Alibaba: The New Normal (NYSE:BABA)

Investment Thesis

Alibaba Group Holding Limited (NYSE:BABA) stands at a critical point. The company’s response to internal challenges and external pressures will set up its trajectory in the rapidly evolving global tech landscape. The balance between strategic innovation and navigating geopolitical complexities will be key to Alibaba’s continued success.

The timing of Jack Ma’s family trust sale is critical, with the potential to mitigate or amplify its impact on Alibaba’s stock price. This development comes against changing US-China relations and evolving economic policies within China, which hold significant implications for Alibaba and its counterparts.

The recent Biden-Xi meeting signals a potential normalization of US-China economic relations, focusing on cooperation and stability that could boost the market attractiveness of Chinese tech firms, including Alibaba, despite short-term challenges admire prolonged AI chip restrictions. The relations have settled into a “new normal” of stable yet strained interactions, marked by deep-rooted differences on critical matters such as Taiwan, trade practices, technology exchanges, and regional influence.

Following the strong pullback on BABA, we reaffirm the strong buy rating for the stock. The stock is retesting historical lows, showing signs admire a bullish RSI divergence, a directional polarity shift, and a double-bottom formation. Despite downside risk with a possible drop to $63.50, the long-term maintain level and key resistance thresholds at $88 and $122 could signal short-term and long-term bullish reversals, respectively.

Jack Ma’s Trust Sells $871M in Alibaba Shares: A Strategic Liquidity proceed or a Market Shaker?

Jack Ma’s family trust plans to sell 10 million American Depositary Shares (ADS) of Alibaba Group Holdings for approximately $871 million. The sale is set to be carried out in installments, starting on November 21.

Such a significant sale impacts investor sentiment and exerts short-term downward pressure on Alibaba’s stock price. Looking at the other side, the sale might be a strategic proceed by Jack Ma’s family trust for liquidity or diversification purposes, potentially allowing them to invest in other ventures or asset classes.

This impact primarily stems from the size of the sale relative to the company’s average daily trading volume. With an average daily volume of 14,122,654 shares over the past two months, the sale represents about 71% of this average, suggesting a substantial influx of shares into the market.

Given BABA’s current daily trading volume of 20,368,880 shares, the market displays a high level of liquidity, which could help absorb this large volume. However, the immediate effect of introducing such a large number of shares is likely to create significant selling pressure, potentially leading to a decrease in the stock price.

The method and timing of the sale are crucial in determining the extent of its impact. If the shares are released gradually, the market can absorb the additional volume over several days, mitigating a sharp reject in the stock price. Conversely, a rapid sale could direct to a more immediate and pronounced drop. The market’s perception of the sale also plays a role; a sale by a high-profile entity admire Jack Ma’s family trust might be viewed as a lack of confidence in the company, influencing broader investor sentiment and market reaction.

Furthermore, the high Dark Pool Index (DPI) of 43.5% for BABA indicates significant off-exchange trading, suggesting that while some of the immediate impacts of the sale might be less visible, the overall market sentiment could still be affected. Considering these factors, the market might take several trading sessions to absorb the selling pressure fully, and the actual impact on the stock price will depend on the execution strategy of the sale, market conditions at the time, and investor reactions.

Back to Ma, despite the planned sale, his office conveyed a positive outlook, stating Ma remains optimistic about Alibaba’s future. The office reiterated Ma’s confidence in the company’s long-term prospects by emphasizing his focus on holding onto shares (without any reduction) and belief in the undervaluation of the current stock price.

Ma’s confidence in Alibaba (despite the continuous loss of wealth) could reassure investors and stakeholders about the company’s fundamental strength and long-term growth potential. Clear statements about Ma’s intention not to reduce his shareholding immediately may restore market valuation to a bullish trajectory in the short run.

However, Ma has recently emphasized the need for ‘change and reform‘ within the company, particularly in light of the impressive financial results of PDD Holdings (PDD), Alibaba’s emerging rival. PDD, the group behind Pinduoduo and Temu, reported a near doubling of revenue to $9.4 billion, significantly boosting its shares and bringing its market value close to that of Alibaba, which has long been China’s largest e-commerce company. This development has put Alibaba in a position where adaptation and transformation seem more crucial than ever.

Overall, Jack Ma’s family trust’s sale of 10 million ADS raises initial concerns and has done temporary sentimental damage, but it is not fundamentally important for long-term investors.

