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China tech

Alibaba shares soar in wake of record antitrust fine

China e-commerce group will ease barriers for its merchants, says CEO Zhang

Chinese e-commerce giant Alibaba says it will make it easier for merchants to sell on its site after the government on April 10 imposed a record 18 billion yuan ($2.75 billion) fine on the company.   © Reuters

HONG KONG -- Shares in Alibaba Group Holding rose sharply on Monday following a record 18 billion yuan ($2.75 billion) antimonopoly fine against the e-commerce group, as its executives vowed to rectify its problems and step up efforts to retain the merchants it does business with.

The price of Alibaba's Hong Kong-listed shares rose as much as 9% in morning trading, reflecting a belief by investors and analysts that the record fine draws a line for now under Beijing's regulatory action against one of the country's tech giants.

The shares closed at 232.2 Hong Kong dollars, up 6.51% for the day. The stock had lost almost one-third of its value since Beijing launched a series of investigations into the company last November.

Daniel Zhang, Alibaba's chairman and CEO, told investors in a call on Monday that Alibaba will introduce new measures to lower entry barriers and business costs for merchants.

After a four-month investigation into Alibaba, China's State Administration for Market Regulation concluded that the company had violated the antimonopoly law by using its power to prevent merchants from using other platforms.

Over the weekend the regulator imposed a record fine on Alibaba for its practice of preventing sellers from using other platforms. It demanded that Alibaba stop such practices, develop a comprehensive rectification plan by end of this month and submit self-evaluating compliance reports to the authorities for the next three years.

Zhang said the required rectification will have limited impact on the company's financial results. "We don't rely on exclusivity to retain our merchants," Zhang said, as such arrangements only applied to a number of brands. "Business-wise, we don't expect a material negative impact."

CFO Maggie Wu said Alibaba has reserved billions of yuan to support the cost-reduction measures and training for merchants.

Joe Tsai, executive vice chairman, said in the same call that the amount accounted for less than 20% of Alibaba's cash flow in the past 12 months.

"With this penalty decision, we received good guidance on some of the issues under the antimonopoly law and we are pleased that we are able to put this matter behind us," Tsai said.

Jeffrey Towson, an online lecturer on China's digital sector and former professor at Peking University, said the fine imposed was "corrective but not debilitating." 

According to a revision to the current antimonopoly law, fines for anticompetitive behavior can rise to 10% of the companies' revenue. In Alibaba's case, 18 billion yuan represents about 4% of 2019 revenue.

"The fine gives the market a general ballpark figure for future fines," Towson said.

Ernan Cui, China consumer analyst at Gavekal Dragonomics, said, "The fine itself is not a big deal for Alibaba, but the regulator decision could lead to changes in the business models of the industry."

She noted that the regulator has made a point that it will no longer tolerate some of the hidden rules in the e-commerce economy, which makes it more difficult for companies like Alibaba to sustain their double-digit growth.

But the upside is that the regulator is unlikely to impose further penalties of this scale on Alibaba in at least the next three years if Alibaba follows its instructions, Cui said, as Beijing still values the economic benefits created by its domestic internet companies at a time when foreign trade is becoming less stable.

However, "the required corrective measures will likely limit Alibaba's revenue growth as a further expansion in market share will be constrained," said Lina Choi, senior vice president at Moody's, the credit rating agency. "Investments to retain merchants and upgrade products and services will also reduce its profit margins."

Robin Zhu, China internet analyst at AB Bernstein in Hong Kong, said the penalty clears the air for investors.

"[It's] a sign that the worst was now over for Alibaba as far as regulatory scrutiny was concerned," he said in a research note.

But he noted that the elimination of forced exclusivity would enable brands to look beyond Alibaba's marketplaces and potentially allocate some of their business to rival platforms like JD, Pinduoduo or Douyin.

As the market expects the regulatory storm that has engulfed Alibaba to subside, more emphasis is likely to be put on the competitiveness of the company's core ecommerce as well as its new group-buying business.

"Our longer-term concern remains the increasing crowdedness of the e-commerce market in China, and the potential impact this will have on Alibaba's core e-commerce profitability," he wrote.

Analysts expect Alibaba will not be the only company hit by hefty fines, as Beijing steps up the crackdown on the power of internet giants.

Towson believes the financial services and gaming sectors face higher risks for regulatory actions, with Tencent Holdings -- one of the two most valuable listed companies in Chinese tech alongside Alibaba -- a likely target.

"All eyes are now turning to Tencent," he said.

However the questions would be different from those faced by Alibaba, as Tencent is mainly a gaming, payment and media company, Towson said.

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