BABA Analysis

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by deah12


I had some free time and went back to go look at the original footage of Jack Ma’s speech two weeks ago, and for all that matters I’m Chinese.

Let’s just say it wasn’t great, he openly made the branches of government regulators: the Chinese SEC, and BRC look like fucking idiots, and tried to quote Xi while doing it. It became viral a few days ago when the news of the suspension hit. People in general are pretty pissed online, and I think that that mood is intentional since it matches the government’s stance on the issue.

Jack Ma, founder of BABA and “de facto head” of ANT did things like:

“labeling the global banking Basel Accords as an “old people’s club,” Ma said “systemic risk” is not the issue in China. Rather, China’s biggest risk is that it “lacks a financial ecosystem.” Chinese banks are like “pawn shops”, where collateral and guarantees are the hard currencies. As a result, some decided to go so big they are not allowed to fail.”

I mean yes it’s true these are actual issues, but calling them out for the entirety of the public and media to see is not how shit works in China. There have always been monopoly concerns for BABA both in their eCommerce branch as well as payment branch, which split into ANT.

A lot of people don’t know wtf ANT does to earn a 300B+ valuation. Essentially besides being the main competitor to Wechat Pay (basically PYPL or SQ but more widespread, every single vendor in China and aims to serve Chinese customers will accept this), and also having the world’s largest money management fund at one point from all the cash from their users that they put on the platform, they’ve loaned 2T+ RMB to individuals and small businesses (8/2 split). Which is about 300B. This is through two services called Jiebei and Huabei, essentially it’s just like you doing cash withdrawal from your credit card but obviously, all of it is electronic at 18% interest per annum (which is high in China). Here’s the thing, ANT started this whole thing with 3.8B RMB. They leveraged up 100x+ by selling tranched securities on their loans which they packaged. The A tranche and B tranche pay around 6-8%. So ANT makes a shit ton of money, “risk free” leveraged to the tits.

This is why the Chinese government is seriously pissed, there is a huge fucking default bomb that could lead to sector collapse since ANT sold off these securities to asset management and banks, and then used the money they gained from the securities to make more loans and make more securities. Thereby repeating the cycle precisely because the fintech company wasn’t regulated at the same standard as Chinese banks. Now Jack Ma has the balls to come in and criticize the very thing that made his business possible in the first place?

A day after Jack Ma had the meeting with the big 4 regulatory agencies (Central Bank, SEC, Bank and Insurance Commission, and Foreign Exchange Commission), they released a draft of new legislation called 网络小额贷款业务管理暂行办法

There’s no Official English but it means

Laws Regarding The Current Management of Small Online Loans (Draft)

Among the new laws, the chief one is that companies cannot leverage over 1x via bank loans, and leverage up to 4x through securitization, as well as the fact that the loan originator needs to provide over 30% of the amount.

So the reason BABA is dipping so hard is that this immediately fucks up the valuation of ANT, they need a serious injection of cash to stay afloat with their current loans. Which was precisely the point of the IPO. If ANT is valued as a bank rather than a fintech company (and that’s what regulations suggest), then they’re fucked. Now I don’t think this means BABA is going to nosedive, but there are going to be better opportunities considering the headline risk.

TLDR: My warning for anyone looking to buy the dip is that it’s not as easy money as you think


Sold all BABA calls (11/20 300C 330C spreads)

LONG JD (holding 12/18 85C) for eCommerce play


Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.


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