Why Chinese language Regulators Need Alibaba to Promote Its Media Companies

Alibaba (NYSE: BABA)China’s largest e-commerce and cloud platform company could be forced to divest its media resources in the near future. China’s antitrust authorities, which opened an investigation into the tech giant in December, are reportedly concerned about their involvement in various print, broadcast, digital and social media platforms, as well as their potential impact on these outlets.

Alibaba’s media subsidiaries include the streaming video platform Youku Tudou, the film production unit Alibaba Pictures, the video game publisher Lingxi Games and UCWeb – a software subsidiary that develops a mobile browser, an online search engine and a news app. Earlier this month, the company shut down its streaming music service, Xiami, after years of slow growth.

Alibaba's campus in Hangzhou, China.

Image source: Alibaba.

However, Alibaba also holds passive holdings Weibo (NASDAQ: WB), a microblogging platform that hosts 511 million monthly active users; Bilibili 09.30 am NASDAQ: BILI, a popular Gen Z-oriented platform for anime, comics, and games; Yicai Media, one of the largest financial media companies in China; the South China Morning Post, a leading English newspaper based in Hong Kong, and several joint ventures with state-sponsored news agencies.

The Wall Street Journal claims antitrust authorities wanted Alibaba to sell its passive stakes in outside media companies instead of outsourcing its direct media subsidiaries. Let’s see how these moves could affect Alibaba and whether or not investors should prepare for more regulatory headwinds.

Another escalation of the cartel war against Alibaba

China’s antitrust investigation into Alibaba initially focused on restricting its online marketplaces, which eMarketer estimates will account for 56.6% of the country’s e-commerce market this year.

Regulators wanted Alibaba to end its exclusive deals with traders, penalizing sellers for listing their products on other marketplaces. and the use of algorithmically driven, loss-making promotions to attract new customers.

They are also interested in getting a stake in Alibaba’s fintech subsidiary Ant Group, as their core app, Alipay, has an almost duopoly relationship with the Chinese online payments market Tencent‘s (OTC: TCEHY) WeChat Pay. Ant, in which Alibaba has a 33% stake, should go public in November. However, the IPO was stopped abruptly after Jack Ma, co-founder of Alibaba and Ant, criticized the Chinese banking system.

Earlier this month, regulators began drafting their final ruling against Alibaba. The Wall Street Journal claims these demands include distancing the company from Jack Ma, aligning itself more closely with the Chinese Communist Party, ending its exclusive dealings with merchants and potentially losing some of its non-core assets.

The government will also reportedly impose a one-time fine on Alibaba that could exceed the record antitrust fine of $ 975 million it imposed Qualcomm back in 2015.

Alibaba can afford to lose its non-core assets

In the first nine months of fiscal year 2021 (ending March 31), Alibaba generated 87% of its sales from its core business segment, which includes Chinese online marketplaces, brick and mortar stores, cross-border and overseas marketplaces, and its logistics subsidiary Cainiao.

A puzzle of an ascending diagram that is put together.

Image source: Getty Images.

The trading segment is also Alibaba’s only profitable business unit, and its profits regularly subsidize the growth of its unprofitable cloud, digital media and entertainment businesses and innovation initiatives.

Of these three non-core businesses, Alibaba Cloud, which according to Canalys controls over 40% of the Chinese cloud infrastructure market, is the most important. Revenue in the first nine months of fiscal 2021 increased 56% year over year and accounted for 8% of revenue. It also became profitable on an adjusted EBITA basis in the third quarter, but still unprofitable on a GAAP basis.

Alibaba’s digital media and entertainment business, which includes direct media subsidiaries such as Youku Tudou, UC and Lingxi, only generated 4% of its sales and remains unprofitable. Regulators are unlikely to force Alibaba to sell these holdings – which it has amassed over the years to expand its moat against Tencent. Baiduand other tech giants – but it can easily afford to shed the entire unit.

However, China’s antitrust authorities appear primarily interested in separating popular media platforms like Weibo, Bilibili, Yicai and the South China Morning Post from Alibaba, presumably to dilute the tech giant’s alleged influence on online news and social media platforms. and digital displays.

Alibaba’s net income and interest across its investment portfolio accounted for 42% of net income before tax for the first nine months of fiscal 2021. However, this total includes investments in all business areas including the core business area and the business area. Passive investments in media companies are likely to be a tiny fraction of this total.

Alibaba does not disclose the value of this sliver, but its combined stakes in the publicly traded companies on this list are only worth about $ 8 billion, or 1% of its market cap. Hence, giving up all of these media resources would not materially affect Alibaba.

However, be aware of the other risks

Alibaba stock may look like a bargain today with only 19x futures earnings, but it’s cheap for obvious reasons. The oppressive regulatory pressure could continue for the foreseeable future and help the two biggest competitors – JD.com and Pinduoduo – gain ground. Regulators are also setting a cap on Alibaba’s long-term growth, suggesting that the risks will ultimately outweigh the potential benefits.

This article represents the opinion of the author who may disagree with the “official” referral position of a Motley Fool Premium Consulting Service. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

Comments are closed.