Jack Ma Times Market Selling Second Alibaba IPO in Rally

Sep 02, 2014 5:11 am ET

(Closing figures Hong Kong trading in sixth paragraph.)

Sept. 2 (Bloomberg) -- Jack Ma knows how to time an initial public offering.

The 49-year-old former school teacher preparing to list Alibaba Group Holding Ltd. during a record rally for U.S. stocks did the same thing seven years ago, when Alibaba.com Ltd. went public in Hong Kong a week after the Hang Seng Index hit an all- time high. By the end of 2008, the gauge had slumped 55 percent and the company lost more than $20 billion in market value.

Ma ended up delisting the Hong Kong-traded business-to- business marketplace in 2012 at its IPO price after more than 2,300 vendors used the website to defraud buyers and as stocks languished almost 40 percent below the 2007 peak. Even with valuations for technology shares at a 4 1/2-year high, investors see better prospects for this Alibaba and this bull market.

“For Alibaba.com, the timing of the listing was at a market peak so that’s why the performance was disappointing,” said Alex Wong, Hong Kong-based asset-management director at Ample Capital Ltd., which oversees about $150 million. Now, even with the Nasdaq Composite Index at a 14-year high, “the business environment is more favorable, it’s not just an asset bubble,” he said. “This is time for these kinds of businesses to blossom.”

The Nasdaq Composite Index climbed to the highest since March 2000 on Aug. 29, while the Standard & Poor’s 500 Index hit a fresh record and a gauge of Chinese stocks in the U.S. traded near a three-year high. The dot-com bubble peaked with the S&P 500 trading at close to 30 times annual earnings of its companies, data from S&P Dow Jones Indices show. That compares with a valuation of 18 times now.

Consumer Marketplace

Hong Kong’s benchmark Hang Seng Index closed little changed today, maintaining this year’s advance of 6.2 percent. Futures on the S&P 500 rose 0.2 percent from Aug. 29, with U.S. markets closed yesterday for a holiday.

Alibaba, China’s biggest e-commerce company, provides a digital marketplace that sells everything from animatronic dinosaurs to fiberglass speedboats along with everyday goods. Anticipation for the IPO reflects optimism the company’s profits will swell as the world’s most populous nation uses the Internet to buy more goods and services. Alibaba’s net income nearly tripled to $1.99 billion in the three months through June as advertisers boosted spending.

“The new Alibaba is playing in a much bigger market,” said Rex Chen, a Des Moines, Iowa-based analyst at RS Investment Management Co., which oversees about $25 billion. “It’s much more focused in consumer-related commerce. The old Alibaba.com that was listed in Hong Kong was business-to-business, so that was very different.”

IPO Demand

Alibaba.com, which connects manufacturers with overseas wholesale buyers, is a unit of the entity that’s now set to list on the New York Stock Exchange. Less than 19 percent of Alibaba’s revenue came from its wholesale businesses in the year ended March, according to the share-sale prospectus.

Jim Wilkinson, a spokesman for Alibaba, declined to comment.

Investors fell over themselves in 2007 to pile into Alibaba.com’s IPO, with Hong Kong individuals placing orders for 257 times the amount of stock available. Shares almost tripled on the company’s trading debut, with volume so high that it caused order delays.

That exuberance lasted less than a month, with Alibaba.com crashing 91 percent from its Nov. 30, 2007 peak through an Oct. 28, 2008 low. Concern over valuations coincided with a market slump as Chinese regulators pulled back from a plan to allow mainland investors to buy Hong Kong stocks and the global credit freeze caused a worldwide equity rout.

Alibaba.com Buyout

Ma repurchased the 27 percent listed stake in Alibaba.com for HK$13.50 a share in June 2012, the same price as investors paid in the IPO and a 46 percent premium to the company’s last close before the buyout announcement.

Foundation Asset Management (HK) Ltd., which declined to invest in the Alibaba.com IPO, is more interested this time, according to Michael Liang, Hong Kong-based chief investment officer.

“The Chinese consumer space is probably a lot more exciting,” Liang said. “But I’m not saying this is going to be a skyrocketing IPO. The performance depends on the pricing. If it’s priced to perfection there will be little room left for after market appreciation.”

Alibaba may set its IPO value at $154 billion, or 22 percent below analyst valuations, in a move that could avoid repeating Facebook Inc.’s listing flop, according to the average estimate of five analysts surveyed by Bloomberg in July. The poll respondents saw Alibaba’s post-listing valuation at $198 billion. Ma owns 8.8 percent of the company.

Sale Timing

Alibaba, which was weighing a plan to market its IPO early this week, now expects the meetings to begin in the week of Sept. 8, with tentative pricing on Sept. 18 and trading to start the following day, said a person familiar with the matter, who asked not to be identified discussing private information. A $20 billion offering would edge past Visa Inc.’s $19.65 billion IPO in 2008 as the largest in U.S. history, data compiled by Bloomberg show.

Ma founded Alibaba 15 years ago in his apartment in Hangzhou, China. The company’s growth and the upcoming IPO have made him China’s richest person with a fortune of $21.8 billion, according to the Bloomberg Billionaires Index. He’s one of 27 Alibaba partners who have the right to nominate the majority of its board, a governance structure that kept the company from pursuing a listing in Hong Kong.

Market Share

Alibaba has a lockdown on online sales between Chinese consumers, with its Taobao Marketplace accounting for 99 percent of market share, according to data from Shanghai-based Internet consultant IResearch. Its virtual shopping center Tmall.com has 57 percent of the market for businesses selling products to consumers, more than double its closest rival JD.com.

The Chinese government projects e-commerce transactions will reach 18 trillion yuan ($2.9 trillion) next year, representing an 80 percent increase from 2013, as the world’s largest pool of Internet users gets even bigger.

“Alibaba is probably going to grow, and it will definitely survive among peers because of this huge market share,” Ryosuke Kawahata, a Tokyo-based money manager at Mizuho Asset Management Co., which oversees about $38 billion, said by phone on Aug. 22. “I’m definitely interested in buying shares if the valuation is attractive. We’re focused on its strength and whatever happened in the past with the previous Alibaba isn’t a concern.”

Tech Listings

Alibaba will follow a flood of technology and Internet IPOs in the past three years, including King Digital Entertainment Plc, Yelp Inc. and Twitter Inc. Investors had unrealistic expectations for the Alibaba.com offering and won’t make the same mistake twice, according to Jeff Papp, a senior analyst at Oberweis Asset Management Inc.

“Expectations are still going to be high, but valuations would be reasonable for the type of margins and cash generation that you’re going to get,” Papp said by phone on August 25. “The one risk is Jack Ma top ticking the market like he did in 2007.”

--With assistance from Elena Popina and Leslie Picker in New York.