AliBaba overpriced, but have a look at Xiaomi – Hong Kong tech analyst

The newest Chinese sensation to hit Wall Street, online auction business AliBaba.com, yesterday became the biggest IPO in history when underwriters took up additional shares, taking its total fund raising to $25bn. AliBaba’s share price surged to 40% above the listing level and demand for the stock remains strong. In CNBC Africa Power Lunch today asked Muzhi Li of Arete Research in Hong Kong for his assessment of AliBaba’s current price and for a similar Chinese tech stock to watch. – AH

ALEC HOGG: Muzhi Li, Senior Analyst at Arete Research joins us on the line from Hong Kong to give us the insight from China of Alibaba’s global record-breaking listing with $25bn raised in the IPO. Muzhi, from the perspective of you sitting in Hong Kong, it’s a champion from your area going into the US markets. Was the reaction of American investors expected?

MUZHI LI: The deal definitely signalled a milestone for Chinese Internet stocks. But I also think there’s something significant about this. About three or four years ago, the Chinese Agricultural Bank actually broke the global IPO record and now, instead of being a State-owned enterprise backed by the Government’s resources, we now see a technology company funded by self-made entrepreneurs who bring in such records. I think this really signals that the economic growth in China has been driven by consumer economics, by private enterprise, and hopefully, will continue to be driven by the entrepreneurialism rather than crony capitalism, natural resources or real estate tycoons. I think this is a rather healthy trend.

ALEC HOGG: Indeed. From a South African perspective of course, we are very interested in what happened with Alibaba because of the relationship between Naspers and Tencent. Has there been much reaction from investors to this listing success on the Tencent share price?

MUZHI LI: Well, I’m glad you brought it up. Comparing Tencent with Alibaba: I think their business models are rather different. Tencent is a social networking company growing very big in both PC and mobile Internet. Alibaba is basically has dominance in the online shopping market in China. They are not really the same market. Increasingly, they have started penetrating into each other’s territory, which fuelled some tough competition between the two companies. In addition, when I look back at these two companies, Alibaba has been funded by foreign investors like Yahoo! and Softbank.  Tencent has been funded by South Africa’s Naspers. These two companies have a great future, from building from the synergies from working with their investors in the past. I think the two companies will continue to drive innovation and hopefully bring up shareholders value in the future.

ALEC HOGG: What about the valuations of both Alibaba and Tencent? I take the point that they have different business models, but they’re both driven by highly successful entrepreneurs. Are the valuations now reaching a level that is concerning you?

MUZHI LI: Yes, they do. Alibaba’s IPO price is $68 per share fairly valued the company. Based on my estimates 27 times of this year’s PE and 22 times next year’s PE. I think that at the issue price it was basically trading about fair value. Now the stock price has been trading roughly 35 percent above the IPO price and I think that reflects investor’s optimism of the company and of the Chinese consumer economy as well as very strong demand. Now the stock is trading at nearly 40 times PE. I think that is too high and would stay away from the stock and wait for a better entry point.

ALEC HOGG: You mentioned at the outset of this interview that you are celebrating Alibaba because it is an entrepreneurial story, rather than a crony capitalist story. Who’s in the next wave? Can you give us some companies or stocks to watch, coming out of China – also, entrepreneurially driven – that are starting to appeal?

MUZHI LI: Xiaomi Mobile Phones could be another candidate.   The Xiaomi phone has sold something like 60-million in China and growing at 200 to 300 percent year-on-year. I think it represents not on the Internet, but also the connection between the Internet of things because they not only produce for Android-based Xiaomi phones, but also TV’s and TV boxes and routers etcetera, to connect the homes/buyers all together and so it could be a big candidate in the future.

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