Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

PBoC (People's Bank of China) said on Monday that a "comprehensive, viable rectification plan" for Ant Group had been agreed to and Ant Group will overhaul its business in compliance with higher regulations for Internet finance platform companies.  As a result, Ant Group will apply to become a financial holding company. Similar to the AML fine on Alibaba, we believe this directive will now allow Ant Group to move forward possibly with a slightly lower valuation but share overhang lifted.  At the same time, I believe the market will be relieved to hear the regulator's carefully crafted supportive tone towards the Internet platforms.   Impact: <ul>
<li>The impact on <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> is nominal, in my view.  Alibaba owns 33% of Ant Group.  With the market already having priced-in a bear case scenario, we believe this news has minimal impact on Alibaba's valuation.  </li>
<li>I believe the market already valued Ant Group at USD170-180 billion after the failed IPO.  This news does not change the valuation significantly.  </li>
</ul>Implications: <ul>
<li>As a holding company, Ant will be subject to higher capital requirements.  But the market is well aware of this already.  (Please see our report, <a href="https://www.smartkarma.com/insights/alibaba-baba-us-ant-group-woes-overly-priced-in" target="_blank" data-smartkarma-citation="insights:48648" rel="noopener">Alibaba (BABA US): Ant Group Woes Overly Priced-In</a>, dated 27 February 2021)
</li>
<li> Ant will have to reduce the liquidity risks of its investment products including the InsureTech products and specifically rein-in the AUM of Yue'bao, its money-market mutual fund.  This was broader than expected.  It is difficult to imagine how to stop consumers from selecting an investment product.  </li>
<li>Set up a consumer credit reporting company and strengthen the protection of personal information.  </li>
</ul>

PBoC (People's Bank of China) said on Monday that a "comprehensive, viable rectification plan" for Ant Group had been agreed to and Ant Group will overhaul its business in compliance with higher regulations for Internet finance platform companies.  As a result, Ant Group will apply to become a financial holding company. Similar to the AML fine on Alibaba, we believe this directive will now allow Ant Group to move forward possibly with a slightly lower valuation but share overhang lifted.  At the same time, I believe the market will be relieved to hear the regulator's carefully crafted supportive tone towards the Internet platforms.   Impact: 
The impact on Alibaba Group (BABA US) is nominal, in my view.  Alibaba owns 33% of Ant Group.  With the market already having priced-in a bear case scenario, we believe this news has minimal impact on Alibaba's valuation.  
I believe the market already valued Ant Group at USD170-180 billion after the failed IPO.  This news does not change the valuation significantly.  
Implications: 
As a holding company, Ant will be subject to higher capital requirements.  But the market is well aware of this already.  (Please see our report, Alibaba (BABA US): Ant Group Woes Overly Priced-In, dated 27 February 2021)

 Ant will have to reduce the liquidity risks of its investment products including the InsureTech products and specifically rein-in the AUM of Yue'bao, its money-market mutual fund.  This was broader than expected.  It is difficult to imagine how to stop consumers from selecting an investment product.  
Set up a consumer credit reporting company and strengthen the protection of personal information.  


Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<ul>
<li>State Administration for Market Regulation (SAMR) fined Alibaba RMB18 billion.</li>
<li>Alibaba had forced retailers to leave competitors via an “either-or” choice since 2015.</li>
<li>The penalty amount is not significant to Alibaba.</li>
<li>We believe that the penalty is just part of SAMR’s action after the new law, but not especially against Alibaba.</li>
<li>We do not believe the penalty will impact Alibaba’s long-term value.</li>
<li>We set an upside of 37% and a price target of USD$306 according to the 3-year P/E average.</li>
</ul>
Our previous coverage on Alibaba:
<a href="https://www.smartkarma.com/insights/alibaba-baba-many-positive-signals-in-december-quarter-27-upside" target="_blank" data-smartkarma-citation="insights:47726" rel="noopener">Alibaba (BABA): Many Positive Signals in December Quarter, 27% Upside</a>
<a href="https://www.smartkarma.com/insights/alibaba-baba-this-online-antitrust-wave-a-risk-but-not-a-massacre" target="_blank" data-smartkarma-citation="insights:46377" rel="noopener">Alibaba (BABA): This Online Antitrust Wave, A Risk, But Not A Massacre</a>


