Alibaba: a gateway to China’s middle class

For decades the world has been looking at China – a market of 1.3 billion people – with awe and apprehension. During this time investors have asked themselves how they can get exposure to its vast wealth and emerging middle class.

Source: Bloomberg

The rise of China’s urban consumers

With over a decade of double-digit GDP growth, more and more Chinese are experiencing rapid increases in wealth. It’s also prompting rural Chinese to pour into the sprawling metropolises looking for an opportunity to tap into the boom.

Global investors on the outside looking in have been searching for ways to get exposure to China’s enormous middle class. With only weeks left in what will be the largest listing in history, Alibaba is the quintessential example of how to gain exposure to China – and tap into its middle class.

Alibaba – an online marketplace, clearing house, online payment system and now loan provider – has over 7 million sellers and over 800 million products on offer. For the international investor looking for immediate scale and mass, Alibaba provides an instant way to reach China as a whole.

This explains why global investors are looking to the NYSE listing in September with delight. By opening the e-commerce giant up to the world, it provides them with one of the purest paths into the country.

The fundamentals

Despite high double-digit estimates made by analysts and the IPO prospectus, historical earnings and revenue growth are already visible from Alibaba’s existing global investors. This lends support to forward growth estimates.

Yahoo! (YHOO), which holds a 24% stake in the company, shows us that in the fourth quarter Alibaba’s revenue increasing by 66% to $3.06 billion, with profit doubling to US$1.35 billion – leading to strong appreciation in YHOO’s share price over the year. YHOO’s stake in Alibaba masks the fact its core businesses are contracting, illustrating the degree to which investors want exposure to the online retailer.

The results seen by YHOO have also been replicated by SoftBank, a 37% stakeholder. However, unlike YHOO SoftBank share price has fallen due to charges relating to its preference shares. This is because these shares are treated differently under Japanese accounting laws.

An e-commerce goliath

Word from the street is that interest in the IPO remains as robust as ever and the listing can’t come fast enough. The rumour is the valuation may be set at US$154 billion – the lower end of estimates – representing a 22% discount to the consensus. This is to avoid a Facebook-like scenario where the share price fell flat after the listing began at the top end of the scale.

Whatever happens, the demand for the share illustrates how the world sees China. More specifically, it illustrates the excitement with which the world views the country’s important middle class. China’s economy is subtly changing from an export-led to consumption-based nation, meaning it will increasingly look inward to satisfy its needs. This, in turn, leaves Alibaba positioned to gain an even greater share of the vast Chinese middle-class market.

The world remains transfixed on Jack Ma’s attic dream.

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