THB
2022-06-20

By Reshma Kapadia

When discussions turn to China, one question that always pops up from U.S. investors: Is it safe yet to buy Alibaba Group Holding, the e-commerce juggernaut that has been battered over the past two years amid the country's crackdown on technology?

Alibaba's stock (ticker: BABA) fell 74% from its peak in fall 2020 at $317, to its low in March, and shares are still down 10% this year. Barron's has been cautious for a while as others have jumped in.

Volatility is likely to continue. After all, Alibaba is a popular proxy for China and a multitude of risks persist. Policy makers must steady the country's battered economy and deal with Covid. Chinese companies continue to face the prospect of U.S. delistings, and even broader U.S. investment restrictions.

But the magnitude of further declines may be limited. The stock has recouped 30% in the past month to a recent $106.45, as Chinese policy makers intent on stabilizing the economy have hit the pause on their regulatory onslaught of the internet sector.

Even emerging markets managers bargain-hunting elsewhere in China -- in software, financials, or renewable companies while de-emphasizing the internet sector that once dominated their portfolios -- expect Alibaba to remain dominant and the go-to spot for anyone trying to sell to Chinese consumers.

Value managers are jumping in, even as they acknowledge the risks. David Herro, manager of the Oakmark International Fund, accounts for some of these risks by lowering the multiples he is willing to pay for Chinese companies versus a couple of years ago. Plus, concerns about transparency and other risks means he models a cost of equity for Chinese companies close to 14%, compared with 9% or 10%, for a U.S. company.

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