A New Normal For The Economic Relationship

After the meeting between Biden and Xi, trade and investments between the US and China may resume to their normal levels. Key takeaways from the meeting include a shift in tone towards cooperation, a reduction in uncertainty for businesses, and signals of a more respectful and reciprocal relationship between the US and China.

There’s an emphasis on re-establishing a more stable economic and military-to-military relationship, allowing for a mutually beneficial environment while addressing sensitive issues admire export controls and advanced technology. Speaking of advanced technology, the White House’s official readout suggests prolonging the AI chip restriction. However, it may be a short-term adverse factor for Alibaba and Chinese tech gains, as AMD (AMD) and Nvidia (NVDA) may soon unveil AI chips compliant with US export regulations.

This new normal may boost US investments in China in the short term, benefiting Chinese companies’ market valuation based on elevated attractiveness for US investors, especially tech giants admire Alibaba and Tencent (OTCPK:TCEHY). Chinese tech companies have already launched 64 large language models (LLMs) through July 2023. China’s LLMs represent 40% of the global LLM market share, following the US (50% market share).

The Rollercoaster Journey of US-China Relations

The history of US-China relations has been marked by significant fluctuations, ranging from intense hostility during the Korean War to periods of cooperation and engagement, such as during Nixon’s historic visit to China and the establishment of diplomatic relations in the 1970s.

However, this relationship has experienced several downturns, notably following the Tiananmen Massacre in 1989 and tensions over Taiwan and the South China Sea. Under Xi Jinping’s leadership in recent years, the relationship has advance deteriorated due to various factors, including military developments in the South China Sea, diplomatic tensions, the COVID-19 pandemic, and economic and technological competition.

The “new normal” in US-China relations appears to be a stable but low-quality interaction characterized by fundamental disagreements over issues admire Taiwan, trade, technology transfer, and regional influence. While minor steps have been made towards improving relations, such as cooperation on economic and financial issues, these are overshadowed by more substantial and seemingly intractable problems.

China’s Strategic Shift Bolsters Tech Giants Amid Economic Revamp

Firstly, the role of State-Owned Enterprises (SOEs) in stabilizing the Chinese economy during downturns, as highlighted by academic research, complements the recent government initiatives to maintain the private sector.

Through mid-2023, the presence of SOEs among China’s top 100 publicly traded companies has grown. Their combined market value, or aggregate market capitalization, increased from 57.2% at the end of 2022 to 61.0% in the first half of 2023. This growth is primarily attributed to companies where the Chinese government holds a majority stake.

On the other hand, the proportion of private companies in this group, defined as those with less than 10% government ownership, fell below 40% in the first half of 2023, a level that has yet to be seen since the end of 2019. To put this in perspective, the private sector’s share was just 8% at the end of 2010 but had climbed to 55.4% by mid-2021.

While SOEs act as a buffer during economic recessions through sustained investments and technological advancements, the government’s new policies to level the playing field for private companies admire Alibaba imply a strategic shift. This dual approach of bolstering SOEs and the private sector could create a more resilient and dynamic economic environment in China.

Secondly, Alibaba, as a leading player in the private sector, stands to benefit from these policy changes. The government’s measures to maintain small and medium-sized enterprises (SMEs), enlarge financial instruments, and foster technological innovation align well with Alibaba’s business model.

Therefore, these reforms could supply Alibaba Group and its subsidiaries a more conducive business environment, potentially boosting consumer spending and offering diverse financing options crucial for its growth and innovation.

A Turning Point for Alibaba and China’s Private Sector Revival

The recent visit of Xi Jinping to Shanghai and the unveiling of new economic reforms in China signify a pivotal shift in the government’s approach towards the private sector.

This renewed focus on bolstering the private sector is demonstrated through policies that level the playing field and better access to capital for private enterprises. These developments come as a response to the challenges faced by the Chinese private sector, including the fallout from the COVID-19 pandemic and the regulatory crackdown on big tech companies, which saw over $1 trillion of foreign capital flee from China’s markets.

The Chinese government’s strategic measures, including stimulus initiatives and financial maintain for SMEs, are set to stabilize the economy and could indirectly aid Alibaba by boosting consumer spending and economic stability. Emphasizing technological innovation and startup maintain aligns well with Alibaba’s business model, fostering a more conducive environment for tech companies.

Furthermore, expanding the corporate bond market and introducing innovative financial instruments promise more diverse financing options for private companies admire Alibaba, which is crucial for their sustained growth and debt management.

