How Alibaba brought fabulous profits to investors

In the current reading, Alibaba is a fairy tale about a poor and poorly educated translator from Hangzhou who overnight became the richest man in China, and his company became one of the largest in the world. Among those who believed in this story were wealthy Russians: they attended the feast, drank mead and beer, and received almost a thousand percent of the profit.

By ringing the New York Stock Exchange bell, Jack Ma announced the most anticipated IPO of the year.
Photo: Mark Lennihan, AP

EVGENY SIGAL

On September 19, a new record was set on the New York Stock Exchange: the Chinese Internet giant Alibaba Group placed shares at the highest price in the history of the stock market. The company expected to raise $21.8 billion, but the demand for its shares was so high that participating banks began to sell the options due to them, as a result, the placement volume grew to a record $25 billion. Previously, in the entire history of the markets, the $20 billion threshold for share placements had been exceeded only three companies - General Motors, the Chinese bank ICBC and the Chinese Agricultural Bank.

The rally continued. On the first day of trading, Alibaba Group's share price soared by almost 40%, from $68 to $94, and the company's capitalization reached $231.4 billion. This is three and a half times more than the capitalization of its main competitor ebay.com ($66 billion), and one and a half times more than Amazon.com ($150 billion). In terms of capitalization, Alibaba Group entered the top twenty largest global companies, surpassing Chevron, Facebook, P&G and GP Morgan.

The founder of the company, Ma Yun (he owns 8.8% of the shares), became the richest person in China in one day. The Bloomberg Billionaires Index estimates his wealth at $21.9 billion.

Translator from Hangzhou

Life did not foretell anything like this for a man born in 1964 into a poor family in the city of Hangzhou. A small town in Eastern China did not have its own university, and after graduating from school (not too brilliantly - the teachers considered him a hooligan and a poor student), Ma Yun went to enter Peking University. We must give the young man his due, he had ambitions: having received 1 point out of 100 in the mathematics exam, he tried again the following year - but again without success.

Ma Yun returned to his native Hangzhou and entered a pedagogical school. He trained as an English teacher and went to work at the Institute of Electronic Industry. The salary was meager (less than 100 yuan), Ma Yun had difficulty making ends meet. He worked part-time as a translator, then got a job as an assistant manager at a chain of fast food restaurants.

In 1992, Ma Yun and his friends opened a private translation agency, but the business did not go well, his partners left him, and he was forced to engage in trade in addition to translations for several years. He traded whatever he had to - clothes, medicines, souvenirs, and it turned out that Ma Yun was good at selling. And in 1995 he went to the USA and discovered the Internet. This turned his life upside down. Ma Yun posted an advertisement about his translation agency on the Internet and within a few hours received a dozen orders for translation. Upon returning to China, he borrowed several thousand dollars from friends and launched the China Yellow Pages website, which became the first business information resource and online directory in the Middle Kingdom. The site made money from advertising revenue.

At the same time, Ma Yun was toying with the idea of creating a unified online trading platform aimed at small and medium-sized businesses. China was entering a period of industrial boom, Chinese goods were flooding the world, and Ma Yun decided to create a platform where manufacturers and buyers could meet. And in 1998, one of the main meetings in Ma Yun’s life took place: he met the co-founder of Yahoo! Jerry Yang, and later Yahoo! will become the largest shareholder of Alibaba Group.

In 1999, Ma Yun, together with seventeen partners, raised $60 thousand and created the website alibaba.com. As planned, the site operated on a b2b model. It was created practically on the knees, in a rented one-room apartment, because every dollar counted. However, the situation soon changed: the American investment bank Goldman Sachs invested $5 million in alibaba.com. And in 2000, the Japanese telecommunications company Softbank invested $20 million in exchange for a 32% stake. That is, a year after its creation, Alibaba was already valued at $60 million. After the IPO, Softbank’s share is estimated at almost $74.2 billion.

Alibaba.com began to make a profit within three years of its creation. And Ma Yun, who by that time was increasingly called Jack Ma in the Western manner, decided to create a b2c project - focused not on business, but on individuals. To do this, in 2002 he created the online platform Taobao.com. The number of users increased exponentially, and three years later Yahoo! bought 44% of the group's shares for $1 billion. The amount is fabulous for a Chinese startup: the deal was carried out based on an valuation of $2.3 billion for the company. However, by the time of the IPO, the share of Yahoo! decreased to 24%, since in 2012 Alibaba Group bought back its shares from the American search engine: 20% was bought for $8 billion, and the company itself was valued at $40 billion. And the remaining from Yahoo! the package after the IPO is estimated at $55.7 billion.

