“I have a crush on China,” Ryan Cohen once tweeted. The Canadian meme stock investor has picked ecommerce giant Alibaba in the hope of recreating the rally he led in struggling US retailer GameStop. He has taken an undisclosed stake and is pushing for higher buybacks, disposals and growth in free cash flow.
Unfortunately for Cohen, stakeholder activism tends to be the prerogative of the government in one-party states.
His demands are logical enough. Shares in the online retailer have been depressed by state crackdowns on a sector Beijing judged too big for its boots. The stock has fallen 12 per cent in the past year alone, leaving it two-thirds below its 2020 peak. Shares trade at just 14 times forward earnings, less than a fifth of the ratio for Amazon.
Last year, Alibaba’s growth hit its slowest pace since the company’s 2014 listing. Third-quarter revenue rose just 3 per cent from a year earlier. Sales in Alibaba’s key customer management segment fell 7 per cent. Revenue in the cloud segment, which Alibaba sees as its growth engine, continued to decelerate.
Alibaba has more than $30bn in cash and equivalents. That could easily fund increases to the $25bn repurchase programme. There are few investment opportunities in the slowing local economy that would justify using the money for that purpose.
Cohen could wash his face as a passive investor. Party bosses may loosen restrictions on the tech sector in an effort to encourage lost-pandemic growth.
He is deluded if he believes US activism can work in China. First, companies such as Alibaba use a so-called “variable interest entity structure”. They set up offshore holding companies for their overseas listings. This means foreign shareholders are allowed to share profits but technically have no ownership of the underlying business.
Golden shares are the second, more important issue. A state that already calls the shots is taking small but influential stakes in companies it does not already formally control. Local internet regulators took a holding in an Alibaba unit earlier this month.
Cohen’s demands will have little sway compared with official policies.
Golden shares have broader implications for foreign investors. Expect Chinese groups to put a lower emphasis on growth, profits and shareholder returns. Social usefulness — as defined by the party — and financial stability will be higher in the mix.
Cohen has chosen the wrong country to crush on.
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