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Alibaba plots comeback from biggest market-value wipeout
[HONG KONG] It took less than a year for Alibaba Group Holding to turn from a stock-market darling into the biggest source of shareholder losses worldwide.
Now, China's biggest e-commerce operator is plotting its comeback. This week's purchase of a stake in Suning Commerce Group - chairman Jack Ma's largest deal ever - is part of the company's push to reach millions of new customers in rural China and abroad through a bigger logistics network.
Mr Ma is counting on expansion outside China's largest cities to offset a slowdown in sales growth that helped erase more than US$90 billion of market value since Alibaba shares peaked in November. While the strategy may take time to bear fruit, Wall Street is keeping its faith before the release of Alibaba's quarterly results on Wednesday. Share-price forecasts tracked by Bloomberg imply a 35 per cent rally over the next year, the second-biggest projected return among the world's 25 largest companies.
"Rural and overseas businesses present a great opportunity, but they take time to grow," said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong.
Alibaba's fiscal first-quarter sales are projected to climb 33 per cent, the weakest pace in at least three years, to 21 billion yuan (S$4.65 billion), according to the average of 26 estimates compiled by Bloomberg. That compares with a mean growth rate of 56 per cent for the previous 12 quarters.
Alibaba shares closed Tuesday at US$77.34, down 35 per cent from their Nov 10 high. While the stock is still trading above its initial public offering price in September, the company has lost the equivalent of Goldman Sachs Group Inc.'s entire market capitalization since its peak - the world's biggest destruction of market value. The Hangzhou-based company is now ranked 24th worldwide with a value of US$194 billion.
After its record US$25 billion IPO and 75 per cent surge in the first two months of trading, Alibaba has been hit by a succession of bad news.
It faced a scathing report from the Chinese government about its business practices in January, was sued in May by the maker of Gucci handbags over claims the e-commerce platform facilitates sales of counterfeits and agreed to sell its US website 11 Main two months ago amid criticism from American merchants.
Perhaps most importantly, Alibaba is grappling with weak growth in larger cities as new customers become harder to find and China's economy heads for its slowest annual expansion since 1990.
Despite the setbacks, Mr Ma sees room for growth. Monday's agreement to spend 28.3 billion yuan for a 20 per cent stake in Suning Commerce adds more more than 1,600 electronics stores in about 290 cities and enables its Cainiao logistics affiliate to cover almost all of the 2,800 counties and districts in China.
The acquisition is Alibaba's biggest-ever, excluding a US$7.1 billion share buyback in 2012 from Yahoo! Inc.
This month, Alibaba tapped former Goldman Sachs partner Michael Evans as president to help the company reach a target of getting more than half its revenue from outside of China.
Through its AliExpress platform, Alibaba has become the top shopping site in Russia and Brazil. It accounts for about half of online goods purchased in Russia, according to Maria Gracheva, the chief executive officer of Yandex Money, a payments processor for Alibaba's online sales in Russia.
Within China, Ma plans to build a delivery network that can spirit packages between 100,000 villages, which account for less than 10 per cent of online purchases on Alibaba's retail platforms.
Among the 18.9 million new Internet users in China in the first half, more than 48 per cent came from rural areas, according to the China Internet Network Information Center. Alibaba's partnership with Suning will expand the company's reach in those fast-growing areas, according to Cynthia Meng, an analyst at Jefferies Hong Kong.
The deal gives Alibaba "much strengthened logistics and delivery capability, especially in lower tier markets," Ms Meng wrote in an Aug 10 report. She has a buy rating on the stock, with a price target that implies 22 per cent upside.