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To the margins of the Alibaba IPO

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risk_2 May 7, 2014 (Chinavestor) Chinese e-commerce website, Alibaba, is going to go public in the US via an IPO. The size of the IPO is potentially bigger than that of Facebook (NASDAQ:FB). Most of the excitement is about prospect of such a big company in such a big market, but I want to remind investors that devil is always in the details.

Investors should not make a mistake that something is going to be successful just because it operates in a vast Chinese market. Sure, China has 1.3 billion people and it's a closed market, hard to penetrate. This would give Alibaba a huge initial advantage. True. However investors have to remember that what works in China will most likely not work outside of China. Youtube's market share is not threatened by Youku Tudou (NYSE:YOKU), the Chinese video sharing portal. Google's dominance is not threatened by Baidu's (NASDAQ:BIDU) dominance in China. Facebook's market share is independent from that of  RenRen (NYSE:RENN). And so on. The point is that even the most successful Chinese online ventures have no impact outside of China. This line of logic leads us to believe that chances are slim that Alibaba will be a global leader in online retailing.

Another important factor when it comes to China is transparency. Chinese companies have earned a horrendous reputation lately when it comes to corporate governance, and for a good reason. The SEC finally clamped down on Chinese listings in 2012 after the lion share of Chinese issues turned to be fake at best. Most of these companies got listed via reverse merger, a lot less transparent process that an IPO. So the SEC went as far as not accepting audits from even Chinese subsidiaries of the big four  - KPMG, PWC and the likes. They want US companies to audit Chinese firms.

In Alibaba's case, lack of transparency means that most of the numbers are coming from China. How reliable those numbers are? That is a very good question. So when a company says that it generated so and so traffic/sales/profits, investors should ask themselves a question: how do I know what they say is true?

And finally, Alibaba became so successful partially because it was the first e-commerce site. So they captured the lion share of the market. But the company has been loosing market share and the question is how much of a future Alibaba really has.

The following quote from Yahoo Finance highlights my biggest concern when it comes to transparency : "Alibaba said China's mobile Internet arena, where it is battling Tencent Holdings for supremacy, is the next growth industry. China will have an estimated 750 million mobile Internet users by 2017, according to data from China-based consultancy iResearch." See the last part of the sentence? According to data from iResearch. Who is iResearch?

This is where everything else is just speculation. We have NO reliable data bout Alibaba and the more we know, the less attractive it is. Investor, be extremely careful!

 



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