Alibaba Files For IPO, As Yu’ebao Pauses

Curtain formally opens on Alibaba IPO

The IPO story of the year has finally begun, with word that leading Chinese e-commerce firm Alibaba has finally made its first public filing for a listing in New York. But anyone hoping for a blockbuster deal that would have been the biggest tech IPO since Facebook’s (Nasdaq: FB) 2012 offering will be disappointed to learn that Alibaba is seeking to raise a relatively modest $1 billion in the deal. Alibaba made the filing as a separate media report said the company’s high-flying Yu’ebao, its financial product that competes with traditional bank savings accounts, is about to have its wings clipped with new reserve requirement regulations from the central bank.

The big news surrounding Alibaba’s IPO is the relatively modest size of the offering. As a former reporter, I know that media report the biggest numbers they can, since larger numbers make better headlines. Still, the $1 billion fund-raising target is quite a bit smaller than previous reports that said Alibaba could raise up to $15 billion through the offering, which would have made it the biggest tech IPO since Facebook raised $16 billion 2 years ago.

The modest target isn’t all that surprising, since the market for Chinese tech IPOs in New York and Hong Kong has been rapidly cooling over the past 3 weeks following a window of positive sentiment that opened in the second half of last year. Still, Alibaba is the leader in its sector and should be able to generate a bit more excitement due to huge growth prospects in China’s e-commerce market.

Apart from the fund-raising target, the prospectus filing also contains a wide range of financial data. (Chinese article) I won’t recount any company-specific figures here, since Alibaba’s latest financials were released last month when its major shareholder Yahoo (Nasdaq: YHOO) announced first-quarter results. (previous post) But it’s interesting to note that Alibaba cites a research report that says e-commerce now accounts for 7.9 percent of China’s total retail sales, but the ratio could grow to 11.5 percent by 2016.

The prospectus filing also says that Alibaba founder Jack Ma owns 8.9 percent of the company. That means that a company valuation of $200 billion, the top of previously cited estimates, would make Ma the richest man in China with a fortune worth about $18 billion. Of course that number was already quite inflated, and the recent drop in valuations for tech firms means Alibaba will almost certainly get a final valuation in the $100-$150 billion range. That would make it roughly comparable in size to current Internet leader Tencent (HKEx: 700), which is valued at $120 billion.

Alibaba’s long-awaited filing comes as separate new reports are saying the central bank will soon impose a deposit reserve requirement on Yu’ebao, making it subject to similar rules that banks must already follow. (Chinese article) Yu’ebao was launched by Alibaba last summer, and functions much the same way as traditional bank savings accounts. But the product formally invests in money markets and Yu’ebao isn’t a bank, so it wasn’t subject to the same strict regulation as traditional banks.

That difference allowed Yu’ebao to offer return rates far higher than those for bank savings accounts, whose interest rates are tightly regulated by Beijing. Those advantages allowed Yu’ebao to post explosive growth to become China’s largest fund in just a matter of months. Yu’ebao also didn’t have to set aside reserves as a form of insurance against market downturns the same way that banks have to do.

The broader lack of regulation sparked big complaints from traditional banks, which said Yu’ebao was getting too many unfair advantages. In that light, this pending new reserve requirement by the central bank isn’t too surprising and is probably even quite appropriate. But it will almost certainly force Yu’ebao to lower its return rates for depositors, and we can probably expect more regulation in the months ahead that will further reduce its attractiveness.

Bottom line: Alibaba’s modest IPO fund raising target reflects a recent cooling of the broader market, and is likely to value the company in the $100-$150 billion range.

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