Forget the bearish economic forecasting about China’s lagging growth. Chinese industry is about to make a significant splash in both the U.S. and global markets.
Chinese technology giant Alibaba Group recently announced its intentions to issue an initial public offering on the New York Stock Exchange (NYSE). Early estimates suggest that the IPO could raise more than $15 billion, making it the largest offering in Chinese history and the largest since Facebook went public in May 2012. Though a specific date was not disclosed, experts at the Wall Street Journal predict the offering will occur this summer.
The news of Alibaba’s U.S.-based intentions came as a surprise to analysts, many of whom conjectured that the tech giant would stay closer to home with an issuance on the Hong Kong Stock Exchange (SEHK). However, in an official statement, the company declared its excitement for the IPO in New York and indicated that SEHK’s governance structure and regulatory environment were sticking points.
But what exactly is Alibaba and why is it valued so highly?
Alibaba is a Chinese technology holding company, a large corporation that owns shares in other businesses. A holding company’s product is not physical; it does not sell computers or hamburgers, for example. Instead, it makes money through savvy private equity investment and active management of its subsidiaries. In the case of Alibaba, the company purchases private equity stakes in technology startups and shepherds them to profitability.
Perhaps the best comparison to help understand Alibaba’s product is to think of it as a mixture of Amazon, eBay, PayPal and Google. The company’s specialties lie in e-commerce, and its subsidiaries dominate the sizeable Chinese market.
Alibaba’s most successful subsidiary is a bazaar-like entity called Taobao. Unlike its U.S. counterpart, Amazon, which buys goods from suppliers and sells them at a discount to customers, Taobao acts as an intermediary that connects individual buyers and sellers and facilitates transactions. This model is much closer to the platform employed by U.S. Internet auction giant eBay. However, instead of selling products through auctions, Taobao facilitates fixed-cost vending.
Unlike U.S. sites, Taobao does not charge vendors to list the items, but brings in revenue from advertising services it sells to vendors. Taobao uses these ads to redirect searchers on the company’s website to specific listings.
Taobao’s success has led the company to spin off e-commerce sites, including Tmall, which caters toward larger merchants such as Nike and Gap. As opposed to Taobao’s fee-free structure, Tmall charges vendors annual fees for membership and commissions on individual sales.
The success of Taobao and Tmall in particular have led to huge earnings for parent company Alibaba. In 2012, Taobao and Tmall’s combined transaction volume topped 1 trillion yuan ($163 billion) and surpassed the combined efforts of Amazon and eBay.
While the company’s earnings were only 10 percent of Amazon’s, Alibaba has proved much more profitable and has significant upside potential. Currently, the firm’s profit margin sits at 44.6 percent and quarterly revenue has risen to $1.78 billion, up 51 percent for the third quarter last year. In comparison, Amazon lost $41 million in the same quarter.
In addition to Taobao and Tmall, Alibaba owns Alipay, a PayPal-like electronic payment service, as well as a microloan division that is backed by the Chinese government to provide aid to startup banks in the nation’s largest cities. Alibaba also owns numerous other private equity stakes in Chinese tech startups. The extent of this ownership will become clearer once Alibaba’s files paperwork with the Securities and Exchange Commission, and the IPO progresses.
In an era of falling Chinese growth numbers and bearish sentiment towards the nation on the Street, Alibaba is growing by leaps and bounds and has no indication of slowing soon. The pending IPO will allow investors the world over to profit from this company’s soaring success.