Commentary: China’s tech darlings have a fundamental value problem

Commentary: China’s tech darlings have a fundamental value problem

Difficult to decide what some high-flyers are actually worth, yet bankers and investors shouldn't let them get away with easy billion-dollar valuations, says one observer from the Financial Times.

FILE PHOTO: Alibaba Group Executive Chairman Jack Ma attends the 11th World Trade Organization&apos
Alibaba Group Executive Chairman Jack Ma attends the 11th World Trade Organization's ministerial conference in Buenos Aires, Argentina on Dec 11, 2017. (File photo: REUTERS/Marcos Brindicci)

HONG KONG: Just how much is the world’s largest and fastest growing financial platform really worth?

The problem is there are two answers to the question: Fundamental value and what someone will actually pay for it.

The latter assessment has long held sway in China. So-called “red chips” - Chinese companies that few international investors will have heard of until they tapped the Hong Kong public markets for money - hit price to earnings multiples of 80 or 90 times before the Asian financial crisis hit in mid-1997.

At the time, queues for listing prospectuses proved a far better measure of where the price would end on trading debut than actually reading the documents.

But the gap between what a company is fundamentally worth and what people will pay for it again appears to be growing wider. Ant, the payments affiliate of tech titan Alibaba, is the latest case in point.

BILLIONS IN VALUATION

A spat over Ant’s ownership was triggered when Alibaba founder Jack Ma carved it out of the e-commerce group without consulting then-major shareholder Yahoo, pleading a government requirement for such businesses to be in wholly Chinese hands.

Redress made to Yahoo (and fellow shareholder SoftBank) to resolve the issue valued Alipay, the PayPal type payments system that remains the core of Ant, at US$5.3 billion to US$16 billion, analysts at Jefferies calculated at the time.

A customer tries Alipay's facial recognition payment solution "Smile to Pay" at KFC&
A customer tries Alipay's facial recognition payment solution "Smile to Pay" at KFC's new KPRO restaurant in Hangzhou, Zhejiang province, China on Sep 1, 2017. REUTERS/Stringer

Fast forward to 2016, when a fundraising valued the much-expanded business at US$60 billion. A forthcoming funding round could double that, bankers reckon, perhaps optimistically.

At this rate its ultimate initial public offering could dwarf that of its parent, currently the holder of the world’s biggest IPO.

But put Ant on PayPal’s multiple and you get to just US$80 billion.

PASS THE BOWL

The numbers look similarly askew with Xiaomi, which began by making cheap-but-cool smartphones and then took a page out of Apple’s playbook and built a content and payments ecosystem around them. 

But Xiaomi’s revenue model is rather more threadbare: It shies away from giving monthly active users, simply claiming that 300 million have signed up.

What lets Ant and Xiaomi float nine-digit numbers is abundant cash. Bankers in China joke, with only slight exaggeration, that funding rounds no longer follow the traditional multi-part “ABC” series. Instead it is a case of, there is money out there - pass the bowl.

Weida poses at his house with Xiaomi's devices in Shanghai
Pan Weida, 31, poses for a picture at his house, displaying some of his 78 Xiaomi devices in Shanghai, China February 10, 2018. REUTERS/Aly Song

All of which is fine until the tide turns. Last week’s market pullback hints at some rationalisation.

But there are internal changes at work, too. Regulators are honing in on several areas, including data privacy and lending, which will make operating harder in future.

Competition is coming back into play. The emergence of multiple start-ups with identikit models chasing the same customers with ever-diminishing returns is ending in mass consolidation.

But that merger and acquisition could be characterised as aiming to eliminate competition: Not consumer friendly, perhaps, but kinder to the bottom line of those that survived.

Hence Didi bought Kuadi and the pair then chased Uber out of town, leaving Didi to be king of China’s roads. Groupon clones Meituan and Dianping joined forces and are now valued at US$30 billion, based on last year’s funding round.

But as companies expand they are seguing into new areas. Meituan is now offering ride hailing, an unwelcome intruder for Didi.

Xiaomi was usurped in 2015 and 2016 by newcomers Oppo and Vivo, sending it on a cash-burning tear from which it is only now recovering.

Ant’s Alipay, once dominant, has ceded a substantial chunk of ground to WeChat Pay.

An army of salespeople and 200,000 stores across the country have helped Oppo overtake giants Apple
An army of salespeople and 200,000 stores across the country have helped Oppo overtake giants Apple and Samsung in the Chinese smartphone market. (Photo AFP/Nicolas ASFOURI)

Companies argue that competition is fine as the markets grow. As Maggie Wu, Alibaba’s chief financial officer, put it at the company’s third-quarter results last month: “60 per cent of an apple compared with 40 per cent of a watermelon, which one do you want?”

Of course, China is not alone in boasting tech groups with inflated asset values. Nor is it a one-way street. At the other end of the spectrum, online streaming outfit iQiyi is expected to raise around US$8 billion to US$10 billion when it lists.

Put it on the same multiple as Netflix, a proxy so close they even stream some of the same shows, and it would double that.

But shifting regulations and changing industrial dynamics are now making it harder to ascertain just what Ant, and in fact many of these companies, are worth - adding extra complexity to the fundamental value question already troubling board rooms and roadshows this year.

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Source: Financial Times/sl

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