The latest depreciation of Alibaba’s (NYSE: BABA) stock below the technical support level of $ 100 per share signals that fundamental issues, which served as catalysts for the initial depreciation more than a year ago, are still not resolved to this day. Even though Beijing publicly stated last month that it will support overseas listings, the worsening of relations between China and the United States could prevent stocks of Alibaba and its peers from appreciating anytime soon due to risks of increasing international regulatory pressure.
In my latest article on Alibaba, I have already explained why bullish investors are wrong to justify owning the company’s shares by using traditional valuation metrics and comparing the business to its western peers due to the increased interference of Beijing in the firm’s affairs. In this article, I will highlight how the actions of non-Chinese state actors add additional pressure to Alibaba’s stock and make it even harder to justify a long-term long position in the company.
The End of Globalization
In early March, the stocks of Alibaba and its Chinese peers experienced one of the greatest depreciation in their history. In less than a week, Alibaba lost over 20% of its value first on news that SEC began to name Chinese companies that do not comply with HFCAA law, and then on news that Washington threatened Beijing with consequences if the latter provides military and economic assistance to Russia. Shortly thereafter Beijing signaled to the world that it would support overseas listings, which eased the pressure on Alibaba’s stock and helped it to pare the previous losses. Alibaba bulls used this as a sign that the company won’t be delisted from the American exchanges and started to believe that one of the major risks that surrounded its stock is no longer in play.
However, more than a month has passed, nothing fundamental has changed in Beijing’s rhetoric, yet we don’t see a return to normalcy. Alibaba stock continues to depreciate, investors continue to create a selling pressure that destroys value, and major institutions such as BlackRock start to talk about the end of globalization. Add to this the record outflow of international capital from China along with the increased regulatory pressure from Beijing against Alibaba, and it becomes nearly impossible for the tech behemoth to show an outstanding performance in the current environment, which could’ve turned the tide.
At this stage, it becomes obvious that Alibaba is a hostage to Beijing’s internal and external policy. Given the latest developments, it’s safe to assume that political issues will continue to control the narrative and prevent the appreciation of the company’s stock. While China publicly denies that it provides any help to Russia in its unprovoked war against Ukraine, there are signs that Beijing has chosen a path of confrontation against the west, which will have many negative implications for Alibaba and its current shareholders.
Earlier this month, Ukrainian intelligence accused China of hacking the country’s government websites, while a couple of days ago the United States officials once again threatened China with harsh consequences if it helps Russia in its war efforts in Europe. In addition, in early April the US Intelligence Community released its annual threat assessment report in which it stated that China poses the biggest geopolitical threat to the United States.
Considering all of these recent developments, it’s safe to say that relationships between the largest economies of the globe are not going to improve anytime soon. As a result, this path of confrontation creates a real possibility that Alibaba along with its Chinese peers could be delisted from American exchanges in the future. There are already signs that this might happen sooner than anyone expects, which is why the selling of Alibaba’s shares continues to this day.
Delisting Is Still A Possibility
Less than a month ago, the SEC already took action by adding Alibaba’s closest Chinese tech peer Baidu (BIDU) to the list of companies that don’t comply with the HFCAA law and don’t give access to its books to western regulators. This is because Beijing on a state level prohibits foreign auditors from auditing the financial statements of its companies. Baidu released a statement shortly after the SEC action acknowledging the fact that it has been added to a special list and currently it’s looking for a solution to this issue in order to prevent a forceful delisting of its shares from American exchanges. While Baidu and others have some time to work with regulators on solving this problem before facing delisting, it has already negatively affected its shares, which have also been in free fall since last year.
Since late March, the list of companies that do not comply with HFCAA regulations has been steadily increasing and at the time of this writing, it already contains 40 Chinese public firms out of 261 firms that trade on the US exchanges. It’s very likely that once Alibaba releases its fiscal year report in May, it will be added to the list as well, which could create additional selling pressure for its stock. Let’s not forget that Alibaba has been constantly added to the PCAOB’s database of companies that are located in countries where local regulators deny access to conduct independent inspections. Considering this, investors should be prepared for the real possibility that Alibaba will be added to PCAOB’s database and the list of companies that do not comply with the HFCAA law in the foreseeable future.
While the Chinese and American regulators have been in talks with each other to tackle this issue since last year, so far there has been little progress to date. Considering the worsening of relations between the two nations, it becomes harder to predict whether any deal between regulators will be reached in the foreseeable future. Therefore, at this stage, it’s wrong to ignore the delisting risk whatever. It’s true that under the HFCAA law firms have three years to open up their books to international regulators before the SEC can enforce their delisting. However, we still don’t know what kind of sanctions could be implemented by the US against China. Russia’s war against Ukraine left the former without the ability to access foreign capital markets, which resulted in a massive depreciation of its stock such as Sberbank (OTCPK: SBRCY), and led to the decision to delist all Russian firms from western markets. If the United States finds out that China is helping Russia to evade western sanctions, the same fate could await all Chinese-based firms that are listed on the US exchanges.
Given that it’s impossible to predict what will happen to Alibaba in the future due to all of these events, using traditional valuation metrics to find out the business’s fair value becomes useless at this stage. DCF models become obsolete in the current environment as well and even though Alibaba trades at a significant discount to its western peers, it still doesn’t guarantee that the share price won’t plunge further down. In recent quarters Alibaba has been steadily improving its top-line performance and showed decent growth, yet it didn’t prevent the further depreciation of its stock due to politics and it’s unlikely that anything will change soon.
The Bottom Line
Bullish investors are fooling themselves if they think that in the current environment Alibaba’s strong fundamentals will help it to turn the tide and prevent the further depreciation of its shares. In my article on Gazprom (OTCPK: OGZPY) I wrote that due to the company’s significant exposure to the Kremlin, it becomes hard to justify a long position in the firm even though it showed an outstanding performance in recent years simply due to the fact that political risks outweigh all growth opportunities. The same is true for Alibaba due to its overexposure to Beijing. The massive outflow of international capital from China along with the increase of aggressive rhetoric between the biggest global economies shows that the worst for Chinese-based firms is yet to come. For that reason, Alibaba continues to be uninvestable for the long term at this stage.