Alibaba ignores $2.75 billion antitrust fine, shares rise

Authors: Josh Horwitz and Yilei Sun

SHANGHAI (Reuters) – Alibaba does not expect any material fallout from China’s antitrust crackdown that will force it to fundamentally overhaul how it deals with sellers, its chief executive said on Monday, after regulators fined the e-commerce giant $2.75 billion for abusing its dominant market position.

Shares of Alibaba Group Holdings Ltd rose 9% in Hong Kong trading as a major source of uncertainty for the company was removed and the fine and related steps were not more onerous.

Alibaba has come under fire since its founder and billionaire Jack Ma publicly criticized China’s regulatory system in October.

As part of “comprehensive changes” sought by regulators, Alibaba will make it easier for businesses to do business with it, Chief Executive Officer Daniel Zhang told an online conference for media and analysts.

Beijing wants Alibaba to stop requiring sellers to choose between doing business with it or rival platforms, a practice known as “trader exclusivity” that critics say has helped Alibaba become China’s largest e-commerce operation.

Alibaba executives said that despite a record 18 billion yuan ($2.75 billion) fine imposed on Saturday and measures ordered by regulators, they remained confident of the government’s overall support for the company.

“They validate our business model,” said Joe Tsai, Alibaba’s executive vice president. “We’re clear that there’s nothing wrong with our core business model as a platform company.”

SHARES ARE BOUNCING

The company’s shares rose about 8% in afternoon trading in Hong Kong, adding $48.5 billion to its market value and putting it on track for its biggest one-day gain in almost three months.

“Now that the penalty has been settled, market uncertainty about Alibaba will decrease,” said Kenny Ng, an analyst at Everbright Sun Hung Kai.

“Alibaba’s share price has been lagging behind all emerging market stocks for some time now. The introduction of this penalty is expected to help Alibaba’s share price regain market attention.”

In addition to imposing the fine, which is one of the highest antitrust penalties in the world, the State Administration for Market Regulation (SAMR) ordered Alibaba to make “sweeping changes” to strengthen internal compliance and protect consumer rights.

“The required corrective measures will likely limit Alibaba’s revenue growth as further market share expansion will be hampered,” said Lina Choi, senior vice president at Moody’s Investors Service.

“Investments to retain vendors and improve products and services will also reduce profit margins.”

SAMR said it found that Alibaba, also listed on the New York Stock Exchange, had been preventing its sellers from using other e-commerce platforms since 2015.

The practice, which SAMR previously found to be illegal, violates China’s antitrust law by hindering the free flow of goods and harming the business interests of traders, the regulator said.

The investigation comes as China strengthens SAMR, adding additional staff and expanding jurisdiction in a crackdown on tech conglomerates, heralding a new era after years of a laissez-faire approach.

The agency has been particularly targeting Chinese tech giants recently, reflecting increased scrutiny of the sector in the United States and Europe.

EXCLUSIVE EDITIONS

Alibaba said it accepted the penalty and “will ensure compliance with its findings.”

Speaking to analysts on Monday, Tsai said that beyond the company’s merger and acquisition scrutiny that its competitors also face, he did not expect any further investigation by the antitrust watchdog.

“We are glad to put this matter behind us,” he said.

Tsai added that the company “does not rely on exclusivity” to retain its sellers, adding that in the past, such exclusivity deals only covered a small number of Tmall flagship stores.

Alibaba and its rivals remain under scrutiny from the market regulator for mergers and acquisitions, Tsai said at a briefing, adding that he was not aware of any other antitrust investigations.

The fine is twice as high as the $975 million paid in 2015 by Qualcomm, the world’s largest supplier of mobile phone chips, in China for anti-competitive practices.

“The $2.75 billion fine imposed on Alibaba should be treated for what it is — a significant but affordable price to start the process of reconciliation with the Beijing regime,” said Franklin Chu, president of Sage Capital in Rye, New York.

“Alibaba remains an attractive and convenient way to invest in China’s rapidly growing economy,” he said. “Given the strength of its diverse core businesses, the stock is undervalued by most conventional measures.”

(Reporting by Josh Horwitz and Yilei Sun; Additional reporting by Scott Murdoch, Donny Kwok, Andrew Galbraith and Ross Kerber in Boston; Writing by Ryan Woo; Editing by Lincoln Feast and Himani Sarkar.)