Jack Ma founded Alibaba in his one-room apartment in Hangzhou ; Alibaba, whose profits have surged to almost $3bn, looks like the holy grail of the technology market

Alibaba is a rare thing – a tech company worth its valuation

Alibaba, whose profits have surged to almost $3bn, looks like the holy grail of the technology market

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Jack Ma founded Alibaba in his one-room apartment in Hangzhou

By Katherine Rushton

8:47PM GMT 17 Mar 2014

In the sunny sprawl of Silicon Valley, tales of billion dollar companies are familiar.

The rapid growth of Facebook, Google, eBay and Twitter has created thousands of millionaires, trillions of dollars of business and turned their founders into celebrities on a par with Hollywood A-listers.

Their paths to success are pored over with an almost cult-like devotion. Everyone knows the story of how Mark Zuckerberg founded Facebook in his dorm room, for example. Or how Larry Page and Sergey Brin mapped out their plans for Google in a rented garage in Menlo Park.

But more than 6,000 miles away in China is a technology company many in Silicon Valley have barely heard of, and whose founder they could not name. Yet this company’s initial public offering later this year is likely to overshadow any flotation the sunny California enclave has ever delivered.

Alibaba, the e-commerce business, confirmed on Sunday that it is preparing to float in New York, in what analysts predict will be the biggest initial public offering the technology industry – and possibly the world – has ever seen.

The 15-year-old business has not set a date, let alone declared its target range, but analysts expect it to offer between $15bn and $20bn at its IPO, handing it a valuation of as much as $150bn. At that scale, it would dwarf Facebook’s flotation, which ranked as the biggest technology IPO in history in 2011, when it raised $16bn and valued the social network at $104bn. It could even surpass the Visa’s 2008 listing, in which the payments giant raised a record $17.9bn.

Unsurprisingly, New York battled long and hard to secure Alibaba’s business. It is expected to bring in around $1.1bn in underwriting, legal and trading fees, according to Privco, a US analysis firm, at the same time as cementing America’s status as the most importance finance centre in the world.

It is quite a coup that America won. During an extensive courtship, Alibaba was also under considerable pressure to list on the Hong Kong Stock Exchange – a move which would have helped to boost China’s standing in that global pecking order, and made it easy for Alibaba to court investors who are already familiar with the company’s standing in Asia.

However, New York won because it assured Alibaba’s management team more power. The US allows a dual-class share structure, which in turn enables Alibaba to preserve its “partnership scheme”, under which 28 senior figures nominate the majority of directors to Alibaba’s board. Doing so will help the company safeguard its “mission, vision and values” without succumbing to the “temptation of short term gains,” the company’s founder, Jack Ma, has said in the past.

But it will also shine a bright light on a company, which has hitherto gone largely unnoticed by the Western world.

When Mr Ma founded Alibaba, in his one-room apartment in Hangzhou, it was essentially a listings service that offered to connect small Chinese enterprises to potential business clients. The former English teacher hired a dozen or so workers who, according to one interview last year, would try to answer queries from American corporate customers without letting on that they were Chinese.

The company has since evolved into a very different beast, employing 26,000 people around the world, largely focused on ecommerce. Alibaba’s Tmall business allows companies to sell goods directly to the public, like Amazon, while its Taobao business enables members of the public to sell to each other, rather like eBay. More than 500m people use the platform each year, paying for digital bells and whistles to make their listings stand out.

It’s big business. But the figures are expected to soar even higher. China’s online shopping industry is likely to triple to more than $300bn by mid-2018, according to Euromonitor, making it the largest ecommerce market in the world, as customers use their smartphones to buy everything from clothes to concert tickets. Alibaba has a 45pc slice of this pie. In 2012, more than 1.1 trillion yuan (£107bn) worth of goods were sold through the platforms in 2012 – more than Amazon and eBay combined.

That year, the company nearly doubled its turnover to $4.1bn. Last year, PrivCo calculates that its revenues jumped again to around $6.7bn. Meanwhile, net profits are thought to have surged more than six-fold from $536m to $2.8bn. Those sorts of figures look all the more impressive when you take into account the kind of valuations attached to some of the Silicon Valley companies that have listed in recent years.

Facebook clocked up an impressive $523m in profits in the fourth quarter, but that figure looks paltry next to its $175bn market capitalisation. Twitter is valued at $28.3bn, despite the fact it loses money.

Alibaba’s performance has “been nothing short of stunning”, says Sam Hamadeh, founder of PrivCo. “Sustained revenue growth and robust margins make the company the holy grail of a play on the Chinese market.”

Even that is an understatement. Alibaba looks rather like the holy grail of the technology market full stop. Silicon Valley’s entrepreneurs might not know a great deal about Alibaba’s story right now, but that will change once its IPO hoopla enters full swing. Mr Ma is a very different kind of hero than the hoodied founders of Facebook, but his track record could be enough to make America’s West Coast look East.

 

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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