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Lam, Nichols and Greenberg: The IPO we couldn't avoid

25 September 2014

Invesco Perpetual’s William Lam has picked up China tech giant Alibaba despite his scepticism for buying companies at flotation.

By Daniel Lanyon,

Reporter, FE Trustnet

Reasonable valuations and long-term growth prospects made Alibaba an attractive ‘buy’ at its initial public offering stage, according to William Lam, manager of the Invesco Perpetual Pacific fund, who normally avoids IPOs.

Alibaba, the internet e-commerce giant, listed on the New York Stock Exchange on Friday with shares heavily oversubscribed - becoming the biggest initial public offering in history.

The company, which is similar to Amazon although it is a collection of e-commerce businesses that have similar revenue models to both eBay and Google, currently only operates in China but is planning to make the move into the Indian market.

Lam says that too often the share price of a firm when its floats is overhyped but that the case of Alibaba is untypical.

“When we have the chance to participate in an IPO, the first questions we ask ourselves are: Who is selling these shares to us and why, and will the company have tried to inflate both current earnings and expectations of future earnings in order to maximise the IPO price?” he said.

“Often the answers to these questions are: a very knowledgeable and influential owner is selling shares; therefore this seller would have exercised their influence to maximise the selling price.”

“This ‘price maximisation’ can be achieved in a number of ways: for example, if the seller controls the company then they may be able to reduce costs, defer expenditure or even accelerate revenue recognition in the period leading up to the IPO, thus inflating current earnings; in addition the seller can encourage the bankers who run the IPO process to help generate strong expectations for future earnings growth.”

But he says this is not the case with the owners of Alibaba or minority shareholders selling their stake in the IPO.

“Yes, Alibaba’s founder and chairman Jack Ma is selling some of his shares, but that is not a significant portion of his stake. The largest seller is a minority shareholder, Yahoo, who has no control over the company and little control over the IPO process.”

“The whole reason for the IPO was so that minority shareholders such as Yahoo could monetise their stake in a reasonably fair way. It is worth noting that another significant minority holder, Softbank, is not selling in the IPO. Even Yahoo is selling a smaller portion of its stake than it originally intended to.”

“We believe that the company’s management are more interested in creating a positive association with the Alibaba brand than they are in establishing a high price for the IPO.”

“In our meetings with the company this week, it was clear that management was not encouraging investors to hold excessively high expectations for future growth. For example they said that margins could well fall in the future.”

Lam has co-managed the fund alongside Stuart Parks and Tony Roberts since June 2013. He specialises in technology stock selection, which is currently its second largest sector bet representing more than a quarter of the portfolio.

Baidu, which is a competitor to Alibaba, features in the fund’s top 10.

According to FE Analytics, the fund has returned 7.78 per cent since Lam became a manager on the fund compared to an average loss of 0.22 per cent in the IMA Asia Pacific including Japan sector, making it the best performing fund in the sector over this period.

Performance of fund, sector and index since June 2013


Source: FE Analytics

Dale Nicholls, manager of the £650m Fidelity China Special Situations investment trust, also bought Alibaba and says it will remain a long-term holding in his portfolio as he expects it to become a global brand tapping into “one of the biggest commercial opportunities that many of us will see in our lifetimes – e-commerce in China”.

“Alibaba is clearly on track to be a globally recognised name and will be a company investors cannot ignore. Some of the key things to follow will be how it allocates capital going forward, including investments outside of China, but as long valuations remain reasonable relative to growth and returns of the business, I believe this is likely to remain a long-term holding in my portfolio," he said.

“The shift from offline to online in commerce is a global trend, but is occurring even faster in China partly because in the lower tier cities the traditional bricks and mortar infrastructure has not been built out to levels common in the west.”

“Alibaba is at the heart of this change - gross merchandise value is on track to easily surpass $300bn this financial year, more than Amazon and eBay combined, and yet continues to grow at rates north of 30 per cent.”

“With a core strategy of building an ecosystem to support merchants, the company leverages a platform-based business model that makes it the most profitable e-commerce franchise globally.”

Nicholls took over the trust from Anthony Bolton in April 2014. Gary Greenberg, manager of the £311m Hermes Global Emerging Markets fund, also participated in the IPO and says he also got a far smaller amount than desired, receiving half a percentage point of his desired amount.

The manager says he is looking to buy some more of the stock in coming weeks although it will depend on valuations.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.