Alibaba: Don’t Underestimate The Probability Of Tail Risk Events

Alibaba: Don't Underestimate The Probability Of Tail Risk Events

Summary

I don’t like people who mockingly say “I told you so!” to any mistake. However, watching what is happening now around BABA, the temptation to become such a person increases dramatically.

There are still many institutional investors among shareholders in absolute terms – 24.7% of the total shares outstanding. But this number is steadily falling.

I think that institutional investors will continue to get rid of their BABA holdings.

A series of target price cuts from investment banks has already begun.

Given the high volatility of this stock, I do not recommend you to short it – as in my last article on BABA, I recommend investors to watch what is happening from the outside.

Nattakorn Maneerat/iStock via Getty Images Intro & Thesis

I don’t like people who mockingly say “I told you so!” to any mistake. However, watching what is happening now around the shares of the Chinese stock market, the temptation to become such a person increases dramatically. Data by YCharts Western investors are actively disengaging from allocating to China for political reasons, among others, which I have repeatedly warned about in my previous articles on Alibaba Group ( BABA ): BABA’s valuation is indeed cheap amid such strong financial results and an ever-expanding addressable market. However, this does not happen and is unlikely to happen until China’s policy softens towards the tech giants like BABA and turns towards the West – I think this will only be possible when Xi Jinping is gone. [ Alibaba Is Poised To Keep Falling Deeper Until Xi Jinping Is Gone, Sep.21, 2021 ] I remain true to my past conclusion – until the rhetoric of the Chinese authorities changes in favor of Alibaba, there is no point in buying. There is no point in holding a share either – sell now, fix the loss, and live in peace. I remain skeptical of BABA and most Chinese companies (again, with a few exceptions). I do not like the policies of the Chinese authorities not only towards the big tech companies but also towards the smaller representatives of the country’s IT sector. This leads to foreign capital outflows. [ Alibaba: When Cheapness And Financials Are Not Enough To Reverse The Downtrend, Nov.8, 2021 ] Many institutional players have clear capital allocation rules – many of them are forced to close out positions in stocks that cost their clients’ money, even if the managers themselves are convinced of long-term growth. [ Alibaba: Don’t Catch This Falling Knife, Watch From Sidelines, Nov.21, 2021 ] The Chinese economy faces much bigger fundamental problems than it did during that crisis, so BABA still has room to correct further. Since my first bearish article was written, Alibaba shares have fallen >48%: Seeking Alpha Today I want to warn BABA stock dip buyers again – you are not buying common stock, you are buying a preferred stock with no right to profits ( VIE structure that everyone is familiar with) of a Chinese tech company on NYSE. So do not be surprised that the price of BABA is not determined by its fundamental undervaluation, but by the behavior of institutional investors, geopolitics, the will of the SEC, etc. Therefore, in my opinion, it is pointless to buy out drawdowns in BABA and wait for it to grow back – market conditions and common sense investing do not completely determine the ball in this particular case.

So my main thesis today is that soon we’re likely to see the snowball of recent declines in Chinese equities continue to roll down as institutional investors reduce their allocation to China due to a) political risks and b) a resurgent pandemic. Why do I think so?

At first glance, it may seem that the majority of institutional investors have already sold their BABA positions – this is evidenced by a drop in shares by >66% over the past year (supply was much stronger than demand). However, this is not entirely true – there are still very, very many institutional investors among shareholders in absolute terms: Data by YCharts Among major Chinese retailers, BABA has the largest percentage of institutional investors in the share float structure. Seeking Alpha data, author’s calculations 24.7% is the percentage of institutional investors (based on the most recent reporting period, F-13 statements) in the total number of BABA shares outstanding. Think about this number.

In normal, calm times, this is fine – as long as hedge funds and asset managers follow the buy and hold strategy, a high percentage […]

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