Another Gorilla – This time a Chinese one – growls

Alibaba comes out with its public issue at $ 60 – 63 / share. At the upper end of the price band, Alibaba would have a market cap of $ 160 bln +. With the promoter, Jack Ma holding ~ 10% stake, his networth would equal ~ $ 16 bln. This is simply wow, considering that co. was established in only 1999.

Some Alibaba stats;

– GMV – $ 300 bln (50% share in the Chinese market)

– Revenues – $ 9 bln

– Profits – $ 5 bln

– PAT % – 55%

– ROIC – 20%

Seems like a highly profitable enterprise, may be this has much to do with the business model that it follows, i.e. the market place model. It essentially acts as a platform to bring together buyers/sells. Much like the equity / commodity exchanges and other platforms. Now, this is different from the other ecommerce model, i.e. the merchant model whereby the company takes care of the logistics and warehousing too. But this comes at a cost, as it is a low margin business due to the increased costs. Desi Flipkart, follows this model. Amazon.com of US follows this particular whereas EBay follows the marketplace model. So no one model seems to be superior, one is a high volume low value whereas the other is a low volume high value.

Valuation: At the upper end of the price band, Alibaba would be trading at 33x FY14 EPS. Now, 33x in for a fast growing internet co. is not much, infact its cheap. So, whats it that we might be missing. FT has this . Essentially, the ADS holders would get shares in a holding co. which in turn has holdings in subsidiaries which in turn has holdings in various operating cos. who have cross holdings in certain “variable interest entities” who crucially control the government liscenses and payment platform, Alipay. These are ultimately controlled by Ma and Xie. This explains the discount.

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