Alibaba Making China Tech Investible Again

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Ma effectively entered into a period of political exile. That appeared to change last week when Xi invited Ma and other tech billionaires to an event heralding Chinese tech back on the ascendancy. Seeing Ma sitting in the front row, and Xi shaking his hand, had investors piling into mainland shares with enthusiasm not seen in years.

The scene suggested that“one of the world's greatest living entrepreneurs” is“back into the good graces,” says analyst Bill Bishop, who writes the Sinocism newsletter. Bottom line, he says,“it's an encouraging signal for private businesses.”

Daiwa analyst Patrick Pan notes that“from a long-term perspective, we turn more positive on the outlook for the China stock market.” China's recent tech breakthroughs and pro-business pivot, he says, are“game changers for China stock prices.”

In March 2023, Alibaba unveiled the biggest restructuring in its 26-year history, splitting into six units and exploring fundraising or listings for most of them. At the time, Alibaba said the strategy is“designed to unlock shareholder value and foster market competitiveness.”

The six units included: domestic e-tailing, international e-commerce, cloud computing, local services, logistics and media and entertainment.

As then-Alibaba CEO Daniel Zhang put it two years ago:“The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready.”

The enterprise was bigger than Alibaba, though. It was a case study of sorts for China Inc as Xi's regulators seek to head off risks and curb monopolistic tendencies among tech giants.

It's quite a balancing act considering how Xi and Premier Li Qiang claim they want private companies to take the lead in creating jobs and boosting a troubled economy.

Ma's Alibaba was an obvious place to start. It's long been a global symbol of China's tech aspirations and a weathervane of Beijing's tolerance of tech billionaires spreading their wings.

Now, after years of uncertainty, says Daniel Ives, analyst at Wedbush Securities, Alibaba just“delivered an inflection point quarter,” led by a stronger-than-expected cloud business and an expanding AI push that could represent the“next gear of growth.”

As current Alibaba CEO Eddie Wu put it last week, AI is“the kind of opportunity for industry transformation that only comes around only once every few decades.”

Wu added that“when it comes to Alibaba's AI strategy ... we aim to continue to develop models that extend the boundaries of intelligence” and that AI could eventually“have significant influence on or even replace 50% of global GDP.”

When it comes to cheap Chinese valuations, Alibaba could be Exhibit A. While some profit-taking might happen, the company is still trading between 35% to 40% below past highs.

Yet pressure is on for Alibaba to take steps to validate investors' bullishness .

“Fundamentals will have to be back in focus” to drive further gains in the stock, says HSBC Holdings analyst Charlene Liu. This includes Alibaba growing its e-commerce market share and demonstrating“a clear strategy to monetize AI and accelerate cloud revenue growth and margin improvement.”

The real onus, though, is on Team Xi to convince global investors broadly that China's“uninvestable” days are over for good.

Over the last dozen years of Xi's leadership, Beijing has too often slow-walked moves to strengthen capital markets, reduce opacity, scale back the role of state-owned enterprises, build a globally trusted credit rating system and increase regulatory certainty.

Clearly, the return of Hangzhou-based Alibaba to favor in Communist Party circles may be its own inflection point.

Recently,“Hangzhou's innovation model has been lauded for fostering numerous superstar technology startups, dubbed the 'Six Little Dragons' in markets,” says Carlos Casanova, economist at Union Bancaire Privée.

This, Casanova says,“suggests China may be preparing to adopt a Hangzhou-style model that promotes both hard technology and high value-added software and services in its upcoming 15th Five-Year Plan, expected to be unveiled this October. Although we will not know for sure until the draft is released, it appears China is positioning for a strategic pivot in 2026.”

Yet convincing global funds that the multi-year tech inquisition is over will be easier said than done. Rhetoric and handshakes are fine, but ensuring that the regulatory chaos of the last few years are over is more important.

This“will take much more than optimistic pronouncements to restore confidence after months of undelivered promises,” says Jeremy Mark, senior fellow at the Atlantic Council.“This uncertainty does not sit well with the foreign institutional investors that Beijing has courted for years.

The volatility of recent months, though,“has given Chinese officialdom greater incentive to pursue a tightly regulated, less volatile stock market - one in which the likes of insurance companies, pension funds, and other government-run behemoths hold sway over individual investors,” Mark says.

The order of the day, Mark adds,“will be to encourage long-term investments in large companies by offering bigger dividends, share buybacks, and - ideally-steady profit growth.”

Of course, some think the attractiveness of mainland valuations trump concerns about market structure.

“Since January, the rally in the Chinese tech sector has been stunning, though the overall A-Shares market has not risen much,” says Jen of Eurizon SLJ.

“Not only are Chinese tech companies aggressively searching for ways to harness the power of rapidly advancing AI, but firms outside the tech sectors are trying to do the same. Chinese companies are generally very eager to adopt the best technologies, especially if they are cheap.”