In the 2020s it is likely China will emerge as the world’s largest economy. There are close to 1.4 billion people in China and the country has been growing at alarming rates. GDP growth rate averages around 6-8%; more than 3x that of the U.S. In addition, the country has a burgeoning middle class and a government intent on doing whatever it takes to strengthen the nation. This includes low corporate taxes, cheap labor, technological investments, and currency manipulation. They even go so far as to publish political propaganda through state-run media. China is also responsible for the Covid-19 pandemic. In any case, it’s necessary to get some exposure to this growing, yet controversial market.
Alibaba Group is an ecommerce company that operates mostly in China. It is the largest ecommerce business in the world. One way to describe this company is the Chinese Amazon. Like its U.S. counterpart revenue has been growing rapidly; nearly 700% in 6 years. Earnings have also increased substantially. Alibaba does however have a much more reasonable P/E ratio, hovering around 25-30 over the past several years. In the near term, the ecommerce business has already recovered from the pandemic. And like Amazon, the cloud computing segment is expanding dramatically. Alibaba also continues to move into international markets.
The company recently dipped, so I began averaging down. Reason being, the Chinese Communist Party is looking into antitrust violations. There is talk that the company might be broken up. This doesn’t necessarily mean doom and gloom. Even if this were to take place, breakups sometimes have the benefit of adding value. A perfect example of this was the recent split of United Technologies, formerly UTX. The Chinese Central Bank recently ordered Ant Group (an Alibaba subsidiary) to halt its expansion into adjacent businesses. The question remains whether or not the CCP will continue to crack down on big tech. This is certainly a risk but not a deal breaker for access to one of the world’s most lucrative markets.
Like any other business, there’s risk involved. In this case the biggest threat is unwanted CCP intervention in the business. In the United States big tech has been largely untouched. They have cozy relationships with U.S. regulators, the media, and many politicians. In China, Jack Ma, the founder of Alibaba recently made critical statements about CCP policy. Any criticism of the one-party state is met with significant backlash. Therefore, investors need to monitor this situation careful. As I mentioned earlier, given the state of the U.S., I believe its important to diversify internationally. And although China is an adversary, it offers was of the most lucrative growth markets in the world.
I am long on BABA. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.
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