Lone bear who predicted Alibaba’s US$220 billion stock crash warns of valuation sinkhole as US delisting risk mounts

  • Alibaba has declined 39 per cent in New York since lone bear from DZ Bank cut his rating to a sell, precipitating a US$220 billion loss of market value
  • Muhl is waiting for two scenarios to play out before reconsidering his bearish view on Alibaba and Chinese tech sector

Manuel Muhl, who downgraded Alibaba Group Holding to a sell in late July before its 39 per cent plunge, said he has been getting a lot of queries from clients raring to pick the bottom. He said the stock remains a valuation trap.

While Alibaba has an intrinsic value, that appeal is not being properly reflected in the stock price, he said in an interview. That is because regulatory risks at home and delisting pressures in the US are key drivers of the stock’s worth, making it difficult to set a buffer on the downside.

The stock trades at three standard deviations below the five-year average in terms of price-earnings multiple, according to Bloomberg data. That compares with 0.5 deviation for JD.com and 1.5 for Tencent Holdings.

“The fear that the ADRs will be delisted, the worry that more regulatory pressure is on the way, have led to those massive sell-offs and right now it is not possible to find an adequate risk premium for the sector,” he said. “Every time you start thinking about a recovery, something else pops up and everyone is forced to react.”

The US Securities and Exchange Commission this month announced its final plan for putting in place a new law that compels foreign companies to open their books to US scrutiny or risk being kicked off the New York Stock Exchange and Nasdaq. It cited China and Hong Kong for not cooperating with Washington since 2002. Hong Kong has refuted that statement.

Alibaba, the owner of this newspaper, has fallen 39 per cent in New York to US$125.06 on Friday since Muhl cut his rating to a sell on July 26, precipitating a US$220 billion loss of market value. Muhl remains the only analyst with a sell rating among 62 tracked by Bloomberg. He lowered his price target to US$130 on November 19.

While Alibaba’s stock is still expected to be plagued by wild price swings, the stock is worthy of allocations in the long run, according to Citic Securities. Its global expansion, innovation and cloud-computing business offer new growth drivers, the brokerage added.

Two possible scenarios would need to play out for Muhl to alter his sell recommendation.

Firstly, regulators have to announce that they are satisfied with the changes implemented by the companies and stop introducing new rules so that investors can catch their breath and invest based on valuation fundamentals.

Secondly, “the sell-off continues to a point where the mismatch between the intrinsic valuation and the stock price becomes so dramatic that the stock can withstand any more negative newsflow,” he added. “Sadly, despite the current valuation, we still haven’t reached this point.”

It does not help that the company co-founded by billionaire Jack Ma disappointed the market with its poor earnings amid regulatory crackdowns. Since the November 18 report, the Hang Seng Tech Index has dropped 7 per cent while the Nasdaq Golden Dragon China Index retreated by 12 per cent, hurting dip-buyers like Charlie Munger.

Chinese tech companies still need to sit down with regulatory authorities to draw a clear boundary that will define their business scopes, according to Thornburg Investment Management, a US money manager overseeing US$49 billion of assets based in Santa Fe, New Mexico.

“I really doubt e-commerce or internet companies will resume leadership,” said Wang Lei, a portfolio manager. “Before that, it was hard to predict their earnings growth profile. You can argue valuation looks very cheap. I don’t think it is the same growth rate but how low can it be? It is still undecided and the jury is still out.”

Many of DZ Bank’s clients are extremely concerned about what has happened with Didi Global, Muhl added, and some fear that this might be the end for US-listed shares of Chinese companies. China would prefer its companies to list at home for strategic reasons and the SEC will also be forced to act, resulting in more delistings. Stock fungibility may be doubtful in some cases.

“What I do know is that some US investors will be forced to liquidate due to regulatory requirements,” Muhl said. “Some investors have constraints and cannot invest in Hong Kong.”

Author: Zhang Shidong, SCMP

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