer to 4 percent or 5 percent. And as economic growth slows, debt keeps rising – never a good mix – to $28 trillion, or more than 250 percent of GDP. Many of those loans went to build housing, much of which remains unused.

As many Western economies know, it can take years to dig out of such problems, and it usually only happens when consumers start buying. And this is where Alibaba can come in. No, it can't reignite China's economy, but much as retailers like Amazon and a raft of new startups found growth through the Great Recession in the US, Alibaba is a position to expand its ecommerce marketplace even through China's economic slowdown.

Alibaba may be coming around. On Thursday, executive vice chairman Joseph Tsai spoke at an investment, offering insights into its plans to expand into new markets in China and explaining why its consumer-driven model might survive any broader economic turmoil. Tsai wouldn't give any metrics out on average spend per user, but he did say that Alibaba is seeing robust sales in big-ticket items like appliances and furniture

What's more, Alibaba isn't directly exposed to over-leveraged industries like construction. Consumption makes up only 37 percent of China's economy (vs, 69 percent in the US), and urban wages have been rising 10 percent a year. And many households have been building up savings, Tsai said:

When we look at the net cash level - that is, the total deposits in the banking system - minus household debt, net cash is $4.4 trillion. That’s a very, very different picture than the consumer picture back in 2008 in the United States when people were very levered to mortgages and all of that. So, fundamentally, we are very positive about people’s ability to spend.

And remember, unlike Amazon, Alibaba isn't displacing a well-developed retail infrastructure. It's largely building one from scratch, often partnering with companies that are also helping to build it. That leaves a lot of potential for Alibaba and its peers like JD.com and Baidu. Alibaba faces this opportunity at at time when investors are doubting its future. But most of the doubts are tied to the company's opacity and investor-unfriendly structure.

The best one-year anniversary gift Alibaba could give to itself is greater transparency, and lots of it. Which would also be the best thing it could do for shareholders.