For more than a year, Charlie Munger, the long-serving investing partner of Nebraska billionaire Warren Buffett, has insisted that market bears have it all wrong about China stocks in general, and about one China stock in particular: e-commerce giant Alibaba Group Holdings.
No more. Sometime over the past three months, Munger, hitherto considered one of Wall Street’s most fervent BABA bulls, appears to have changed his mind.
On Monday, Daily Journal Corp, a Los Angeles-based newspaper and software business that counts Munger as one of the managers of its stock portfolio, disclosed in a regulatory filing that in the first quarter of 2022 the company slashed its stake in Alibaba by about half. The Daily Journal reported in the filing that it owned 300,00 American depository receipts (ADRs) in Alibaba as of the end of March, down from the 602,060 Alibaba shares the company held at the end of last year.
According to the filing, as of March 31, the Daily Journal’s Alibaba shares were valued at $32.6 million, down from $71.5 million on Dec. 31.
Munger, 98, long described as Buffett’s “right-hand man,” has been vice-chairman at Berkshire Hathaway since 1977 and had served chairman of the Daily Journal for 45 years. He stepped down from that latter post last month but remains on the company’s board. The Daily Journal says Munger continues to be actively involved in selecting the company’s equity portfolio.
Munger has declined comment on the Daily Journal’s move to bail out of BABA. But the retreat reverses the company’s decision in the fourth quarter of 2021 to double down on its bet on Alibaba—and suggests an abrupt shift in the American stock-picking legend’s assessment of the Chinese company’s prospects.
Other global investors began dumping Alibaba shares in October 2020, after billionaire co-founder Jack Ma took to the stage of a high-profile financial conference in Shanghai, gazed out over an audience that included China’s most senior economic policymakers, and decried the central government’s banking and securities regulators as a bunch of risk-averse “pawnbrokers” who were stifling innovation and strangling growth.
Ma’s put-down drew swift retribution from China President Xi Jinping, who personally scuppered a planned $35 billion initial public offering for Ant Group, Alibaba’s mobile payments affiliate. Ma disappeared from public view. Regulators swooped down on both companies, demanding a radical corporate restructuring at Ant and slapping Alibaba with billions of dollars in antitrust fines. The price of Alibaba shares traded on the New York Stock Exchange slid to a near-historic low of $87 on March 12, 2022, down from an all-time high of $317 on October 27, 2020, shriveling the company’s market value to $246 billion, down from a peak of $838 billion—a collapse of more than 70%.
Until the Daily Journal’s disclosure this week, Munger had been considered one of Alibaba’s most stalwart boosters. In the first quarter of 2021, just as Beijing embarked on a regulatory blitzkrieg that would eventually engulf consumer-facing internet platforms in nearly every sector—e-commerce, online gaming, online tutoring, food delivery, and ride hailing—the Daily Journal added 165,000 Alibaba ADSs to its portfolio, making the Chinese e-commerce company the newspaper’s third-largest holding after Bank of American and Wells Fargo. The Daily Journal’s regulatory filings show that, as of March 31, 2021, Alibaba shares accounted for 19% of the company’s entire portfolio.
Business Insider reports that Munger urged the Daily Journal to invest in Alibaba on the basis of a recommendation from Li Lu, the founder and chairman of Himalaya Capital Management and the man who persuaded Buffett to back BYD, a Chinese electric battery and vehicle manufacturer that has turned out to be one of Berkshire’s most profitable investments ever.
In a 2019 Daily Journal meeting, Munger revealed that he had entrusted Lu to invest a share of his personal fortune and lauded the Chinese money manager for his acumen in picking winners in one of the world’s most promising markets. “Li Lu just went where the fishing was good and the rest of us are like cod fishermen who are trying to catch cod where the fish have been fished out,” Munger said.
Alibaba was an unusual investment choice for Munger, who often has disparaged ADRs as opaque and convoluted. Moreover, at the Daily Journal’s annual investors’ meeting in February 2021, Munger praised Beijing’s crackdown on Ant Group and bluntly rebuked Ma for provoking Chinese regulators.
“I think Jack Ma was very arrogant to be telling the Chinese government how dumb they were and how stupid their policies were and so forth,” Munger said. “Considering their system, that is not what he should have been doing.”
