Alibaba-Tencent Retail Push Smacks of Self-Service
(Bloomberg Gadfly) -- For five years, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. have been busy emulating the SoftBank Group Corp. model, splashing out more than $130 billion for stakes in startups across Asia.
SoftBank's investment in Alibaba was so successful that Masayoshi Son would realize a $140 billion capital gain if he sold now. Could a similarly beautiful fledgling emerge from those Chinese nests?
Maybe not. Investors are starting to lose enthusiasm for some of what Alibaba and Tencent are buying, at least in the so-called "new retail" space.
The latest example is Better Life Commercial Chain Share Co., with a market cap of $2.4 billion. This past weekend, the operator of supermarkets in China sold a 6 percent stake to Tencent in a 887 million-yuan ($141 million) transaction, and another 5 percent for 739 million yuan to Tencent's e-commerce partner JD.com Inc. Both deals were done at 17.11 yuan per share. But when Better Life resumed trading this week, its shares tumbled 8 percent in two days, against a broadly rising Shenzhen market.
The investor reaction when Alibaba bought 36 percent of Sun Art Retail Group Ltd. for $2.9 billion in November was muted, too.
Compare that with two years ago, when investors could hardly contain their excitement.
Suning.com Co., an electronics retailer, sold a 20 percent interest to Alibaba on Aug. 10, 2015, at 15.23 yuan per share -- a premium of only 5.8 percent to its average price the previous 20 trading days. That didn't stop Chinese investors pushing the stock up 40 percent in four days on speculation its backer would turn the store operator into a higher-margin, more valuable e-commerce proposition. Today, Suning is languishing at 12.37 yuan.
Perhaps people are finally realizing the tech giants may not have their affiliates' best interests at heart. Case in point: Last quarter, profits at Alibaba's "equity investees" (excluding Koubei Co., which helps people find restaurant deals) came in at only $105 million, not even 5 percent of the earnings at Jack Ma's flagship.
It may be that all Alibaba and Tencent want from their retail and logistics affiliates is data on shoppers and shippers. SmartKarma analyst Daniel Hellberg says that whether the startups perform well as financial investments "is almost beside the point."
Indeed, stocks of Alibaba's own affiliates, including Alibaba Health Information Technology Ltd. and Alibaba Pictures Group, have underperformed the parent in the past year.
Yet the tech giants keep spending. The latest splash is in food delivery. Alibaba plans to buy out Baidu Inc. and other investors in privately held startup Ele.me, Lulu Chen of Bloomberg News reported. Two years ago, Alibaba and Ant Financial invested $1.25 billion in the delivery company.
One could argue deals like this are more defensive than visionary, because they center on Alibaba and Tencent cementing their position atop the multibillion-dollar mobile-payments business. First mover Alibaba wants to safeguard its leadership; Tencent, a newcomer, is rapidly building market share.
As for everybody else, move out of the way. Alibaba and Tencent don't much care how you do.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.
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