The research report linked below is authored by Ram Parameswaran, founder and managing partner of San Francisco-based Octahedron Capital.

Given the recent spike in US investor concerns about recent China regulatory changes regarding internet platforms and fintech lending, we are sharing a more grounded discussion of the actual changes made, the larger regulatory context, and the impact on Alibaba.

Though the timing of the recent announcements was suspect, our view is that November 2020’s draft regulations are the expected “next steps” in the ongoing 3-year central government efforts to more systematically regulate each of (i) major China internet and e-commerce platforms and their activities, and (ii) non-bank Internet Finance platforms, especially their consumer lending activities.

We do not see this month’s developments as surprising or especially sudden, and they do not substantially change our positive medium-term (>1 year) outlook on Alibaba overall (below). However, the new internet platform regulations temper our near-term (3-6 month) outlook on Alibaba’s core China commerce segment (Tmall and Taobao), because the clearer anti-monopoly rules and stricter bans on forced merchant exclusivity help further level the playing field for Pinduoduo and by reigning in these Alibaba advantages. As such, the correction of the stock price in November was mostly driven by a change in sentiment rather than by any structural change in the fundamentals of the business, and we believe that Alibaba is the one of the best risk / reward investment opportunities in our public coverage universe.

On the other hand, we expect the Nov. 2 online lending draft regulations to have a (somewhat) material impact on Ant Group’s consumer lending business (Huabei and Jiebei), though not as dire as some US media reports suggest. Prior to the new rules requiring online private lending platforms to fund 30% of issued/originated loan amounts from their own balance sheets, we valued Ant Financial’s consumer lending business at between $40B and $50B, or around 12% – 16% of the proposed $320B enterprise value of Ant Financial at IPO. Even if the entire lending business were valued at $0 (we now value it at <$5B after the new regulations), our fair value estimate for Ant Financial would go to US$280 bn from our original US$320bn in 2023. The impact on Alibaba stock from this reduction in value is between $4 and $6/share.

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