September 10, 2019

Jack of All Trades Retires

On Tuesday, September 10th, former schoolteacher Jack Ma steps down as CEO of Alibaba – the online retail company he created and ran for 20 years. His resignation was a fait-attendu: he had previously announced he would step down at 55, and September 10th is his birthday.

It’s ironic to think that one of the world’s richest men (with a $35.6 bn bank account, he comes in at 21st by Forbes) began life beset by hardship… some may even say failure. As a youth, he made money by giving tourists guided tours on his bike – a chance to brush up on his English. He had to apply four times before being accepted to a local teacher’s college, was reportedly rejected from thirty job applications, and so on. So that by the time Ma, now an English teacher, went to the US for the first time in 1995, he knew he had something to prove. Some would even say that his Hong Kong IPO – originally scheduled for next year and atop what is still considered the largest IPO ever in New York in 2014 – would be a sort of “coming home”, even though Ma and Alibaba are still closely related to and indeed located in his home province of Hangzhou.

Sadly, that posting has now been cancelled.

The Web that Jack Built

Ma’s first internet adventure was a website that introduced China to casual surfers in 1995. Next came an online Chinese Yellow Pages. He and some friends followed that with building websites for private companies, after which Ma went on to head a government-owned technology company. In 1999, they founded Alibaba, which went on to garner venture capital and even marshalled enough support to refuse a takeover bid from eBay. In 2007, Alibaba was listed on the Hong Kong Stock Exchange, but 5 years later, Ma delisted the firm, buying back Yahoo’s $7 bn stake, primarily because – as company officials explained the move – being publicly listed limited their freedom of action. Less than 2 years later, Alibaba’s 2014 $25bn IPO in New York put it on equal footing with the most valuable technology companies in the world.

Meanwhile, China had initiated a painful transition from a manufacturing-based to a service-based economy. Its opening up to the global economy is best embodied in last year’s Shenzhen-Hong Kong exchange connect – a connection between two stock exchanges that enables foreign investors to invest indirectly (through Hong Kong) in China’s economy. Perhaps out of nationalist ideals, perhaps in a savvy business move, Jack ma announced at the beginning of 2019 that he was planning a secondary listing in Hong Kong – 5 years after New York, 7 after delisting there in the first place. His company, now with a market cap of $417 bn (1600% of the IPO), would offer shares valued at about $20 bn, enabling Chinese pension funds and other mainland investors share in the dream.

Coming Home

Ma’s original intention was to connect Chinese manufacturers with US retailers, a dream that has made him a very rich man, but one that is now under the clouds of the US-China trade war that penalizes any such relations. Another cloud stalking his dreams has been the student protests in Hong Kong; for it is here that his vision is being tested. It is here that the idea of commercial independence from the political behemoth is coming under attack, under a regime that believes that all commerce must, at the end of the day, answer to the representative of the masses: the PARTY. Any illusion of commercial independence under a Communist regime is being destroyed.

In February of this year, Hong Kong Governor Carrie Lam submitted a proposal to amend extradition laws, which would enable extraditions to China. Thousands soon took to the streets in demonstrations, in a protest that has since mobilized millions. Although China has surprisingly distanced itself from the events, clearly, Lam was prevented from making concessions by her lords in Beijing, and only withdrew the bill upon their blessing. More interestingly, though, Hong Kong’s flagship carrier, Cathay Pacific suspended personnel who participated in the protests.

Flight of the Fit

In August, CEO Rupert Hogg resigned and at the beginning of September – Chairman John Slosar. For those who are surprised at the typically un-Asian sound of these names, let it be said that 45% of Cathay Pacific is owned by Swire Pacific – a subsidiary of John Swire & Sons Limited whose founders was one of the Tai Pans of Hong Kong’s illustrious 19th Century British colonial history. Cathay pacific is not a government company but a private one, indeed a company that – in light of the origin and current status of its owners – could easily be considered British.

And yet, although the consensus is that the Cathay resignations were not ordered by the mainland, soon after, China Air – a Chinese government-owned company and holder of 17% of Cathay Pacific – announced: “it had no plans to take over Cathay Pacific.”

A week after Slosar resigned, Jack Ma cancelled plans for Alibaba’s Hong Kong listing.

Freedom or Bust

When Ma announced intentions to list in Hong Kong, Kevin Leung, a strategist at a Hong Kong brokerage said he expected other local companies to move back due to insecurity in US markets. He was referring, of course, to Trump’s embargoes on Chinese tech firms at the onset of the current trade war. The irony of the statement only becomes clear when, given social instability, the true ability of a government to influence markets becomes apparent to the detriment of the latter.

For, Donald Trump can rant and rave; he cannot drive the shareowners who drive the S&P and he cannot force a FED chair, who answers, not to him, but to Congress. Chinese Premier Li Keqiang (incidentally, a professor of economics) has considerably more influence. What has become clear in the past few weeks is that, just as socialist ideals like healthcare, compulsory education and a social welfare net cannot exist under unfettered Capitalism, a true free market cannot exist under a proper Communist regime. A private company, even one that is foreign-owned, cannot be safe in China. And Jack Ma, come 55, must go.

Alibaba – Still Opening Doors

Despite all, and perhaps thanks to it all, Alibaba remains one of the best stocks on the market. Despite a 6% drop in value since year’s start, its 29% increase year to date is still crushing the S&P500’s 16%. It Alibaba Cloud is on schedule to overtake Amazon in cloud services, even though Alibaba shares are still much cheaper than Amazon’s. And thanks to the ongoing trade war, most analysts quoted by Seeking Alpha and Zachs consider the stock way below fair value – seeing as how in the US, the company is considered an importer rather than a Chinese exporter (perhaps another good reason to wait with the Hong Kong IPO?). Earnings for the past 2 quarters surprised to the upside and revenues consistently surpass expectations by 25% on average.   

After his resignation, Ma will remain on Alibaba’s board until next year’s general shareholders’ meeting a lifetime partner of the Alibaba Partnership,

To celebrate former English teacher Jack Ma’s 55th birthday (and, coincidentally, Chinese Teachers’ Day) and the stellar performance of his company, AvaTrade is offering a 55% spread reduction on Alibaba share investments – a chance for AvaTrade clients to share in the Magic of Alibaba.