Alibaba Profit Growth Boosts China Internet Valuations

"Investors are driving up valuations on Chinese Internet companies as an almost threefold surge in Alibaba Group Holding Ltd. (BABA)’s profits buoyed the earnings outlook for the industry.

Online companies includingVipshop Holdings Ltd. (VIPS), a fashion retailer, and YY Inc. (YY), a social entertainment website, have led gains this year on the Bloomberg China-US Equity Index. The gauge, with about half of its members focused on web business, trades at 18 times forward earnings, near a four-year high reached July 28 and up from a multiple of 11 in February.

Investor confidence is growing in companies that provide online services to the world’s largest pool of Internet users -- some 632 million people -- after Alibaba said in June that net income rose to about 23.1 billion yuan ($3.7 billion) in the 12 months through March from 8.4 billion yuan a year earlier. Alibaba,China’s largest e-commerce operator, is preparing its U.S. listing in a deal that analysts estimate may value the company at $198 billion, three times what it was in May last year.

“The surge in Alibaba’s valuation along with its booming sales and profit help bring people’s attention to the quick growth in China’s Internet sector and its potential,” Tan Chiheng, an analyst at Granite Point Capital Inc., which invests in Chinese equities, said by phone from Boston. “The giant has made quite a few acquisitions that have lifted the targets’ valuations. More mobile-focused web companies can become buying targets.”

Alibaba’s profit soared as sales jumped with shopping promotions and new acquisitions bolstering mobile services. The Hangzhou-based company said in a filing for its initial public offering that it will make investments and acquisitions in areas of mobile, digital media and logistics after announcing 26 deals worth $16 billion since the start of 2012, for companies ranging from online mapping and video to web browsers.

Companies in the KraneShares CSI China Internet Fund (KWEB), an exchange-traded fund that tracks web companies with listings abroad, boosted sales by 41 percent and earnings by 30 percent on average in the first quarter, compared with sales growth of 19 percent and 24 percent profit increase for U.S. web-focused companies, according to Brendan Ahern, managing director at New York-based Krane Fund Advisors LLC. The ETF has rallied 16 percent in 2014.

Sales Surge

Guangzhou-based Vipshop’s net income surged fourfold in the first quarter this year as sales jumped 126 percent to $701.9 million. YY, also based in Guangzhou, said profit rose 139 percent in the April-June period while revenue doubled to $135.6 million.

“The Internet is picking up momentum in China, the population is vast and the language, regulation and cultural barriers have made it good for local companies,” Gustavo Galindo, senior emerging markets portfolio manager at Russell Investments, said by e-mail Aug. 1.

While Chinese Internet company shares have done “tremendously well,” the prices may not reflect the risk that more and more mergers and acquisitions make differentiation more difficult, according to Devan Kaloo, head of global emerging markets at Aberdeen Asset Management Plc.

Margin Compression

“The boundary between Internet companies is blurred,” Kaloo said in an interview at Bloomberg’s headquarters in New York on Aug. 6. “They are going to fight each other out. That means there potentially a big risk to margin compression because of that.”

SOURCE: BLOOMBERG

   In a complacent market it is always prudent to take a cautious approach,and  a measured risk. 

China Loosens Monetary Conditions in Test of Credit Power

Bloomberg’s new China Monetary Conditions Index -- a weighted average of loan growth, real interest rates and China’s real effective exchange rate -- rose 6.71 points to 82.81 in the second quarter from the previous three months. That’s the biggest jump since the July-September period of 2012, with May and June’s numbers the first back-to-back readings above 80 since January 2012.

New yuan loans in July will be a record high for that month, according to a Bloomberg News survey of analysts before data due by Aug. 15, suggesting officials are keeping the credit spigot open even as debt risks mount. While consumer inflation below the government’s goal allows room for more easing, economic data will determine how far policy makers go.

“The central bank worries more about inflation and financial risks, but the government is worried more about growth and employment,” said Ding Shuang, senior China economist at Citigroup Inc. (C) in Hong Kong. “Growth will rebound in the second half, so that will give the central bank some support in not expanding credit and liquidity further.”

