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 JD.com 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.
Members, log in below to access the restricted content.
Not a member?
Thank you for your interest. Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form:
Important disclosures: This document is provided for informational purposes only and is intended solely for the person to whom it is delivered. This document is confidential and may not be reproduced in its entirety or in part, or redistributed to any party in any form, without the prior written consent of Octahedron Capital Management, L.P. (“Octahedron”). This document was prepared in good faith by Octahedron for your specific use and contains certain information concerning Alibaba (“BABA”), a long position currently in the portfolio of Octahedron Master Fund, L.P. (the “Master Fund”). Information contained in this document is current only as of the date specified in this document, irrespective of the time of delivery or of any investment, and does not purport to present a complete picture of Octahedron, SE, the Master Fund, Octahedron Onshore Fund, L.P., Octahedron Offshore Fund, Ltd. (together with the Master Fund, the “Funds”), or any other fund or account managed by Octahedron, nor does Octahedron undertake any duty to update the information set forth herein. This document does not constitute an offer to sell or the solicitation of an offer to purchase any securities, including any securities of Octahedron, the Funds, or any other fund or account managed by Octahedron. Any such offer or solicitation may be made only by means of the delivery of a confidential private offering memorandum (each, a “Memorandum”), which will contain material information not included herein regarding, among other things, information with respect to risk factors and potential conflicts of interest, and other offering and governance documents of any given fund or account (collectively with the Memorandum, the “Offering Documents”). The information in this document is qualified in its entirety and limited by reference to such Offering Documents, and in the event of any inconsistency between this document and such Offering Documents, the Offering Documents shall control. In making an investment decision, investors must rely on their own examination of the Funds and the terms of any offering. Investors should not construe the contents of this document as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security. Past results are not necessarily indicative of future results and no representation is made that results like those discussed can be achieved. Investments in funds and accounts managed by Octahedron may lose value. Investment results will fluctuate. Certain market and economic events having a positive impact on performance may not repeat themselves. Past results may be based on unaudited, preliminary information and are subject to change. Notwithstanding the information presented herein, investors should understand that neither Octahedron nor the Funds will be limited with respect to the types of investment strategies they may employ or the markets or instruments in which they may invest, subject to any express terms or limitations, if any, set forth in the Offering Documents. No assurance can be given that any investment objectives discussed herein will be achieved. In calculating projected results, Octahedron utilizes certain mathematical models that require specific inputs that, in some cases, are estimated, and certain assumptions that ultimately may not hold true with respect to any investment. These estimates and assumptions may cause actual realized results to deviate materially from modelled expectations. These models, including the estimates and assumptions, are prepared at a specific point in time and reflect conditions at such time. The projected results are premised on several factors, which are uncertain and subject to numerous business, industry, market, regulatory, competitive, and financial risks that are outside of Octahedron’s control. There can be no assurance that the assumptions made in connection with the projected results will prove accurate, and actual results may differ materially, including the possibility that an investor will lose some or all its invested capital. No assurances can be made that projected results will correlate in any way to past results, and no representation is made that results like those shown can be achieved. The inclusion of the projected results herein should not be regarded as an indication that Octahedron considers the projected results to be a reliable prediction of future events, and the projected results should not be relied upon as such. Please contact Octahedron at [email protected] if you would like additional explanation concerning the models, including the estimates and assumptions. The investment discussed in this document has been included to demonstrate Octahedron’s investment strategy and investment process, and has been selected based on objective, non-performance based criteria. Specifically, Octahedron will distribute to investors an investment memorandum four to six times a year regarding the then-largest position in the Master Fund’s portfolio that was not already discussed in prior investment memoranda distributed to investors. The investment discussed in this document does not represent all the investments selected by Octahedron with respect to the Master Fund. The investment is not intended to be, and should not be construed as, investment advice or a recommendation to purchase or sell any particular security. The investment discussed in this document ultimately may generate positive returns and other investments made in the Master Fund, but not discussed in this document, may generate negative returns. It should not be assumed that investments made for the Master Fund will match the performance or character of the investment discussed in this document. Investors may experience materially different results. The information included in this document is based upon information reasonably available to Octahedron as of the date noted herein. Furthermore, the information included in this document has been obtained from sources Octahedron believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein and no liability is accepted for the accuracy or completeness of any such information. This document may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All such forward-looking statements are conditional and are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates and availability of leverage, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors, any or all of which could cause actual results to differ materially from projected results.