Alibaba (NASDAQ: BABA) Shares are Collateral Damage in U.S. China Cold War

Chinese e-commerce platform Alibaba (NASDAQ: BABA) shares are feeling the impact of the accelerating geopolitical tensions between the  U.S. and China. While this strikes as déjà vu from the trade war uncertainty that was put to rest at the start of 2020, the growing resurgence seeks to unravel the phase one trade pact and overall relations. Allegation ranging from deceptive handling to the creation of the COVID-19 virus that leads to a global pandemic, has been launched at China. The U.S. ban on China-based Huawei Technologies from doing business with U.S. companies over 5G security concerns is still on the table. Tension is rising again in Hong Kong as protestors resumed clashes with the government when China implemented new security laws heading into the end of May warning the U.S. not to intervene. The rhetoric between the two superpowers are heating up tremendously as it seems hostility towards China’s tactics seem to be the single bipartisan issue that both parties are united on. The recently passed Senate China oversight bill is a punch in the nose directed at China in regard to the potential de-listing of U.S.-listed Chinese companies. Investors in BABA may find it prudent to unwind positions before hostilities climb to a boiling point between the nations.

The Senate Chinese Oversight Bill

On May 20, 2020, the U.S. Senate passed legislation requiring U.S. listed foreign companies to certify they are not owned or controlled by a foreign government. While the bill itself applies to all foreign companies, the direct jab at China was summed up by the bill’s sponsor Senator John Kennedy. His statement held nothing back, "The Chinese Communist Party cheats, and the Holding Foreign Companies Accountable Act would stop them from cheating on U.S. stock exchanges… We can’t let foreign threats to Americans’ retirement funds take root in our exchanges." It can’t be understated the history of fraudulent Chinese internet companies dating back to the internet bubble of 2000. The recent stock implosion of Chinese coffee chain Luckin Coffee (NYSE: LK) is yet another cautionary tale for investors in fraudulent reporting from Chinese companies. The bill is expected to pass the House of Representatives as attacking China seems to be the one bipartisan issue between the two sides.

Q4 FY2021 Earnings Results

On May 22^nd, Alibaba reported its Q4 Fiscal Year 2021 earnings of RMB 9.20-per share, beating consensus analyst estimates by RMB 3.13. Revenues grew to RMB 114.31 billion versus RMB 108.31 estimates, up 22.3% year-over-year (YoY). Annual active consumers on China retail marketplaces rose to 726 million, up 15 million YoY. Mobile monthly active users (MAUs) grew to 846 million in March 2020, up 22 million YoY. Despite COVID-19, Alibaba  grew total annual active consumer base to 960 million globally and “achieved a historic milestone of $1 trillion across our digital economy this fiscal year.” As per Chairman and CEO, Daniel Zhang. The Company adjusted down guidance to RMB 650 billion versus RMB 656.44 consensus estimates. By any metric, Alibaba’s numbers are still impressive in the backdrop of a global pandemic that peaked in China during the first three months of 2020. So why did the stock sell-off (-6%)?

All War is Based on Deception

Revered Chinese General Sun Tzu, author of The Ancient Art of War, notes that all war is based on deception. If this is the new cold war, then those words should be taken to heart for U.S. investors.

The Senate’s oversight bill calls into question whether U.S.-listed Chinese companies’ numbers are real, and can they be trusted? This will rely on the Public Company Accounting Oversight Board’s (PCAOB) determination which will require validating three consecutive years of accounting inspection for companies using a foreign public accounting firm. This would require companies to turn over original auditing documents which are restricted by Chinese law. It’s also an accepted practice for the Chinese government to own a piece of most businesses operating in China. The SEC and analysts have questions about how Ali Baba calculates it gross merchandise value (GMV) for years as well as the underlying structure of the many subsidiaries within.

The Controversial Loophole with Chinese Stocks

It is illegal for non-Chinese citizens to own shares of Chinese companies. To bypass this regulation, Chinese companies create pass-through entities in Bermuda and the Cayman Islands that track or receive proceeds of funds. These are basically shell company entities that then get listed on the U.S. stock exchanges enabling U.S. investors to ‘invest’ in the Chinese companies. It’s a loophole that China has purposely ‘overlooked’ in the past. However, this structure can collapse the moment China closes this loophole, a possibility very few investors ever thought would become a reality.

Opportunistic Entry Levels

Using the rifle charts on a monthly, weekly and daily time frame provides a broader view of the landscape for BABA stock. BABA shares have been resilient throughout the COVID-19 pandemic until the most recent earnings release combined with the threat of the Senate oversight bill. The monthly rifle chart shows a make or break forming with the falling stochastic and 5/15-period moving averages (MAs) capping the channels at $202.29 and the $186.50 Fibonacci (fib) level.  The weekly rifle chart is a make or break situation with a rising weekly stochastic and flat 5/15-period MAs that were challenged at $199.70 on the recent earnings sell-off. The most recent market structure low (MSL) buy triggered above the $194.74 fib, which is a key line in the sand now. The daily stochastic was rejected hard off the 80-band to cross down. This set-sup a reversion or a perfect storm breakdown in the coming week. Investors should pay attention to the trajectories as potential downside and plan accordingly in a timely manner to protect gains or minimize losses. The upside reversion trajectory sits at the $207.69 and $211.59 fibs. If the weekly stochastic crosses down from the daily stochastic oscillation down, then a perfect storm can trigger for downside trajectories to $194.74 daily MSL trigger/fib key line in the sand if broken triggers further selling to the $190.96 fib then $186.40 monthly 15-pd MA/fib. If the monthly candle closes under the 15-pd MA, then a further downside move would target the $170.49-$166.10 fib range.