Chinese BATs

Apparently, the three Chinese internet congolomerates, Baidu, Alibaba, and Tencent, are referred to as BAT, and Alibaba was a wake up call to the world.

For the twelve month period ending June 2014, this was Alibaba's performance:

  • Revenue: $9.3 billion
  • Revenue growth rate: 92 percent
  • ROIC: 97 percent
  • Pre-tax operating margins: 50 percent

Aswath Damodaran gave Alibaba an equity valuation of $160 billion, or $66 per share. And, by the way, he assumed the 92 percent annual revenue growth dropped to 25 percent for the next five years and tapered to 2.41 percent, the U.S. risk free rate, by year ten—a pretty significant assumption given Alibaba's recent growth, immense market leadership, and relatively low penetration of the Chinese market. Alibaba is currently trading at $88, or about a $215 billion market cap.

Stepping back, Mike Moritz had some interesting things to say in the WSJ:

What has been apparent to very close observers for several years and people who were interested in investing in China is that the whole global online chess board is being rearranged, and Alibaba is the latest and most profound example of that.

Over the next decade, what has effectively been separate theaters of activity — China and the West — will become one global battlefield.

People in the U.S. and Europe are probably in a state of suspended denial about the ambition of the four or five leading Chinese companies. If you do a stack ranking of the most valuable Internet companies in the world and you throw in Google, Facebook, Alibaba, eBay, Tencent, Baidu, Naspers — it isn’t an overwhelming percentage that is American.

Over the next decade, to some extent, I think the advantage lies with the Chinese companies. The Chinese companies will have an easier time competing in the West then the Western companies will have competing in China.

The following are slightly dated, from The Financial Times in March 2014 (so the Alibaba market cap is off), but a good summary of the global internet landscape nonetheless:

Some of the noteworthy insights in that article:

  • They're disrupting the status quo.

Their expansion highlights rapid evolutions in the Chinese internet market, a source of wealth and power that challenges the country’s traditionally state-led economy.

Two factors have shaken up the cosy world of China’s internet. The first is that internet companies have become the largest private-sector companies in China by capitalisation and revenues and are awash with cash. Second, the arrival of the mobile internet has given them something to fight over. Nearly half a billion Chinese use smartphones that cost as little as $50 each to get online.

  • Mobile is forcing them to adjust.

“Before, each of these companies had a distinct sphere, but with the arrival of mobile internet there is more and more convergence on a single model, and more areas of overlap. That’s where the battle lines are now,” says Arthur Kroeber of Gavekal Dragonomics, the research group.

Most of the new acquisitions have been made with mobile in mind. Baidu paid $1.9bn in July for 91 Wireless, an app store designed to give it an edge with mobile users. Alibaba has an undisclosed stake in UC Web, China’s top mobile browser. Last month Alibaba made an offer for AutoNavi Holdings, a mapping service, valuing it at $1.6bn, and allowing it to compete head-to-head with Baidu’s mobile map app.

  • Conglomerates are emerging (and not just in China; Google, Apple, Facebook, and Amazon in the U.S.)

China’s internet giants are becoming what analyst Anne Stevenson-Yang of J Capital Research calls “tech Kereitsus”, referring to the national champions that dominated the Japanese economy in the 20th century with interests in multiple industries. “When companies are this big in China, the difference between public and private is not that important,” she says. “For all intents and purposes these companies have become the ministry of the internet.”

Tren Griffin pointed out that Yuri Milner at DST was able to connect the dots on Facebook's future better than many others because he was able to look at models in Russia. He called it "information arbitrage". I read something similar about Roelof Botha looking at Korea and Japan for indicators that the U.S was ready for various new offerings and how this framework was an important factor in his YouTube investment.

Another fascinating read, also touching on the idea of information arbitrage, was the FT's interview with Zhang Lei of Hillhouse Capital, an early investor in Tencent.

Zhang holds informal Hillhouse gatherings with the leaders of private companies, many of them the consumer and tech enterprises in which Hillhouse invests, and many of them on the verge of going public. “The entrepreneurs in my portfolio companies learn from each other,” Zhang says, noting that he has fostered study sessions between JD and a hypermarket chain he has invested in. “Etailers learn how offline companies think and retailers learn how ecommerce companies think.”

He cites a practical example of companies learning from each other: Zhang invested in Blue Moon, a liquid detergent maker, and had its executives meet JD. That session led Blue Moon to redesign its liquid detergent refill packs so they could fit more easily into JD’s delivery bins. “Bulky is an advantage to attract consumers in a physical world but it is a disadvantage in a virtual world,” he says.

Now Zhang is taking the Chinese template offshore. “The Chinese model, which is mobile-driven, is more suited to emerging markets than the US model, which is desktop driven,” he says. “The socio-economic profile is more similar. We can help companies like Tencent go abroad and accelerate the growth of the mobile internet elsewhere and others also can leapfrog. It is a win-win situation. We are changing intra-Asian trade.”

In Indonesia, for example, Zhang created a joint venture between Tencent’s WeChat mobile messaging platform and Global Mediacom, Indonesia’s largest media, television and pay TV conglomerate. “Indonesia now is like China some years ago,” he says.

There's a lot to think about here, but the biggest takeaway for me from all this is that while Silicon Valley retains a lead in the global technology marketplace, they dynamic is shifting in an unexpected yet interesting way. At least studying in far greater detail what Baidu, Alibaba, and Tencent are doing in the context of their environment, if not spending a significant amount of time in China to truly understand the dynamics, will yield tremendous returns for the ecosystem in Silicon Valley. It's hard to break out of the Valley mindset at times, and this is one way to do that.