Alibaba’s Online Land Grab

FEBRUARY 11, 2014, 11:26 AM  Comment

Alibaba’s Online Land Grab

By ROBYN MAK and JOHN FOLEY

Alibaba’s purchase of AutoNavi is a land grab, in two senses.

The Chinese e-commerce group has offered a premium price to buy the 72 percent of AutoNavi, a mapping company listed in the United States, it doesn’t already own, valuing the whole thing at $1.6 billion. There’s a compelling competitive reason for Alibaba to get deeper into online maps, but what’s hard to locate is the financial rationale.

One driver of the deal is keeping up with the Joneses. Baidu, China’s leading search engine and a rival of Alibaba’s, is also the country’s dominant online mapper – its map-apps account for 35 percent of total downloads, according to research by T. H. Capital. Tencent, the third member of China’s Internet oligopoly, is far behind, but its chatting app WeChat is rapidly branching into location-based services, posing a potential e-commerce threat.

Buying AutoNavi also plugs into the growing mania for O2O commerce – online-to-offline. The theory is that consumers will increasingly use smartphones to point them to nearby services and shops, or even preorder from restaurants online, all of which benefit from detailed mapping. In Alibaba’s case, there’s also an opportunity to weave in its fast-growing payment and financial service, Alipay.

What doesn’t appear on the plan is strong financial logic. It’s plausible that AutoNavi might be worth more with the backing of a cash-rich Internet giant. Competition is fierce, and AutoNavi’s revenue, which comes partly from making in-car navigation systems, is starting to decline.

But Alibaba is valuing AutoNavi at around five times forecast revenue for 2014 according to Eikon estimates – and a 39 percent premium to AutoNavi’s 10-day average trading price – for a business that analysts estimate will swing from a small operating profit to a $46 million loss this year. Expanding O2O services sounds exciting, but it’s not clear if it will translate into incrementaladvertising revenue.

China’s Internet continues to grow rapidly, but such concerns are remote. Alibaba is paying for AutoNavi in cash, and the additional $1.2 billion payment is small for a company that is likely to command a market capitalization of more than 100 times that if a long-awaited listing takes place in 2014. As long as grabbing market share is the priority, questions about return on investment can be easily buried.

Robyn Mak is a research assistant and John Foley is China Editor for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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