Alibaba Faces Scrutiny on Two Fronts: U.S. and China. Why Investors May Want to Wait to Bargain Hunt.

Overnight, Beijing ordered Chinese media to censor coverage of its antitrust probe of Alibaba, coming against a backdrop of growing speculation about the whereabouts of co-founder Jack Ma. The usually ubiquitous billionaire has been out of the limelight since he criticized Chinese regulators’ approach to fintech innovation in the fall, sparking a very public rebuke, including regulators torpedoing the initial public offering of Ant Group, which he also co-founded.

It’s the latest in a string of actions by Beijing against one of China’s most visible and valuable internet juggernauts. The censorship is another sign of the seriousness of Beijing’s intentions, with regulating the large internet platforms a very high priority this year. “Authorities are working to ensure public opinion remains on the right side of the debate,” says TS Lombard economist Rory Green.

Beijing’s attack on the internet is on different fronts. They want an effort to intervene before these companies become too big to govern, says Winston Ma, formerly a managing director and head of the North American office of China’s sovereign-wealth fund, China Investment Corp., and co-author of The Hunt For Unicorns: How Sovereign Funds Are Reshaping Investment in the Digital Economy. “They want to say that they are willing to tackle the super platforms before they become too big to govern, even if the cost is its market valuation.”

There are various pillars to Beijing’s approach to reigning in the internet giants. On the banking front, it is forcing Ant to hold more capital, changing its business model. On the data front, it’s with a personal protection law that goes into effect this year that could limit internet companies’ collection of personal data.

At the moment, the People’s Bank of China already has transaction data from payment apps but Ma says it could ask Alibaba and Tencent Holdings (700.Hong Kong) for auxiliary data related to transactions. “The central bank wants to make the data more like a public asset,” Ma says, a move that he says could have an indirect impact of chipping away at the companies’ competitive advantages and limiting revenue growth.

Investors should watch closely what happens on the antimonopoly front, which could have more fundamental impact on the companies. So far the focus has been on financial regulatory arbitrage, but “antimonopoly” is a more nebulous concept, Green says.

“It’s relatively easy to mandate a 30% capital buffer, say, but harder to determine: discriminatory business practice, algorithmic pricing, misuse of data etc. This is new territory for regulators all over the world not just China, so there is a great deal of uncertainty as to the eventual form of government policy and its impact on business operations,” Green says.

It’s unclear when there may be more clarity on what type of measures Beijing will take next on the antimonopoly front, with some looking to March meetings of the National People’s Congress. If the company is forced to divest parts of its business or assets, that would have a more fundamental impact on the company, Ma says. The measures could also ripple through the bigger ecosystem of larger Chinese internet companies.

Shares of the KraneShares CSI China Internet exchange-traded fund (KWEB) was up 4.4% on Friday but its 2.8% gain over the past month lags behind the 4% gain logged by the iShares MSCI China ETF (MCHI) over the same period.

And then there is the possible threats from the U.S., with The Wall Street Journal reporting discussions within the Trump administration about adding Alibaba and Tencent to a Defense Department blacklist of companies with ties to China’s military, which would ban U.S. investment in them—similar to what has happened with China Mobile (CHL).

But that could be a stretch. “Smoke but likely no fire,” writes Stephen Myrow, managing partner at Beacon Policy Advisors and a former senior treasury official, in a note to clients. “There is still a focus on anti-China actions, but given the emphasis now being placed merely on self-preservation within the administration, the efforts to continue hemming in the Biden administration have slid down the priority list,” Myrow writes.

Even if they were placed on the list, the administration of President-elect Joe Biden would be the ones to figure out the logistics. Plus, the new administration is expected to put a moratorium on all executive orders from the last 90 days pending administrative review, Myrow adds.

The bigger risk is likely to come from within China. Several fund managers have continued to see long-term opportunity in Alibaba. Citi analyst Alicia Yap reiterated her Buy rating on the stock this week, citing the 25% decline in the shares since November, the company’s underappreciated cloud business prospects, and its e-commerce market presence.

While Yap sees it as “highly unlikely” that Alibaba is fined millions of dollars as a result of Beijing’s probe, the uncertainty around the outcome, alongside the geopolitical tensions could keep a near-term rebound at bay until there is some outcome to the probe and more insight on antimonopoly measures.

Bargain hunters may want to hold off for now.

Write to Reshma Kapadia at [email protected]