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Bear Of The Day: Alibaba (BABA)

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I am pitching Alibaba BABA, the Amazon AMZN of the East, as the bear of the day purely due to geopolitical risks, which have grown daily since Jack Ma's criticism of China's financial system nearly a year ago. The significant and highly uncertain regulatory overhang coming out of Beijing has made Chinese tech an uninvestable class of securities at this time. The growing threat of delisting in the US is pushing market participants away from this toxic equity.  

Despite Alibaba's unbelievably profitable growth and significant valuation discount to its western competitor (Amazon), the dangers surrounding Xi Jinping's recent crackdown on tech has investors running for the hills.

Analysts have been precipitously dropping EPS estimates on BABA since its fintech subsidiary, Ant Group, was forced to suspend its IPO last year combined with Xi's tightening autocratic grip on Chinese tech, pushing BABA down to a Zacks Rank #5 (Strong Sell).

Bear Market For Regulation-Ridden Chinese Tech

Hong Kong officially entered a bear market (over 20% below recent highs) at the end of August as its innovation-powered Hang Seng Index experiences endless regulation catalyzed capitulation. Beijing has been busy releasing a flood of value-killing statutes that have brought Chinese tech stocks to their knees.

Alibaba's co-founder and former CEO, Jack Ma, and his eccentric, outspoken personality catalyzed this endless flow of tech-focused regulation in China. Jack Ma's fame and influence on society made his candid opinions a "threat" to the communist state, and ultimately Xi Jinping's control.

Xi's regime impeded Ma's fintech giant Ant Group's nearly half a trillion-dollar IPO last year, wiping out over $150 billion in market value from this fintech titan virtually overnight last November, with a fresh regulatory overhaul aimed at Ant Group's unique lending methods, which BABA own a 33% stake in. This move by Chinese officials appeared to be in retaliation to Jack Ma's (founder and owner of the business) public criticism of the republic's financial system. Alibaba has since lost $435 billion in value, and now holds on to less than half the market cap that it had just 1-year ago.

Jack Ma's denouncement of China's financial practices seems to have triggered this fresh wave of tech regulation in the region. Xi fears that he could lose control of his economy to ostentatious billionaires like Ma (the man who founded both Alibaba & Ant Group), or worse, US investors.

Another 'timely' restriction came just 2 days after DiDi DIDI, the Uber UBER of China, released its shares to US investors, the Cyberspace Administration in China announced a data-security review of the company that would require them to temporarily halt user growth. DIDI shares have since lost over $50 of their value. In fact, every publicly traded Chinese tech stock has taken a sizable dip since these restrictive announcements became a systemic issue earlier this year. 

The progressing communist regime once headed towards capitalism is now reeling back towards a Mao Zedong style government-controlled autocratic economy.

However, it is not unusual for the Chinese stock market to see these 20%+ stock market sell-off in any given year. In the past decade, the Hang Seng Index has experienced an over 15% market downturn in all but 2 of those years, entered a bear market (20%+ decline) in 4 of the last 6 years. The volatility that we are seeing in the Chinese market today is not unusual, but the mounting regulatory overhang causing this value deterioration is unique to 2021. As I said, the unusual uncertainty here is what continues to compress Tencent and its cohorts' valuations.

Xi Jinping's rule is reversing decades of progress that China had been making towards a democratized international superpower. I only hope that it doesn't turn into a full-on totalitarian nation. 

Final Thoughts

There is geopolitical risk in every foreign entity, but China tech shares may hold the most as Beijing's clamps on innovative growth tighten. Since this wave of regulation was catalyzed by Jack Ma, founder of Alibaba, I see significant risk in these shares specifically, though there is a value argument to be made for the stock.

The investability of BABA stands with what you believe China's end goal is with these tech-specific regulations. Does Xi want to rid its country of US investors, or is this flood of regulation just a short-term powerplay to show these companies whose really in charge?

I'm hoping that Xi isn't dumb enough to destroy the value of his country's largest GDP drivers for nationalist reasons, so I hope that the latter of these reasonings turns out to be true. Either way, I would stay clear of Chinese equities until the opacity surrounding this situation clears.

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