However, Jack Ma did not stop there. In 2010, he created the Tmail platform, which helps foreign companies sell clothing and accessories from high-end European and American brands in China. And the site aliexpress.com, which allows Chinese manufacturers to sell their clothes around the world to both end consumers and resellers. Now the Alibaba Group unites several e-commerce platforms, its services are used by almost 300 million people in China alone, and it accounts for over 80% of e-commerce turnover in the country. In 2013, the Financial Times declared Jack Ma Person of the Year. And after the IPO, Alibaba Group became the world's largest e-commerce company.

Russian businessmen also made money from the Alibaba Group IPO. In 2011, the DST Global fund of Alisher Usmanov and Yuri Milner in a consortium with the American fund Silver Lake and the Chinese fund Yunfeng Capital (in what proportion is unknown) bought a 5% stake in Alibaba Group for $1.6 billion. Now this package is worth $11.6 billion The profit of DST Global and partners is thus $10 billion.

Ali Baba with a Russian accent

Russian users of the World Wide Web know Alibaba Group mainly for its second most important project after alibaba.com - the online store aliexpress.com. However, “known” is an understatement. According to TNS Russia, in July 2014, aliexpress.com was visited by 15.9 million Russians, and it overtook LiveJournal to become one of the ten most popular sites in Russia. Moreover, the growth in traffic to aliexpress.com in Russia was of the same explosive nature as throughout the world. Aliexpress.com entered the Russian market in mid-2012, and just six months later, in January 2013, its monthly audience was 3.1 million people. Over the course of a year, by January 2014, it increased fourfold, to 12.4 million. And now it has come close to 16 million.

As a result of rapid growth, aliexpress.com overtook all its closest competitors and became the most popular online store in Russia. The monthly traffic of ozon.ru is almost half as much - 8.5 million, as is the Russian audience of ebay.com - 8.2 million. However, in terms of the number of orders, the Chinese online store still lags behind its American competitor. According to Yandex, last year Russians made more than 20 million purchases on aliexpress.com, that is, 55 thousand purchases a day, and ebay.com sends 90 thousand parcels to Russia every day.

However, if aliexpress.com maintains its current growth rate, it will very soon overtake ebay.com in terms of the number of orders on the Russian market. For now, in any case, aliexpress.com is trying more actively than anyone else to earn the loyalty of its audience. Firstly, due to the assortment: goods in 6 thousand categories, from electronics, clothing and accessories to goods for children, home, and sports. Secondly, the convenience of payment: money is debited from the card only after the goods are delivered. Thirdly, the prices for a significant part of the goods are significantly lower than those of competitors: the goods are mostly Chinese, and the store, due to its huge turnover, can get by with a small margin. For example, a nose and ear hair clipper will cost $1.69 on aliexpress.com, with free shipping. And the Wi-Fi Smart Plug charger, which is also a modem that supports next-generation Wi-Fi standards (AC), will cost only $20.

Free shipping is another reason why aliexpress.com is so popular. With the exception of large items - in these cases, delivery may be more expensive than the item itself. For example, a mini-scooter costing $562 will be delivered from China to Bryansk for $1,141.

Complex and expensive logistics and poor performance of Russian Post are the main problems for both aliexpress.com and ebay.com. As users of aliexpress.com indicate, delivery times for orders to Russia can take up to 50 days. This is probably why aliexpress.com is mostly popular in Siberia and the Far East: thanks to its geographical location, goods are delivered much faster.

For aliexpress.com, the Russian market is one of the most important. According to Similarweb, users from Russia account for 15% of site visits. In second and third place, with a small gap, are users from the USA and Brazil. In a 2013 report, Alibaba Group indicates that the sharp increase in the popularity of aliexpress.com in Russia was one of the reasons for the group’s revenue from international trade to increase by 1.4 times.

Capitalization of expectations

Alibaba Group's annual turnover in 2013 was nearly $300 billion, with consolidated revenue of $8.5 billion and net profit attributable to shareholders of $1.3. These indicators are the main reason for the company's successful IPO. Compared to many other Internet companies with a meager turnover that have never shown a profit and are valued by the market at billions and tens of billions of dollars, Alibaba Group is a real gift for investors. Not just a sketched website on the Internet with abstract users who still have to be monetized somehow, but a clear and profitable business model. Moreover, on the eve of the IPO, investor excitement was fueled by even stronger reporting: for the second quarter of 2014, Alibaba Group’s profit amounted to $2 billion, which is one and a half times more than for the entire last year.

Another factor in the success of an IPO is, of course, the expectation of further growth, which is already built into the current share price. Despite some contraction, the Chinese economy is growing at 7-8% per year, which is strikingly different from developed economies. Investors hope that this process will continue to translate into growth in income and consumption of the Chinese. That’s why investors are once again in vogue for China.

And of course, the successful placement was helped by the successful situation. The market, primarily the American one, has been growing steadily over the past year or two. Dow Jones and NASDAQ (Internet sector index) update historical highs over and over again. And the end of this holiday is not yet in sight; on the contrary, the pre-New Year rally awaits the markets ahead. I couldn't think of a better time to go public.

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