Chinese and foreign investors belong to two major controversies

Reporter Jiang Jia Dai Qin Wei Hong Kong reports

There are numerous connections between Jack Ma's private investment and the interests of Alibaba's companies. Is it a conflict or a win-win situation? Chinese and foreign investors belong to two major controversies.

"Unless the overall market valuation is lower than Tencent, I will consider buying new shares of Alibaba; because I am really not sure which acquisition interests into Jack's pocket, and which will appear in Ali's next balance sheet." Kuang Lotte, head of equity investment at BNP Paribas Asia Pacific, said that the complicated cross-shareholdings and funding sources in mergers and acquisitions once again confirm the embarrassing choice of "shareholder third" in Ma Yun's mind.

In the past year, Jack Ma has directly completed the mergers and acquisitions through its private investment vehicles in at least two acquisitions. Yunfeng Fund, co-sponsored by him, has repeatedly participated in Ali's large-scale expansion in all fields as a cooperative investor , Covering CITIC 21 century, Youku potatoes and other transactions. As for the 1.2 billion stake in Evergrande Football Club, Ma is "drink" made by the private decision. Although the share of rights and interests is not much, but private interests and corporate rights are interlinked or even "bundled", not a mature corporate governance model.

An insider close to several mergers and acquisitions (M & A) deals explained that the merger of Yunfeng Fund and other entities was mainly based on China's "weird" legal restrictions on foreign-funded enterprises. The prospectus, as a legal document, also clearly restricted Ali's right to restrict Ma benefited from his personal investment; including donating to a public fund or directly transferring his interest to Alibaba Group with the permission of the law.

On the conflict of interest, the reporter asked two Chinese-funded asset management companies in Hong Kong. One of the fund managers said Ali is no way to ensure that all of Jack's private interests will be translated into the company's book proceeds, similar to domestic tech companies controlled by other VIEs, such as Hang Seng Electronics and other financial assets.

"Alleged corporate governance issues exist in almost all US-listed Chinese stocks, with private investment vehicles and affiliate subsidiaries investing in turn to create various contractual commitments among shareholders. I do not think This will be a hidden danger, even if the use of corporate resources, will usually receive an equal return. "Another QDII fund manager who requested anonymity, said it would subscribe for new shares in Alibaba.

How to honor promises

Among the private investments that Mr Ma participated in, a huge debut of 6.5 billion yuan worth of loans from Zhejiang Lynx Technology Company was quite controversial. As a result, institutional investors were caught up in possible public-private conflicts of interest between executives such as Ali and Jack Ma .

According to the prospectus, on April 8, Alibaba Group and Xie Shih-huang reached a total of 6.5 billion yuan of all recourse loan contracts with a term of 10 years and an annual interest rate of 8%. Xie's identity is the founder and shareholder of VIE entities. Funds Used to acquire shares in China. Hsieh Shik Wong pledged his interest in the partnership and the number of shares held by the partnership as loans.

The prospectus did not disclose the name of the partnership, "21st Century Business Herald" had previously reported that the partnership is Yunxi investment, the specific entity to provide loan funds for Zhejiang Lynx Technology. Financing arrangements enable Alibaba to establish strategic cooperation with China.

"Obviously, such a huge takeover by private management can hardly be transformed into a future stake in Ali's balance sheet, and loans among shareholders may potentially take up cash flow from the company." Mr Kwong said investors Knowing that their own interests are not valued by management will require a risk discount on the offer price to make up for the lack of clarity in corporate governance.

However, the source said that neither Husqvarp Media nor Hang Seng Electronics, which was also acquired by Jack Ma Private, was a restricted list of industrial investments and therefore would not appear on listed assets. In other words, investors must recognize that the private investment made by Jack Ma and his team of associates does not actually increase the financial rights of listed companies.

In a prospectus, Ma promised to Alibaba Group Board of Directors that if Ma Ali promised to use all the legal investment vehicles, holding companies and various VIEs to further enhance the Group's commercial interests, Ma promised not to withdraw from it Any financial gain and, where law allows, enter into agreements with the Alibaba Group to transfer these proceeds in order to develop Ali's business interests in the Internet, media and telecommunications related industries.

However, the preconditions mentioned here, such as "If Ali requires" and "Where the law allows", as well as the legal effect of Jack Ma's "Promise," are still subject to some uncertainty for investors.

The aforesaid Chinese fund managers said that the synergies of similar acquisitions of China Electronics and Hang Seng Electronics are tacit. First, there is no equity relationship between the lender's domestic entity and the Cayman-incorporated Alibaba Group. However, the financial value-added services led by Hang Seng Electronics may further enhance the customer experience of its e-commerce business, making it difficult to easily quantify and calculate.

For potential conflicts of interest, Alibaba has made a risk alert in its prospectus. Within China, the directors and management of VIE, including Jack Ma, need to operate in the best interests of VIE as required by Chinese law. However, at the same time, as a director of the Alibaba Group registered in the Cayman Islands, Ma also needs to be held accountable to Alibaba shareholders under Cayman law.

In addition to direct acquisitions of private investment vehicles, Yunfeng Fund, which was founded by Jack Ma, accounted for 2% of the equity stake in the acquisition of Youku Tudou for $ 1.22 billion. In addition, Yunfeng Fund has also participated in the 21st century investment in Hong Kong listed CITIC Securities. In the transaction of HK $ 5.37 billion for the acquisition of Intime, Intime Chairman Shen Guowun and Jack Ma were the founding members of Yunfeng Fund.

The prospectus disclosed that Ma will donate all proceeds from Yunfeng Fund as a partner to Ali Public Foundation. In the risk alert, Ali said if there is a conflict between public and private interests, only to find legal proceedings under contractual arrangements.

Where does the money come from?

Although minority shareholders in Ali can not fully share the benefits of mergers and acquisitions, it is undoubtedly helpful to expect the valuation of Ali to be boosted by the industry-wide or even "over-the-top" acquisition. To Ali's financial ability, can maintain such a high-density trading rhythm? The answer is for the time being sure.

Ali on June 26 just updated the prospectus in the financial data. Among them, the most important GMV (total merchandise turnover) for e-commerce companies recorded 1.1720 trillion yuan in the 2013-2014 fiscal period ending on March 31. In the first three months of the year, the GMV increased by 46.3% over the same period of last year and the single-season 4300 One hundred million yuan is 10 times (44.1 billion) more than Jingdong, the main rival of the same period.

For Lynx and poly-sellers, Alibaba will charge GMF 3-5% to 5% if it is settled through Alipay. In the first three months of this year, Lynx GMV reached 135 billion yuan, an increase of 91%. In FY14, Alipay's total payment amounted to a staggering 623 billion U.S. dollars, or about 387.2 billion yuan, down from an average daily payment of 10.6 billion yuan.

Owing to strong free cash flow generated from operations, Alibaba still maintained a free cash flow of RMB32,246 million after the crazy mergers and acquisitions of the past year. As of March 31, the Group held a total of 436.32 cash, short-term investments and cash equivalents In addition, Ali made a profit of 24.92 billion yuan in FY14. The U.S. listing, investment bank is expected Ali will raise more than 200 billion US dollars.

"At present, China is still in the rising cycle of various segments of the Internet industry, so regardless of Ali's aggressive acquisition strategy, it will not appear in the short term investment risk.But investors can not wait for the risk appear again leave, if Ma continue to 'shareholder Third 'principle and has been involved in the main business is not related to the industry (football, etc.), the market will certainly reflect a reasonable discount on the stock price. "Kwong Lotte said.