New York Times reported late Friday evening that Jack Ma, founder and chairman of China’s biggest listed company is planning to retire to focus on philanthropy. Interestingly enough, soon after the New York Times article was published, the company came out and semi denied The Times reporting.
South China Morning Post (Scmp.com) wrote Saturday morning;
Ma will remain executive chairman while the plan is carried out. A New York Times report that said he was “stepping down” to “retire” was out of context, and factually wrong, an Alibaba spokesman said
Mr. Ma said in an to the South China Morning Post;
“I sat down with our senior executives 10 years ago, and asked what Alibaba would do without me I’m very proud that Alibaba now has the structure, corporate culture, governance and system for grooming talent that allows me to step away without causing disruption.”
Interestingly enough, New York Times followed-up and said they stand by their reporting. Even though Mr. Ma has since a while ago given up the operational duties of the company to his lieutenants, it strikes quite odd that the face and leader of China’s biggest company would chose to leave when its share price is down almost 25% from peak.
Watch the 160 big support here.
This comes of the heel, of all big Internet companies (for example Tencent which we at AskBrokers wrote about earlier here) have all been suffering substantial declines in their share prices, due to in general the emerging markets crises, but more importantly increased regulation and control in China.
Could it be Ma’s retirement is not strictly due to private considerations, but more importantly has to do with the political climate in China and President Xi. Forbes points out;
With the consolidation of political power by China’s president, Xi Jinping, however, the business climate has changed. Xi has consistently represented himself as an anti-corruption reformer. Xi has tightened control over businesses, especially ones that allow people to communicate over the Internet.
Earlier this year President Xi made an ominous signal to Investors – in essence warning investors that Any Chinese Billionaire could fall with the arrest of billionaire and founder of CEFC Energy Ye Jianming. As Scmp writes;
Ye’s detention in China was ordered directly by the Chinese president Xi Jinping, according to a source familiar with the matter.
Interestingly enough, late August, CEFC Shanghai International Group, a unit of the country’s largest private oil conglomerate CEFC China Energy, defaulted on some debt.
Beijing has recently been extorting its power visibility. The once big conglomerate HNA is a clear sign of this. Just recently they had to sell their 7.6% stake in Deutsche Bank. WSJ notes;
In a significant comedown for a once-highflying company, HNA Group Co., an owner of airlines and hotels that amassed more than $40 billion worth of businesses and stakes in companies in an aggressive global acquisition spree from 2015 to 2017, is dismantling its overseas empire to shrink its balance sheet under renewed pressure from Chinese regulators and its creditors, according to people familiar with the matter.
As a side note, HNAs founder recently fell to his death during a trip to France, after the start of the divestment plans were put in place.
With all these points of the Chinese government exhorting more power and reigning various big companies, the recent news about Alibaba (BABA US) and Jack Ma could raise concerns amongst investors.
Furthermore, there are additional risks with investing in Chinese companies, especially those listed in US with all their accounting opaqueness and irregularities. Washington Post recently addressed this;
The growing presence of Chinese companies in U.S. stock exchanges poses a dangerous and growing risk for U.S. investors and the American economy as a whole — a problem that has been overlooked for far too long. If President Trump really wants to fix the unfair U.S.-China economic relationship, this is where he should start.
The risk lies in Beijing’s refusal to allow U.S. regulators to do their jobs and verify that Chinese companies are in compliance with U.S. laws. Chinese companies’ systematic use of irregular investment structures to do business on U.S. exchanges without real financial transparency has been going on for more than a decade.
Florida Senator Marco Rubio said;
“It’s outrageous that the Chinese government shields China-based companies operating in the United States from complying with American laws. If China-based companies want to list on stock exchanges or access capital markets in the United States, we should make them comply with American laws. If they will not, we should delist China-based companies from American stock exchanges.”
Senator Rubio plans to introduce new legislation which would force all the Chinese companies listed in the US to follow the laws.
Important factor here is that Alibaba (BABA US), like all other Chinese companies listed in the US has a so-called Variable Interest Entity “VIE” structure. This is in essence a way for Chinese companies to get around Beijing’s laws that does not allow (sensitive) assets to held by foreigners. What this means, that as a shareholder of Alibaba (BABA US), or any US listed Chinese company, if there are any issues or even worse, fraud or bankruptcy, the investors have no rights. In another words, investing in these companies, one is not actualyl holding a share of the companies.
That is exactly the potential problem when comes to Alibaba (BABA US) as various parties have been questioning their accounting. Famed short sellers Muddy Waters tweeted in 2017;
Entertaining and coherent dissection of how obviously fake $BABA‘s numbers are. Points out Singles Day claimed GMV exceeds ANNUAL rev of Sears/K-mart.
Investor site “Deep-Throat-IPO” have written extensively about this over the years.
So with the retirement of Jack Ma, increased encroachment of power from Beijing and President Xi, potential clampdown by US regulators, and accounting irregularities, there is plenty of negative risk out there that could come to fruition. Kevin C. Smith noted it best
When Jack Welch retired from $GE at height of .com bubble, it was the #1 mkt cap stock in the US and world. GE’s stock has been down ever since. Jack Ma’s early age retirement from $BABA, the #1 mkt cap stock in China is a strong micro and macro signal for everyone not asleep.
We here at AskBrokers will continue monitor the development of Alibaba (BABA US), rest of the Chinese companies. We will at a later stage delve deeper in the VIE structure a lot of Chinese companies have and how it can be a catastrophe in the making if you are an US investor in these companies.