Singles Day breathes life into Chinese investment sentiment

• Global
• Alibaba, China, Naspers, Prosus, Tencent
• November 11, 2020

Alibaba founder Jack Ma has had an awful November. The listing of Ant Group, a payments company incubated within Alibaba, was pulled by Chinese regulators (read more here) in response to ongoing criticism by Ma of the state of regulation in China.

In the fallout over the Ant Group listing, Alibaba itself took a knock to the share price as investors started asking questions about how secure their investments are in companies that are focused on China.

To make the situation worse, the Chinese government has unveiled regulations that target monopolistic practices in the internet industry. This is clearly negative for Alibaba and for Tencent, putting fuel on the fire that is spooking investors.

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Alibaba, Ant and Tencent held a combined valuation of nearly $2 trillion before the listing was pulled and the trouble started. That’s far larger than state-owned companies like Bank of China Ltd. Communist China clearly isn’t enjoying these capitalist statistics.

JSE-listed Prosus has not been spared either, as investors fret over the Variable Interest Entity (VIE) structure that allows Prosus to hold its stake in Tencent in China. Prosus is down over 14% this week and Naspers is down 12%. To understand the Naspers – Prosus – Tencent relationship properly, see my previous article here.

The VIE structure was introduced back in the year 2000. It rests on questionable legal grounds, but investors have accepted this risk as part of accessing incredible growth potential in China. The problem is that the outcome may well be binary.

What would happen if the VIE structure suddenly fell away?

This would crush the valuations of Prosus, Naspers, the JSE Top40 Index and therefore the pensions of millions of South Africans. Much of our country’s private wealth sits in a holding company that holds a Chinese gaming and payments app via an untested legal structure.

It’s an unpleasant thought to chew on. At least Alibaba’s Singles Day has given some positive momentum to the China investment story and hopefully put a smile on Jack Ma’s face.

It’s another record

Alibaba’s Singles Day sales surpassed $74bn, more than double the previous record ($35.8bn). It’s a Chinese shopping holiday that dwarfs Black Friday, an American shopping craze that South African retailers have adopted with great enthusiasm.

More than 250,000 brands and 800 million consumers participated in Singles Day this year. It’s hard to fathom those sorts of numbers. Nike achieved sales of $15 million in just one minute.

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Singles Day on November 11^th was started by Alibaba to celebrate single people, in contrast to Valentine’s Day. Yes, that’s a bit weird. Yes, it really worked, becoming a huge source of sales for Alibaba and the merchants that operate through the platform.

This year, it was expanded to start in the first few days of November, including leading American brands in the sale. The expansion is a nod to Black Friday trends but naturally it’s also a direct swipe at the likes of Amazon.

Luxury brands are on the up in China

There’s evidence in a number of places that China is a great market for luxury goods. BMW, for example, cited strong growth in China in top-level models (like the X7) as a major source of growth in Q3.

Luxury goods group Richemont has entered into a partnership with Alibaba and Farfetch to provide luxury brands with enhanced access to the Chinese market. Richemont owns a portfolio of luxury brands that includes Cartier, Montblanc, IWC and Panerai.

We are talking about online sales of timepieces that cost more than most of our cars. What a time to be alive.

I must be honest though – I’m a little concerned about my Prosus shares. It’s a company that I was on the fence about investing in. I also have shares in Alibaba, which I felt better about at the time of making the investment.

This is why a diversified portfolio is important: some days China will make you smile, other days the U.S. will make you smile and occasionally even South Africa will give you something to celebrate financially.

At least Jack Ma will head into this weekend feeling a bit better about his life.

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