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Alibaba braces for hit as China growth slows

China’s slowing growth—which has rocked old-economy stalwarts such as auto makers and steel companies—has now hit new-economy bellwether Alibaba Group.

Alibaba Group Holding Ltd. says slower consumer spending means the value of its electronic-commerce transactions will be lower than originally expected for the quarter ending this month. The disclosure is the latest in a series by the Chinese e-commerce company that, combined with souring investor sentiment on Chinese stocks in general, has sent the company’s shares lower. At Tuesday’s close, they were trading 10% below the price at which they made their debut in a $25 billion U.S. initial public offering a year ago.

The question is how badly the slowdown will affect Alibaba and others in China’s booming Internet sector. E-commerce, electronic payments and Internet-user numbers are all still growing at a healthy pace. But China’s slowdown is showing signs of deepening, and factors such as the slumping stock market could damp consumer confidence and spending.

“I am concerned that some amount of money was lost by local Chinese investors. That money therefore won’t be available for consumption,” said Mark Yusko, chief investment officer of Morgan Creek Capital Management LLC, in Chapel Hill, N.C. Morgan Creek has bought and sold Alibaba shares and is considering them again.

On whether Alibaba and others could be hurt by the stock-market drop, he said, “I think the answer has to be yes, and we’re trying to get a sense of what that is.”

At a conference Tuesday in New York, Alibaba investor-relations chief Jane Penner said the company sees “negative impact to the magnitude of the spending” by Chinese consumers on their online platforms.

The company believes its gross merchandise value, a closely watched measure of total transaction value, will be “mid-single-digits lower than our initial expectations,” she said. “We do think it will have an impact to the September quarter.” Asked for Alibaba’s internal projection for the September quarter’s gross merchandise value, a spokesman for the company said it doesn’t disclose its specific estimates.

The surge in China’s Internet sector has been driven by explosive growth in e-commerce, innovative online-payment and social-media services, and the rise of mobile apps linking Internet users with services such as food-delivery and ride-hailing.

Three Chinese Internet companies—Alibaba, Tencent Holdings Ltd. and Baidu Inc.—are now among the world’s largest in market capitalization. The industry’s rise has come even as China’s economic growth has slowed from its double-digit pace of a decade ago.

Some other competitors are expressing caution, though many are signaling still-strong growth. Executives at Alibaba rival JD.com Inc. said last month that they expect third-quarter revenue growth of between 49% and 54%—compared with a year-earlier 61%—reflecting a “conservative outlook in light of the recent Chinese stock-market correction and the slowing macroeconomic conditions.”

During Sina Corp.’s quarterly earnings announcement last month, executives at the Chinese Internet portal blamed an 8% decline in advertising revenue from the previous year on macroeconomic factors, as brands cut ad spending, particularly within an auto sector that is beset by declining passenger-car sales.

The slowing Internet growth is partly because of a maturing market. The number of Chinese Internet users, which totaled 649 million at the end of last year, continues to rise, though not at the pace it once did. Alibaba’s revenue grew at the slowest pace in three years in the quarter ended in June, but that was still a 28% rise from a year earlier.

Ms. Penner said the company doesn’t see the economic slowdown directly hitting Chinese pocketbooks so far, citing wage growth and other indicators.

“We think this is more due to psychology than to an ability to spend,” Ms. Penner said. “We’re still seeing actually high engagement by buyers on our platforms.”

Alibaba’s shares closed Tuesday at a new low of $60.91, down 4.7% from the previous day and off 49% from their November high of $120. Robust as they are, the company’s financial results fall short of the perhaps too-buoyant expectations that arose as it came off its blockbuster IPO, said Kathy Smith, principal at Renaissance Capital, a manager of IPO-focused exchange-traded funds in Greenwich, Conn. Alibaba is the largest holding in Renaissance Capital’s IPO exchange-traded fund, accounting for 8.6% of the portfolio.

“It just didn’t knock the cover off the ball in its reports since it’s been public, so I think that has hurt it,” Ms. Smith said. “Now of course, it’s being the whipping boy for China.”

She said U.S. investors who sold Alibaba shares over concerns about China did so because “it’s easier to throw the baby out with the bath water.”

The shares were up 5.5% at $64.25 on the New York Stock Exchange on Wednesday afternoon, in a recovery from Tuesday’s decline.

China’s first-half gross domestic product was up 7% from a year earlier, the slowest pace of economic growth in 25 years. August data suggest that the economy is slowing further in the second half, leading many economists to question whether Beijing will hit its 2015 target of about 7%.

The approaching expiration of an Alibaba post-IPO share lockup, coming Sept. 19, has given investors pause. According to Vince Rivers, a senior portfolio manager at J O Hambro Capital Management, investors interested in Alibaba say to him, “Do I have to own this stock now? If I wait a couple of weeks, I can see how things go with China, get a firmer sense of how the Internet’s going, get past the lockup, so what’s my rush?”


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