Alipay Fallout: Foreign Investors and China Risk Assessment

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Lots of interesting things that have happened recently with Chinese firms that have foreign investment. In short, investors have run into a lot of trouble. But will this have any effect on the China bubble, or will investors continue flocking to Chinese companies without a thought about potential risks?

I’m skeptical about foreigners’ willingness to learn lessons from the past, mostly because the problems they are having today are similar to ones I started seeing over a decade ago. A lot of this stuff isn’t new, folks.

OK, specifics. The big story of course is the asset transfer of Alipay:

Here’s what’s going on: Yahoo is a big shareholder in Alibaba, which is the biggest e-commerce company in China. Alibaba transfered ownership of its payment unit Alipay to an entity majority-owned by Jack Ma, the founder of Alibaba. This sent Yahoo’s stock diving because some investors think most of Yahoo’s value is in its Asian investments like Alibaba and Yahoo Japan.

This story hasn’t played out yet, and we don’t have all the details. As a corporate lawyer, I am confused that Yahoo’s Jerry Yang, who is on the board of Alibaba, wasn’t aware of the transfer. Alibaba CEO Jack Ma said that the board was notified. Seems like something Jerry Yang would have paid attention to if he was actually told about it.

I also don’t know any details of the transfer terms. Yahoo is demanding compensation. What did Alibaba get out of the transfer deal in the first place? How was the asset purchase booked? For one thing, it would be interesting to know what was disclosed to the tax authorities. Hmm.

I understand that this is a high-level deal involving a great deal of money, but the relationship between Alibaba’s local folks and Yahoo is really very much like a joint venture. They are basically partners.

And JV partners screw each other over every day. Sino-foreign JVs are particularly volatile, one of the reasons why so many foreign firms switched over to wholly foreign-owned entities as soon as China law allowed them to.

Some JV partners have good relationships, some don’t. Some foreign investors in China JVs have trouble, and some maintain good relationships and have healthy returns.

Whether Jack Ma used the excuse of foreign investment restrictions is beside the point. If he screwed over Yahoo, that’s on him, and by itself doesn’t necessarily say anything about Chinese investments. So in that sense, I’m not sure the Alipay deal will have much of an effect on anyone else, whether it’s a current relationship or a prospective deal.

What about all that talk of Chinese companies involved in reverse mergers, and the weak legal structures of many Chinese companies that list overseas? Again, this is all old news. I’ve been writing about those structures on this blog since 2006, and I haven’t seen most VCs or other investors seriously consider these issues when they do their risk analysis.

So has all the negative talk about the reverse merger problems led to a more conservative approach to investing in Chinese companies? The recent IPO of social media giant Renren has been looked at as a possible turning point. Off its scorching debut, the stock has slid quickly, almost coming back to its initial price. Might this be a trend?

After an initial stampede for shares in Chinese internet companies, investors are now worried that another tech bubble is on the way after recent US IPOs from China’s internet players have failed to perform in secondary market trading.

But what’s the reason for this? Sounds like a combination of things:

Some investors now fear a repeat of the late-1990s tech bubble, arguing that valuations are unrealistic given the uncertainties about these companies’ long-term profitability and sustainability. In addition, questions remain about corporate governance standards.

So how much of this newfound reticence has to do with performance and how much with risk? This is arguable, but let’s try a thought experiment: if Renren and all these other recent IPO firms were doing gangbusters and their numbers remained pumped up, would anyone really be talking about corporate governance?

Sure, some of these reverse merger companies have gotten into trouble, with some having to suspend trading, but remember that companies like China Media Express were allegedly inflating their revenues and lying about assets. In other words, their poor governance allowed them to cover up weak performance. Seems like folks are much more worried about the bottom line than anything else.

What does the Alipay situation bring to this? If anything, it’s another indication of the lack of control that foreign investors have. In a perfect world, that would factor in to future risk assessments, particularly in the China Net sector.

But will we actually see a more conservative approach now? If this is any indication, I’m not going to hold my breath:

The Chinese government’s strict supervision of the industry also poses potential risk. For example, the parent group of Phoenix New Media, Hong Kong’s Phoenix Satellite Television, often finds itself in a difficult position.

The group, which is partly owned by China Mobile Communications and News Corp, is the only overseas TV station with similar status to a domestic broadcaster, which has made it one of the most popular sources for news and information about the outside world. But it has to tread a fine editorial line to keep both its audience and the government happy.

Even so, the company’s IPO went relatively smoothly and made a strong debut. It raised $140 million by selling 12.76 million American depositary shares (ADSs) at $11 each after initially setting the price range at between $12 and $14.

The share price increased 23% to $13.5 in the trading debut on the New York Stock Exchange Thursday and ended at $13.2 on Friday.

One response on “Alipay Fallout: Foreign Investors and China Risk Assessment

  1. nulle

    on Chinese (and any oversea) stocks on companies and corporations…caveat empreor

    I personally would avoid investing in any companies in any countries where the rule of law doesn’t exist (ie. China)