Each $1 in new credit added the equivalent of an extra 20 cents in GDP in the first half of 2014, according to data compiled by Bloomberg. That compares with 29 cents in full-year 2012 and 2013 and 83 cents in 2007, when global money markets began to freeze.

Inflation figures released Aug. 9 suggest monetary easing has yet to trigger price gains in the broader economy. The consumer price index rose 2.3 percent in July from a year earlier, the same pace as in June and below the government’s 3.5 percent target. The producer price index fell 0.9 percent, the 29th straight decline.

Bloomberg’s monetary index was introduced in July, with the data series compiled back to 2003. The gauge peaked at 148.02 in November 2009 amid China’s 4 trillion-yuan stimulus plan during the global financial crisis.

This index gives you a handy one-shot explanation of what China’s doing on its monetary policy and its relationship with growth,” said Fielding Chen, a Bloomberg economist in Hong Kong who created the gauge. “It’s showing us that the current pickup in growth momentum, which is likely to be a little stronger in the coming few months, is underpinned by accommodative monetary conditions.”

While economic expansion picked up to 7.5 percent in the April-June period from a year earlier, growth in the third and fourth quarters will dip back to 7.4 percent, according to median estimates in Bloomberg News surveys of analysts.

Data due Aug. 13 from the statistics bureau will provide more indications of the impact of Li’s easing. Industrial output growth in July kept pace with June’s 9.2 percent gain, which was the biggest for a single month since December, while growth in fixed-asset investment excluding rural households picked up to 17.4 percent in the first seven months, according to Bloomberg News surveys.

Total debt reached 251 percent of gross domestic product as of June, up from 234 percent in 2013 and 160 percent in 2008, according to Standard Chartered estimates. Bad loans at China’s commercial banks rose to 1.08 percent of total lending at the end of June, the highest in three years, government data show.

“The government set the growth target at 7.5 percent and they want to keep their promise, so they are prepared to keep policy accommodative even at the cost of rising leverage,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “But they are very likely to lower the target next year -- China just can’t grow at 7.5 percent without government stimulus and without adding leverage.”

Source: Bloomberg

Alibaba Cleans Up 'Gray Market' for Some Prestigious Brands

   The WSJ reports,"Chinese e-commerce company Alibaba Group Holding Ltd. is rolling out a powerful new incentive to attract luxury brands: removing some listings from its online shopping sites.

Like many premium brands, Burberry  PLC had been fretting about a flood of discount Burberry products—some of them fakes—on Alibaba's two big marketplaces, which accounted for 80% of China's estimated $300 billion in online shopping last year. Burberry hadn't authorized any of those vendors to sell its goods.

Alibaba would do its best to get those products off its sites if Burberry opened its own shop on Alibaba's online mall, Burberry was told, according to people familiar with the talks. Burberry opened a store on Alibaba's Tmall in April.

Interviews with nearly three dozen sellers, brands and analysts indicate that Alibaba has recently taken similar steps for other high-profile Western brands, including Estée Lauder

 Cos., hoping they would embrace Tmall, China's main online venue for big brands. Alibaba has promised that once they open their own stores, it will purge goods sold on Tmall by retailers not authorized by the brands or do more to fight fakes on Taobao, Alibaba's online huge online bazaar, according to people familiar with the matter.

Alibaba has been eager to woo high-end brands ahead of a listing on the New York Stock Exchange that is expected to be one of the largest initial public offerings in U.S. history. The presence of luxury brands lends a luster that can draw shoppers, other brands and potentially investors.

Alibaba told many shops on its sites that they had to stop selling the U.K. brand's products. It blocked some stores from posting Burberry items, and checked more frequently to make sure vendors weren't using Burberry copyrighted images, sellers said.

"Tmall is having a change of strategy," said Vincent Wong, chairman of Hong Kong-based Pompei Holdings Ltd., which specializes in selling luxury items at discounted prices and was told to pull Burberry-branded goods from its Tmall shop. "When a global brand opens its store, we are not allowed to display that brand."

