It is very easy to get attracted by glossy numbers in Alibaba’s IPO prospectus: 231 million active buyers last year, 72% revenue growth and 44% profit margins.
After page 19 of the document, is a grim reminder that putting money in a Chinese company -- particularly one as growing as Alibaba -- is also a gamble on how nicely it can get along with Beijing.
The company might raise up to $20 billion in its IPO later this year, 100 times more than the average Chinese IPO in the U.S.
Alibaba is supported by Chinese government. A survey by the Ministry of Human Resources and Social Security indicates that over 10 million people are employed in the e-commerce sector of China. Government’s ban on foreign companies has bolstered domestic companies. Alibaba has invested in Chinese video and messaging services.
Just like many other Chinese companies, Alibaba will depend on a legal configuration called a variable interest entity, or VIE, needed by the Chinese government for specific industries. The VIE provides foreign investors exposure to losses and gains through contracts instead of direct ownership.
Investors should keep in mind that you do not really own the business as most people would think in the United States.
Alibaba earns most of its revenue from totally foreign-owned companies, it might be affected if Chinese government wakes up tomorrow morning and revokes its VIE license.