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Alibaba Results Nudge China Internet ETF Higher


Alibaba still is not a public company, though that could soon change, but the firm’s status is not preventing it from making waves for other public companies. For example, shares of Yahoo (YHOO), which owns 24% of Alibaba, are up 6.2% Wednesday on volume that is already nearly double the daily average.

The KraneShares CSI China Internet Fund (KWEB) is also getting some much needed relief following Yahoo’s first-quarter earnings report, a report which some market observers argue will be the proxy for valuing Alibaba as it nears its hotly anticipated IPO. Shares of KWEB are higher by 1.7% Wednesday.

During its earnings presentation, Yahoo disclosed that Alibaba reported fourth-quarter results of $1.4 billion, more than double the year earlier period. Revenue jumped 66%, to nearly $3.1 billion.

“Alibaba posted its highest profit margins in the fourth quarter since its numbers were first released publicly in late 2009. Gross profit margin of 78% tied a figure posted in the September quarter of 2010, when Alibaba’s revenue was just about one-ninth of what it is today. Meanwhile operating profit margin of 54% topped Alibaba’s previous record, dating back to late 2009, of 51%,” notes KraneShares Managing Director Brendan Ahern.

Robust results from Alibaba ahead of its IPO, which could happen this summer, perhaps sooner, come at a critical time when some investors are increasingly apprehensive about the lack of profits sported by some newly public companies. [Hot, Unprofitable IPOs Look for ETF Homes]

Still, the average first-day return for IPOs this year is 18%, according to Renaissance Capital data, and it should not be forgotten that the best first-day return for any U.S.-listed IPO since 2001 was Baidu (BIDU), which more than quadrupled on its first day as a public company. Baidu is China’s largest Internet search firm  and KWEB’s third-largest holding at 7.5% of the ETF’s weight.

Alibaba’s profitability and overall ability to justify the ebullience surrounding its IPO are also pivotal for KWEB because the ETF could be one of the first, if not the first, to add the stock to its lineup. The CSI China Overseas Internet Index, KWEB’s underlying index, has the ability to add Alibaba after the stock’s eleventh trading day. [ETFs for the Next Batch of China Internet IPOs]

Alibaba could raise as much as $15 billion at a valuation north of $150 billion. That market value is nearly triple Baidu’s current market cap and almost 15 times that of Qihoo 360 (QIHU), KWEB’s second-largest holding.

“Analysts believe the rising profit margins suggests Alibaba is benefiting from so-called ‘network effects’ as more merchants and more consumers are drawn to the online marketplace it has already built. Due in part to China not having as many brick and mortar retail options for consumers as strip-mall saturated America, a factor that bodes well for the continued growth of Alibaba’s business,” said Ahern. [Overlooked China ETF Soars]

KraneShares CSI China Internet Fund