Alibaba's offer to crack down on gray-market goods for brands that open Tmall stores provides a powerful incentive for brands to join the site, said Scott Galloway, chief executive of L2 Inc., a New York-based research firm. Alibaba's websites are a door to China's 300 million online shoppers. In 2012, the combined transaction volume of Taobao and Tmall topped one trillion yuan, or about $160 billion, more than Amazon.com and eBay combined.

Alibaba's intervention can be extremely effective.

Nearly four dozen Tmall shops sold Estée Lauder beauty products earlier this year. But around the time Estée Lauder opened its Tmall store in May, all third-party products had vanished, according to YipitData. Estée Lauder's opening also benefited its sister brand, Clinique, which had opened a Tmall shop last year: All third-party sales of Clinique products also disappeared from the site in May.

In contrast, the number of third-party vendors selling products from Gucci, which doesn't have a Tmall store, rose to 69 in June from 63 in April. Third-party vendors of Giorgio Armani SpA and Ralph Lauren Corp.  —two other brands without a Tmall store—also increased. Gucci and Ralph Lauren declined to comment. An Armani spokesman said the company "engages in various activities around the world to protect [its brands'] integrity," but isn't commenting on the situation in China.

In July, Gucci, Yves Saint Laurent and other luxury brands under Kering SAKER.FR -0.66% filed suit against Alibaba, saying that the Internet company's shopping, marketing and payment platforms "knowingly make it possible for an army of counterfeiters to sell their illegal wares." Two weeks later, the luxury brands withdrew their claims against Alibaba, saying in a joint statement with Alibaba that the parties had "agreed to work together in good faith. to further reduce counterfeiting of Kering brands."

Alibaba declined to comment on its dealings with luxury brands. Burberry referred to its April news release, saying that the Tmall store offers the "purest articulation of the Burberry brand on any of the Alibaba platforms to date." A spokeswoman for Estée Lauder said the brand was "pleased with our relationship with Tmall China thus far and look forward to continuing to expand this relationship.''

Brands also have complained about counterfeits on Alibaba's other website, Taobao, an online bazaar with eight million sellers offering 800 million products. Alibaba has stepped up efforts to deal with the issue, and in the past has signed agreements with Coach Inc.COH +5.43% and LVMH Moët Hennessy Louis Vuitton SA, among others, to crack down on fakes.

People familiar with Alibaba's marketplaces said its efforts to eliminate unauthorized sellers while recruiting brands to Tmall have intensified in recent months.

In December, Alibaba signed an agreement with the British government and said it would remove gray-market products for U.K. brands that opened official shops on Tmall, according to a spokesman for the country's Trade & Investment division. The French and Italian governments have also signed agreements with Alibaba, but haven't said whether Tmall promised to clear gray-market goods.

Some Western mass-market brands that already had Tmall shops, such as Nike Inc.NKE +0.93% and New Balance Athletic Shoe Inc. also are starting to see gray-market goods cleared away, according to YipitData. That pushes more sales to their official stores.

In April, 12.6% of Nike athletic shoes sales on Tmall came from the brand's flagship store. That percentage had nearly doubled by July, according to YipitData.

Nike said the brand has devoted "considerable resources" to fighting gray-market goods offline and online, including working with Tmall to address the issue.

Dan McKinnon, senior counsel of trademarks and global brand protection at New Balance, said the company has spoken to Alibaba "many times" about its concerns about gray-market goods and counterfeits on its shopping platforms. This year, the company noticed fewer gray-market New Balance shoes on Tmall, he said. The percentage of New Balance sales on the site coming from the brand's store climbed to 69% from 57% between April and July.

Analysts said it may be harder for Alibaba to crack down on unauthorized sales for things like sneakers, since unlike the luxury firms, mass-market brands often have authorized distributors on Tmall, making it harder to winnow out the problem shops. Doing so might also hurt Tmall's sales and traffic.

"They need to clean their ecosystem to please the highest-end brands, but on the other hand, the counterfeit and gray-market goods generate a good amount of sales," said Alex Misseri, head of e-commerce at digital-consulting firm Razorfish.

For the gray-market vendors, the selective bans on sales of some brands has been frustrating.

"In an ideal scenario, they don't want people like us, they want the brand owners," Mr. Wong said. "They allow people like us because it generates sales and demand."