Alibaba Stock Falls as China’s Dreaded Tech Crackdown Is Back

Chinese tech stocks including Alibaba (NYSE: BABA) fell last week after China cracked down on tech again and proposed restrictions on online gaming, a sector that it targeted previously as well.

Tech names like Tencent and NetEase lost billions of dollars in market cap last week after the new rules. The sell-off was quite broad-based and Chinese tech stocks fell on fears that the country is resuming its tech crackdown.

For perspective, China’s tech crackdown began towards the end of 2020 and Alibaba was the prime target. The company’s co-founder Jack Ma made comments critical of the Chinese regulators ahead of the planned IPO of its subsidiary Ant Financial.

Alibaba was the face of China’s tech crackdown

Ant was set to IPO in 2020 and raise $37 billion from the mammoth IPO which would have made it the biggest listing ever – surpassing the record set by Alibaba. The IPO received bids worth $3 trillion and Ant was set to have a market cap in excess of JPMorgan Chase, the largest US bank.

However, Chinese regulators blocked the IPO at the last moment. Ma made comments critical of Chinese regulators ahead of the IPO which apparently did not go well with the powers that be in China.

Not only did China block the IPO of Ant but Ma wasn’t seen in public for months. Chinese regulators also intensified the scrutiny of Alibaba and the company eventually paid a record fine of $2.8 billion in 2021 to settle the antitrust case.

Earlier this year, China also imposed a fine of $985 million on Ant Financial for multiple regulatory violations including those related to consumer protection, corporate governance, and anti-money laundering requirements.

China’s tech crackdown

In 2021, China intensified its tech crackdown and targeted several gaming and online education companies. The same year, it forced Chinese ride-hailing app DiDi to delist from the US markets within months of the listing. DiDi incidentally had gone ahead with the IPO despite warnings from Chinese regulators. The country incidentally forced it to delist over “national security” concerns.

Meanwhile, even as it seemed that Alibaba has brought peace with Chinese regulators, the recent rules over online gaming have rekindled fears of the dreaded tech crackdown. Several US fund managers exited Chinese stocks after the tech crackdown and called them “uninvestable.”

Another trouble for Chinese tech stocks is the US-China tensions which have not only hurt their business but also taken a toll on their valuations.

Alibaba called off the IPO of its cloud business

Last month, Alibaba scrapped plans to list the cloud business “in light of uncertainties created by recent U.S. export restrictions on advanced computing chips. Instead, we will focus on developing a sustainable growth model based on emerging AI-driven demand for networked and highly scaled cloud computing services.”

Notably, the US has banned the exports of high-end chips to China which might hamper the AI ambitions of Chinese tech companies.

During the earnings call, Alibaba said, “when we announced the full spin-off, we were looking at a way to sort of a financial engineering way to show the value of the business.” It however added, “But the circumstances have changed. And right now, rather than focus on financial engineering, we rather focus on figuring out how to grow the cloud business.”

Alibaba has reshuffled its leadership team

Since the beginning of this year, Alibaba has reshuffled its leadership team several times. Last week, it announced that its group CEO Eddie Wu would also lead the Taobao and Tmall e-commerce business.

Duncan Clark, founder of the Beijing-based BDA China consultancy and author of Alibaba: The House That Jack Ma Built said, “It is clear there has been a lot of tension internally between the contending factions. This move should unify things.”

Notably In September, Wu also took over as the head of Alibaba’s Cloud Intelligence Group. The group was then headed by Daniel Zhang who was previously Alibaba’s CEO. He later became the CEO of the Cloud Intelligence Group when the company announced a business restructuring.

BABA business reorganization

In March, the Chinese tech giant announced a business restructuring and said that it would become a holding company while splitting into the following six business units – all of which have the ability to consider capital raising and separate listings.

• Cainiao Smart Logistics which holds Alibaba’s logistics business.
• Taobao Tmall Commerce Group which has Alibaba’s online shopping platforms like Tmall and Taobao.
• Global Digital Commerce Group which houses the company’s international e-commerce operations including AliExpress.
• Cloud Intelligence Group which would include the company’s lucrative cloud and AI business.
• Local Services Group which is the company’s food delivery and mapping businesses.
• Digital Media and Entertainment Group which houses the company’s streaming operations.

Alibaba stock has crashed

It’s been almost a decade since Alibaba went public and the stock is only marginally higher than the IPO price of $68. Last year, it briefly fell below the IPO price amid the sell-off in Chinese stocks. Apart from the business restructuring, Alibaba has taken several steps to revive its sagging fortunes.

For instance, it initiated a dividend of $1 per ADS (American Depository Share) last month which would mean a cash outflow of around $2.5 billion, and noted that it has another $13 billion available under its share buyback plan. However, the company ruled out a special dividend to lower the cash on the balance sheet.

Alibaba said that it generated free cash flows of $27 billion in the last 12 months and had around $63 billion in cash and cash equivalents on the balance sheet at the end of September. It stressed, “Alibaba has never been in a better financial position to invest for the growth of our businesses.”

Alibaba is also battling slowing growth in China and while its revenues in the September quarter rose 9% YoY and were in line with estimates, it missed bottomline estimates.

China’s economic rebound this year hasn’t been to the scale that economists were expecting and even the sales at this year’s annual 11:11 Chinese shopping holiday were tepid as compared to what we have seen historically.