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Alibaba rallies 8% despite record US$2.8 billion fine

Alibaba’s Hong Kong shares closed nearly 7% higher after CEO Daniel Zhang assured investors that a recent ruling will have no material impact on earnings.

Source: Bloomberg
  • Alibaba Group Holding Ltd (HKG: 9988) share price burgeoned as much as 8.5%
  • This was despite the company being slapped with a hefty US$2.8 billion fine by Chinese regulators
  • CEO Daniel Zhang said no material impact is expected from the ‘thorough rectifications’ that the group has been ordered to make
  • Analysts are split over the verdict’s impact on the e-commerce platform’s future profitability
  • Buy and sell Alibaba shares with an IG account

Why did Alibaba rally 8.5%?

Shares of Alibaba Group Holding rallied as much as 8.5% on Monday (12 April 2021), after CEO Daniel Zhang said he does not expect any material impact from the changes the company will have to make following a historic antitrust verdict by Chinese regulators.

Last Friday (09 April 2021), China’s State Administration for Market Regulation (SAMR) imposed a massive 18.23 billion yuan (US$2.8 billion) fine on the Chinese e-commerce company for abusing its market dominance.

Besides the fine, regulators also ordered Alibaba to make ‘thorough rectifications’ to improve internal compliance, policies and consumer protection.

Investigators’ main gripe was with Alibaba’s monopolistic behaviour, particularly around one practice that forced merchants to choose between Alibaba or a competitor’s platform, rather than being able to list on both.

SAMR said in a Sunday statement that this practice stifles competition in the online retail market, and ‘infringes on the businesses of merchants on the platforms and the legitimate rights and interests of consumers’, according to a CNBC translation.

In response, Alibaba accepted the fine and said it has already begun implementing changes to its policies and systems.

‘Alibaba would not have achieved our growth without sound government regulation and service, and the critical oversight, tolerance and support from all of our constituencies have been crucial to our development,’ the company said in an open letter released following the fine. ‘For this, we are full of gratitude and respect.’

Analysts divided over future performance

Then on Monday, Zhang said in an investor call that the company will introduce more measures aimed at lowering barriers to entry and its merchants’ operating costs.

Alibaba co-founder and vice chairman Joseph Tsai said the regulatory actions have been ‘undertaken to ensure fair competition’, adding that the company remains confident that ‘there’s nothing wrong’ with its ‘fundamental business model as a platform company’.

Everbright Sun Hung Kai analyst Kenny Ng said that the market’s uncertainty with Alibaba will ‘be reduced’ with the penalty now announced.

‘Alibaba's stock price has lagged behind the overall emerging economy stocks for some time in the past. The implementation of this penalty is expected to allow Alibaba's stock price to regain market attention,’ he wrote.

Less optimistic was Lina Choi, Senior Vice President at Moody’s Investors Service, who said that the required corrective measures will ‘likely limit Alibaba's revenue growth as a further expansion in market share will be constrained’.

‘Investments to retain merchants and upgrade products and services will also reduce its profit margins,’ she added.

Alibaba shares closed 6.7% higher at HK$232.60 on Monday.

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