E-COMMERCE: Alibaba Stock Under Siege, Financial Unit Raises Funds

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Bottom line: Alibaba’s shares and Ant Financial’s new fund-raising plans will come under pressure if China’s stock markets enter a new correction, a possibility that looks high in the current environment.

China sell-off pressures Alibaba shares

E-commerce giant Alibaba (NYSE: BABA) is facing several new challenges as we head into 2016, led by a big drop in its stock on the first trading day of the year after China’s domestic stock markets plunged 7 percent. The 5.6 percent drop in Alibaba’s stock in New York on Monday wiped out around $10 billion in market value, as investors worried that US-listed Chinese stocks could get infected by a potential a new correction on China’s stock markets.

In separate headlines, Alibaba-affiliated Ant Financial is reportedly back in the market to raise at least $1.5 billion, in the run-up to a potential IPO as soon as later this year. That figure looks quite large, and I’ve previously said we’re unlikely to see many private fund-raising rounds of that size this year. But the figure is actually down quite a bit from Ant’s only other fund raising last July, reflecting growing caution from investors worried about China’s slowing economy.

Both of these stories reflect the broader situation for many Chinese companies, which could face strong headwinds in the year ahead as the nation’s economy slows sharply. Such a slowdown will inevitably hit China’s domestic stock markets, which have rallied over the last few months despite growing signs that the downturn could be quite painful. That same slowdown should also dampen sentiment among private investors, meaning fund-raising could be more difficult in the year ahead.

Most US-listed Chinese companies fell on the first trading day of the year, following the rout that saw China’s stock indexes tumble by their newly introduced 7 percent daily limit. While Alibaba certainly wasn’t alone in the sell-off, its shares were among the hardest hit among major US-listed Chinese companies. Among the big names , only e-commerce rival JD.com (Nasdaq: JD) was down by more, tumbling 8.5 percent.

Billionaire Investor Sells Shares

The big sell-off comes just a week after media reported that Russian billionaire investor Alisher Usmanov had begun selling down his Alibaba holdings after making healthy returns on his investments. (English article) Alibaba’s shares took a similar hit last year after US billionaire investor George Soros sold off his shares in the company.

It’s not clear how many shares Usmanov owned, and Soros was said to hold only a small stake at the time of his sale. But both men are known for their financial savvy, and many fund managers often take their cues from this kind of buying and selling decision. In this case I do think that Alibaba’s shares could face more downside if China’s domestic stock markets continue to sink. That’s a scenario that looks quite likely, since many Chinese shares are currently quite overvalued after a recent rally that had no foundation in reality.

Next there’s Ant Financial, which is speaking to a wide range of investors as it undertakes what could become its final round of new financing before an IPO. (English article) The source who disclosed the talks only gave the lower-end target of $1.5 billion, so it’s quite possible we could see the company raise significantly more. But that figure also represents Ant’s best realistic prediction of the minimum amount it thinks it can raise.

The new target contrasts with the 13 billion yuan ($2 billion) that Ant raised last July in its first-ever fund-raising, which came mostly from large domestic institutional investors. Thus the low end of this new target is about 25 percent lower than the earlier funding, an unusual trend in financial markets where new funding rounds are typically larger than previous ones. Much will depend on how China’s domestic stock markets perform over the next couple of weeks. But a new sell-off will put more pressure on Alibaba’s stock and also pressure Ant’s fund-raising targets and IPO plans.

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