In a June 2021 interview with CNBC, Munger defended China’s regulators for bringing Ma to heel. “Communists did the right thing,” he said. “They just called in Jack Ma and say, ‘You aren’t gonna do it, sonny.’ And I wish we had—I don’t want all of the Chinese system—but I certainly would like to have the financial part of it in my own country.”
And yet, until very recently, Munger appears to have weighed concerns about Ma’s hubris and China’s authoritarian system against the seemingly limitless long-term growth prospects of the Chinese market—and concluded that the latter had far more heft when it came to making investment decisions. “China is a big modern nation,” Munger said at the Daily Journal’s 2022 investors’ meeting in February. “It’s got this huge population and this huge modernity that’s come in the last 30 years. We invested some money in China because we could get more value in terms of the strength of the enterprise and the price of the security than we could get in the United States.”
Such optimism seemed well-founded, perhaps even prescient, last month when China’s top economic policy czar Liu He promised a package of sweeping measures to support the nation’s economy and financial markets and signaled Xi’s two-year crusade to rein in the forces of “disorderly capital” was drawing to an end.
But that pledge has been only partly supported by changes in China’s regulatory framework. In the weeks since Liu’s pronouncement, Beijing has granted new licenses to a handful of Chinese online game producers and signaled it will allow some Chinese companies to grant U.S. securities regulators greater access to their financial records in order to prevent U.S. regulators from forcing hundreds of Chinese companies to delist from American exchanges.
Regulators have yet to ease restrictions on Alibaba and other large digital retailers, even as COVID-19 outbreaks in Shanghai, Guangzhou, and other major Chinese cities fuel an urgent need for online delivery services.
Ant’s IPO remains in limbo, despite a sweeping business overhaul in which the company dramatically increased its capital base and raised high firewalls to separate Alipay, its mobile payment platform with 1 billion users, from financial services like wealth management and consumer lending. Ant has reduced assets under management at its money market fund, Yu’ebao—once one of the world’s largest—by more than a third. In October 2020, on the brink of its IPO, many analysts estimated Ant’s value at over $300 billion. The new restrictions have prompted experts and investors to back off those assessments. BlackRock recently valued Ant at $174 billion while Fidelity Investments recently slashed its valuation to $78 billion.
Meanwhile, China’s regulators aren’t letting Ant, Alibaba, or the two companies’ charismatic founder out of the doghouse. On Thursday, Bloomberg reported that China’s top anti-graft watchdog, the Central Commission for Discipline and Inspection, was among the agencies probing links between Ant and a network of state-owned enterprises in connection to their dealings with Zhou Jiangyong, the former party secretary of Hangzhou, the city where Ant and Alibaba are headquartered.
Chinese prosecutors haven’t charged Ant, Alibaba or Ma with misconduct. But this week they accused Zhou, who was arrested in February, of pocketing “huge” bribes. In January, an anti-graft documentary aired on state-controlled media alleged that the former secretary used his influence to help businesses owned by his younger brother.
Munger would not have found solace in Alibaba’s most recent financial results. In February, the company reported year-on-year quarterly revenue growth of 10%, its slowest quarterly growth rate since going public in 2014.
The consensus among global equity analysts remains that Alibaba’s shares are hugely undervalued. Of the 56 analysts following Alibaba tracked by MarketWatch.com, 40 rated the company’s shares a “buy” while six rated them “overweight.” Only one analyst rated the company’s shares a “sell.”
And yet the company’s regulatory travails and lackluster financial results have tested the resolve of even cornerstone Alibaba investors like Masayoshi Son’s SoftBank Group, which holds a 25% stake in the e-commerce giant.
The larger threat to Alibaba is the emergence of nimble e-commerce rivals like Pinduoduo and the evolving shopping habits of Chinese consumers who have shifted from search—going directly to Alibaba’s Taobao or T-mall platforms to look for products—to browsing in which they are pulled into purchasing while interacting with other online content.
Munger is famed for his folk wisdom and no-nonsense approach to investing. But in the case of Alibaba, he appears to have decided that the fishing isn’t as easy as it looked.
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