Alibaba Group Holding Ltd(NYSE: BABA) reported that an initial public offering (IPO) from BABA’s finance arm, Ant Financial, will make the company become a prominent, international brand name this year. BABA will get the benefit from the IPO of Ant Financial substantially as Ant Financial is growing in a thriving financial technology fintech environment. Ant Financial runs China’s biggest payments service, Alipay, which has about 450 million active users and processes 170 million transactions per day. Moreover, Ant Financial is expanding its presence across Asia and Europe by teaming up with local fintech players in various markets.
The group started taking actions against fake goods and recently sued two vendors for selling fake Swarovski watches on their Taobao e-commerce platform. Alibaba Group Holding Ltd (NYSE: BABA) gets approximately 83% of its revenue from e-commerce within China, and now the company is looking at global expansion to reduce its dependence on the Chinese economy.
On the other hand, BABA is facing greater exposure to regulatory and macro risks such as a falling renminbi (RMB). BABA’s revenues and assets are denominated in RMB and have a significant portion of the debt are denominated in U.S. dollars. So, the currency fluctuation like falling RMB could create problems for BABA’s balance sheet and cash flows. Moreover, as the Federal Reserve has the probability to raise rates in 2017, it is expected that RMB might fall. This will increase the demand for dollars and will increase the capital outflows from China. The dollar will appreciate relative to the RMB and as per Deutsche Bank, the yuan will fall 17% over the next two years. Additionally, the tax cuts by President Trump will put money in the US market, which will also appreciate the dollar against the RMB.
In addition, if RMB falls much BABA stock may be hedged against the risk of a falling RMB. Then the cost of hedging could go up and will put pressure on the margins. There is an estimation that that covering a $2.5 billion exposure would cost 500 million RMB.
Meanwhile, BABA has paid a total of $3.41 billion in taxes in 2016 and has created 30 million jobs. BABA and its financial branch have paid 23.8 billion yuan in taxes in 2016 that is 33% greater than 2015. The company has taken new businesses like outsourcing of customer service, quality testing, product photography, e-shop design and recruitment and training for e-commerce.
However, BABA stock fell over 15.9% in the last three months (as of January 3rd, 2017; Source: Google Finance). BABA has an average price target of $123.64, which is a further downside of 39.55%.