Impact of Chinese economic slowdown on Alibaba

Foreign media reported that the economic slowdown in China has affected the automobile, iron and steel as well as other traditional pillar industries. It even affects Alibaba Group Holding Limited (NYSE: BABA), a leader in the emerging industries.

Alibaba estimates that the turnover of its e-business for the quarter ended September is lower than expected as a result of the decline on consumer expenses. The news disclosed by the company as well as the sluggish sentiment on China’s stock market continued to drag down its stock price. The current stock price of Alibaba is 10 percent lower than its offering price in the initial public offering (IPO) in the U.S. one year ago.

The point is that what the influences of China’s economic slowdown on Alibaba and other Internet-based enterprises in China are. Currently, the Internet-based industry is booming in China. Online users, e-business and electronic payment are under stable growth. But China’s economy shows signs of accelerated slowdown. The slump of the stock market and other factors may weaken the confidence and expenses of consumers.

Mark Yusko, chief investment officer of Morgan Creek Capital Management LLC, declares that he is worried that some Chinese investors have lost some capital and thus it cannot be used for consumption. The company once traded Alibaba’s stock and now it is considering buying its stock again.

For the question that where the falling trend of Chinese stock market will impact Alibaba and other Internet enterprises, he indicated that the answer is yes and his team is trying to figure out what the impact will be.

Jane Penner, head of Alibaba’s Investor Relationship Department, declared on a meeting held on Tuesday in New York that the company finds that Chinese consumers’ expenditure scale on online payment platform suffers certain negative impact.

She indicated that Alibaba believes that the company’s total trading amount (namely, the widely concerned total commodities transaction amount) is lower than previous expectation.

Along with the explosive development of e-commerce, innovative online payment and social media service as well as the growth of mobile applications connecting Internet users with services including meal delivery and car service, etc., China’s Internet industry rises sharply.

In terms of market value, the three Chinese Internet companies, Alibaba, Tencent Holdings Ltd. (00700.HK), and Baidu Inc. (NASDAQ: BIDU), are among the top in the world. As the Internet industry rises, China’s economy has slowed from its double-digital growth 10 years earlier.

However, some other companies are cautious. Quite a few companies released signals for continuing strong growth. Senior management of JD.com Inc. (NASDAQ: JD), a competitor of Alibaba, noted last month that the company forecasts a 49 percent to 54 percent growth in revenue for the third quarter, compared with the 61 percent revenue growth in the same period last year. They said that it was a reflection of a conservative view on China’s stock market following the recent adjustment and the lackluster macroeconomic conditions.

The economic slowdown is partly because of the increasingly mature market. The number of Internet users in China is rising, yet at a slower pace. By the end of last year, China has 649 million Internet users. In August, Alibaba announced that its revenue growth for the quarter ended June hit a new low in three years, yet still up 28 percent year on year.

Penner said that the decrease in trading value is more related to consumers’ psychology, rather than changes in their spending ability, and consumers still have passion to shop on Alibaba’s platforms.

Stock price of Alibaba ended at 60.91 U.S. dollars per share on Tuesday, 4.7 percent down from Monday and 49 percent down from 120 U.S. dollars per share in November 2014. Kathy Smith, head of Renaissance Capital, expressed that investors had higher expectation when Alibaba launched the IPO. Although the group keeps strong growing momentum, it doesn’t beat the expectation. Located in Greenwich of Connecticut, U.S., Renaissance Capital is a trading fund management company specialized in IPO. Alibaba possesses the most positions in the IPO trading fund under Renaissance Capital, accounting for 8.6 percent.

Smith remarked that Alibaba has never reached the market expectation since its listing, which impacts its stock price. Right now, it has become a scapegoat of China.

Smith said that the reason why the U.S. investors undersold the stocks of Alibaba with fearing China’s economy was that it would be easier to sell off all of their Chinese assets no matter the assets were good or bad. 

The lockup period of part of Alibaba stocks will be due on Sept. 19, which results in wait-and-see attitude by some investors. Vince Rivers, a senior portfolio manager from J O Hambro Capital Management, addressed that some investors interested in Alibaba said to him: should I hold this stock now? If I wait for weeks, I can know how China’s situation will develop and further learn the situation of Alibaba; and by then, the lock-up period of Alibaba stock comes due. So why do I have to be anxious now?