Alibaba’s latest deal shows the extent of investors’ frenzy for China’s internet. The e-commerce giant announced on March 11 it had agreed to buy 60 percent of Hong-Kong listed ChinaVision for $804 million. The film group’s market value promptly soared to almost $5 billion. Star-struck investors are too easily excited.
ChinaVision is issuing new stock to Alibaba at 50 Hong Kong cents per share, a 22 percent discount to its closing price before the announcement, valuing the existing film production and distribution group at around $1.3 billion. Yet ChinaVision shares, which had already risen before the deal, promptly tripled in value.
Investors seem to be excited about having Alibaba as a major shareholder, but details are missing. ChinaVision’s core business is film production and rights distribution, and the company’s mobile video operation accounted for just 1 percent of total revenue in the first half of 2013.
Investors may be betting on Alibaba moving into digital entertainment – it launched a set-top box and TV operating system last year. ChinaVision’s movies and film rights could help give it a toehold in online video and entertainment. But even if Alibaba is successful, it’s not clear that would transform the Hong Kong unit’s prospects.
Another possibility is that Alibaba wants to use ChinaVision as a back door route to a stock market listing. Jack Ma’s company is locked in an impasse with Hong Kong stock market regulators over its corporate governance structure. In the unlikely event that Alibaba tried, it’s hard to imagine the authorities would allow a company with a likely valuation of more than $100 billion to sneak onto the market.
There are two possible conclusions to draw from ChinaVision’s surge: either the founders undervalued the company when selling to Alibaba, or investors have become star-struck. The latter seems the more likely. Earlier this year, Alibaba participated in a consortium that invested $170 million in a pharmaceutical data company. The shares have risen seven-fold since the announcement. Shares of China South City Holdings, a logistics firm, have doubled since it sold a 9.9 percent stake to media and gaming giant Tencent. As long as investors are so easily excited by China’s internet, companies will continue to cash in on their enthusiasm.