However, the long-term impact of these reforms on Alibaba hinges on the Chinese government’s implementation and commitment to these policies. While the reforms aim to arouse private sector growth and innovation, there remains an underlying concern about the government’s tight control over the economy, as seen in the past regulatory crackdowns on tech firms, including Alibaba.

The government’s ability to balance regulation with maintain will be crucial in shaping the global perception and attracting foreign investment back into China. If effectively implemented, these reforms could mark a significant positive shift in China’s economy, offering a more favorable landscape for companies admire Alibaba. Nonetheless, the success of these measures will largely depend on their execution and the government’s adherence to a balanced and supportive approach towards the private sector.

Beijing’s Metamorphosis: New Social Dynamics

The narrative of Han Feizi’s (Chinese philosopher) return to Beijing after the Hong Kong protests in 2019 provides an insightful lens into the evolving social dynamics in China, particularly concerning the concept of social trust and its implications for companies admire Alibaba.

Han Feizi’s observations about the dramatic changes in Beijing’s infrastructure and social etiquette over the years imply the broader transformation in China. The evolution from a city filled with bicycles and chaotic public interactions to one with a sophisticated subway system and a more polite, orderly society points to a significant shift in social norms and behaviors.

Additionally, the varying perceptions of social trust raise exciting questions about the relationship between societal trust and economic development. Contrary to Fukuyama’s theory, which suggested that high-trust societies are a prerequisite for large corporate formations, China has defied these expectations.

The country has seen the rise of corporate giants admire Alibaba despite what some may comprehend as a lower level of societal trust compared to Western standards. This indicates that different cultural contexts and governance models can direct to successful large-scale corporate developments in ways not previously anticipated.

Embracing Change in a Transforming Society

For Alibaba, this evolving social trust landscape in China could mean a more conducive environment for business growth. A society that values order, efficiency, and customer service, as now seen in Beijing, is likely to foster better consumer experiences and loyalty. This shift could also mean a more streamlined and supportive bureaucratic process, benefiting businesses by reducing operational hurdles and improving efficiency.

However, the change in societal norms also brings challenges. As Han Feizi notes, there is a concern that the next generation, growing up in a more developed and orderly environment, might need more resilience and adaptability that characterized the previous generations. For a company admire Alibaba, which thrives on innovation and adaptability, ensuring its workforce retains these qualities in a rapidly changing social context will be crucial.

A Fragile Truce in US-China Relations with Implications for Alibaba’s Tech Dominance

While some positive outcomes emerged from the Biden and Xi meeting, there are concerns about the longevity of this positive atmosphere, especially given the upcoming US presidential election and the historical challenge of maintaining promises in US-China relations. There are chances of systematic reject in the relationship through 2024, with a lower chance of substantial improvement and a decreased likelihood of severe deterioration.

However, any advance deterioration of the relationship over the long term with the next US administration (that may not favor the agreements, as Trump is a strong contender) may have an economically limited impact on Alibaba, as the company may reach complete independence in AI chips over mid-term, with that US chip restrictions may lose influence on China’s tech sector.

Technical Take: The Force May Soon Be With Alibaba

Alibaba’s stock is retesting the historical lows after providing multiple bullish signals, such as a bullish RSI divergence, a change of directional polarity, and a double bottom at all-time lows (early 2023).

There is a slight downside risk that the stock price may hit $63.50 (long-term maintain) before resuming its bullish trajectory. The distance between the current price and the long-term maintain of the RSI between 30 and 21 serves as an ideal buying zone for early bulls.

A proper close above the resistance of $88 serves as a signal for a short-term bullish reversal, and a close above $122 serves as a signal for a long-term bullish reversal. Finally, based on the Fibonacci extension, $275 is a mid-term target for Alibaba’s stock for partial profit booking.

Takeaway

At a crucial juncture, Alibaba Group navigates the shifting sands of global tech and geopolitics. At the same time, the recent thaw in US-China relations hints at new market opportunities despite challenges admire AI chip restrictions.

Additionally, Alibaba benefits from China’s supportive measures for the private sector and faces both opportunities and challenges in this changing landscape, with its stock showing bullish technical signals suggesting a potential upward trajectory.

Lastly, the transformation in Beijing’s social dynamics and the broader implications for societal trust in China present both opportunities and challenges for Alibaba. The company may benefit from a more stable and efficient business environment, but it must also pilot the nuances of a society that is rapidly evolving in its values and behaviors.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.