Alibaba Group's operating margin shrank to 31 per cent in the last quarter from a year earlier. Reuters
Alibaba Group's operating margin shrank to 31 per cent in the last quarter from a year earlier. Reuters
Alibaba Group's operating margin shrank to 31 per cent in the last quarter from a year earlier. Reuters
Alibaba Group's operating margin shrank to 31 per cent in the last quarter from a year earlier. Reuters

Business

Alibaba market value tumbles $30bn after margins decline

Shares in e-commerce giant fell 5.9 per cent in New York trading, the sharpest drop since June 2016

Sarah Townsend

February 02, 2018

  • English
  • Arabic

Alibaba Group Holding’s shares fell the most in 18 months and cut its market valuation by about $30 billion after investments in bricks-and-mortar assets and digital media squeezed profit margins in the December quarter.

The Chinese e-commerce giant reported revenue that topped analyst estimates and raised its growth forecast for the 12 months ending in March to 55 to 56 per cent. But operating margin shrank to 31 per cent in the last quarter from 39 per cent a year earlier. Shares fell 5.9 per cent in New York trading, the sharpest decline since June 2016.

Alibaba will also buy 33 per cent of Ant Financial, helping to clear the way for an initial public offering of the Chinese payments giant. While no cash is changing hands, Ant Financial will end royalty payments to Alibaba that were worth more than $300m last fiscal year.

Alibaba has not held a stake in the owner of Alipay since founder Jack Ma controversially spun out the business in 2011.

Ant Financial has had a string of recent setbacks, with its US expansion thwarted by the collapse of a deal for MoneyGram International while its Chinese business faces greater scrutiny from regulators and increased competition from Tencent Holdings.

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“This acquisition of Ant Financial’s stake could be a preparation for its potential IPO,” said Steven Zhu, a Shanghai-based analyst with Pacific Epoch.

Formally known as Zhejiang Ant Small & Micro Financial Services Group Co, Ant Financial operates Alipay as well as money market funds and credit scoring. It’s based in Hangzhou, China, the same hometown as Alibaba.

Once dominant in China, Alipay’s share of online payments in the country has slumped to 54 per cent as of the end of September amid the rise of Tencent’s WeChat platform, according to research firm Analysys International. Chief financial officer Maggie Wu said on a conference call that investors should not equate lower margins with lower profits, as the overall business is growing.

“We are making the pie much bigger,” she said. “60 per cent of an apple compared with 40 per cent of a watermelon, which one do you want?"

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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