State Administration for Market Regulation (SAMR) fined Alibaba RMB18 billion.
Alibaba had forced retailers to leave competitors via an “either-or” choice since 2015.
The penalty amount is not significant to Alibaba.
We believe that the penalty is just part of SAMR’s action after the new law, but not especially against Alibaba.
We do not believe the penalty will impact Alibaba’s long-term value.
We set an upside of 37% and a price target of USD$306 according to the 3-year P/E average.

Our previous coverage on Alibaba:
Alibaba (BABA): Many Positive Signals in December Quarter, 27% Upside
Alibaba (BABA): This Online Antitrust Wave, A Risk, But Not A Massacre 

Alibaba (BABA): Fined $2.78 Billion for “Either Or”, But Impact Is Neither Big Nor Long Term

Chinese regulators announced a record fine for <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> amounting to USD2.75 billion for violations related to antitrust regulations.  While the final amount for the fine was previously unknown, the fine itself is not a surprise.  We believe this is a positive outcome for Alibaba: <ol>
<li>
We did not see any hint of additional rectifications related to AML (Anti-monopoly law) other than the penalty amount. (Alibaba has already pledged to modify its "exclusivity" practice to allow for merchants to have greater freedom to list their products on multiple platforms. Share overhang related to this issue should dissipate. 
</li>
<li>
Alibaba could have been penalized more severely (as much as 10% of its revenues for antitrust violations).  The penalty amount represents only about 3.5% of Alibaba's FY20 revenues (4% of CY2019 revenues).</li>
<li>The lower-than-expected fine amount appears to signal that the regulators are not trying to excessively debilitate the industry.  </li>
</ol>We have highlighted the AML and the consumer lending regulation risks to be key share overhang on the BABA shares in our February report, <a href="https://www.smartkarma.com/insights/alibaba-baba-us-ant-group-woes-overly-priced-in" target="_blank" data-smartkarma-citation="insights:48648" rel="noopener">Alibaba (BABA US): Ant Group Woes Overly Priced-In</a>.   We believe BABA shares are undervalued due to the overhang.  The latest regulatory announcement signals the lifting of share overhang related to AML, in our view.

Chinese regulators announced a record fine for Alibaba Group (BABA US) amounting to USD2.75 billion for violations related to antitrust regulations.  While the final amount for the fine was previously unknown, the fine itself is not a surprise.  We believe this is a positive outcome for Alibaba: 

We did not see any hint of additional rectifications related to AML (Anti-monopoly law) other than the penalty amount. (Alibaba has already pledged to modify its "exclusivity" practice to allow for merchants to have greater freedom to list their products on multiple platforms. Share overhang related to this issue should dissipate. 


Alibaba could have been penalized more severely (as much as 10% of its revenues for antitrust violations).  The penalty amount represents only about 3.5% of Alibaba's FY20 revenues (4% of CY2019 revenues).
The lower-than-expected fine amount appears to signal that the regulators are not trying to excessively debilitate the industry.  
We have highlighted the AML and the consumer lending regulation risks to be key share overhang on the BABA shares in our February report, Alibaba (BABA US): Ant Group Woes Overly Priced-In.   We believe BABA shares are undervalued due to the overhang.  The latest regulatory announcement signals the lifting of share overhang related to AML, in our view.  

Alibaba (BABA US): Record Fine - Grin and Bear It as Better Days Are Ahead

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>SAMR’s RMB18.2bn fine for abuse of market dominance could potentially be seen as a watershed marking that the worst of regulatory risk is past</li>
<li>In terms of Alibaba’s relative share performance, since the start of November 2020, it has clearly underperformed Tencent as well as Meituan and Pinduoduo</li>
<li>Relative to these peers, <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> trades at a discount on the core valuation metrics; versus its closest competitor <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> , Alibaba trades at a 28% discount to 2022E PE multiple and at a 21% discount to 2022E EV/EBITDA ratio</li>
<li>Nonetheless, in terms of long term growth potential, Alibaba’s PEG ratio discount of 5% to Tencent is low</li>
<li>In our view, Alibaba’s outlook, especially relating to regulatory risks, remain unclear, especially with regard to the future of <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a>, its value and its potential IPO</li>
<li>Risks to our bearish view on Alibaba include a better than expected performance versus its core competitors and a fast resolution to regulatory risks with SAMR</li>
</ul>


SAMR’s RMB18.2bn fine for abuse of market dominance could potentially be seen as a watershed marking that the worst of regulatory risk is past
In terms of Alibaba’s relative share performance, since the start of November 2020, it has clearly underperformed Tencent as well as Meituan and Pinduoduo
Relative to these peers, Alibaba Group (BABA US) trades at a discount on the core valuation metrics; versus its closest competitor Tencent Holdings (700 HK) , Alibaba trades at a 28% discount to 2022E PE multiple and at a 21% discount to 2022E EV/EBITDA ratio
Nonetheless, in terms of long term growth potential, Alibaba’s PEG ratio discount of 5% to Tencent is low
In our view, Alibaba’s outlook, especially relating to regulatory risks, remain unclear, especially with regard to the future of Ant Financial Services Group (6688 HK), its value and its potential IPO
Risks to our bearish view on Alibaba include a better than expected performance versus its core competitors and a fast resolution to regulatory risks with SAMR


Alibaba (BABA) Fine – Close, but No Cigar

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Focus On Positives: Given the scrutiny that Tencent Holdings (700.HK) [Tencent] has come under, it comes as no surprise that Tencent wanted to highlight its positive developments such as international expansion and tailwinds in gaming, potential ad load expansion in Video Accounts, and Mini Programs enrichment; and*Elephant In The Room: Over time, it is our belief that Tencent likely will be required to create a financial holding company for all of its banking, insurance, and payment services businesses – and be regulated along the lines of the banking sector. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks.

*Focus On Positives: Given the scrutiny that Tencent Holdings (700.HK) [Tencent] has come under, it comes as no surprise that Tencent wanted to highlight its positive developments such as international expansion and tailwinds in gaming, potential ad load expansion in Video Accounts, and Mini Programs enrichment; and*Elephant In The Room: Over time, it is our belief that Tencent likely will be required to create a financial holding company for all of its banking, insurance, and payment services businesses – and be regulated along the lines of the banking sector. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks.

China

PDD Holdings Inc. is a multinational commerce group that owns and operates a portfolio of businesses. The Company focuses on digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities. PDD Holdings has built a network of sourcing, logistics, and fulfillment capabilities for its underlying businesses.

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PDD Holdings (PDD US)

Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward

Ant Group announced its restructuring plans on Monday. Find out what is the actual impact on Ant Group and Alibaba and how Ant Group's valuations...

Mitchell Kim

Alibaba (BABA): Fined $2.78 Billion for “Either Or”, But Impact Is Neither Big Nor Long Term

The penalty amount is not significant to Alibaba. We believe the penalty is just part of authorities’ action after the new law, but not especially...

Ming Lu

Alibaba (BABA US): Record Fine - Grin and Bear It as Better Days Are Ahead

A record-setting fine related to the antitrust violations was imposed on Alibaba on Friday. Find out why we think this is a positive outcome for...

Mitchell Kim

Alibaba (BABA) Fine – Close, but No Cigar

SAMR's fine on Alibaba is a positive step in the process of resolving regulatory risk, but we are not there yet, in our view; unresolved issues...

Victor Galliano

Tencent Holdings – What Wasn’t Said

TENCENT HOLDINGS: Tencent receives a premium valuation which will be eroded over time, as it likely will be required to create an FHC. No matter...

Thomas J. Monaco

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