Banks' Estimates Value Alibaba IPO Price at Discount to Tencent
Earnings Forecasts Put Chinese Internet Giant's Initial Stock Price at 20% Discount to Rival's Valuation
Salespeople at banks working on Alibaba Group Holding Ltd.'s potentially historic initial public offering are pitching the shares as a bargain.
In recent days, citing future profit estimates from their banks' stock analysts, stockbrokers have told clients they could get shares in the Chinese e-commerce giant at a discount, roughly 20%, to where shares of Chinese Internet rival Tencent Holdings Ltd. TCEHY -0.90% are trading, and an even bigger discount to shares of Facebook Inc., FB +0.70% people familiar with the conversations said.
The discussions come as China's largest e-commerce player, Alibaba, and its advisers are in the thick of a two-week campaign to win over investors. Later next week, the company is expected to sell stock to select investors at a set price, and the following day, likely Friday, shares will begin trading on the New York Stock Exchange.
Meetings with investors are taking place this week across the U.S., before moving next week to Asia and Europe.
Last week, Alibaba set an initial price range of $60-$66 per share. However, even in big deals like this one, companies and their bankers on occasion raise the final price for the shares from the initial range. Such a bump, made depending on bankers' assessment of demand, would raise more money for Alibaba but leave less potential gain for its investors. Of the 14 global listings bigger than $10 billion since 1995, four priced above their initial offering range, according to Dealogic.
Alibaba, which charges commissions and advertising fees to merchants looking to promote themselves in its online stores, has impressive profit margins, converting 52% of its revenues into net income in calendar-year 2013.
The first half of this calendar year saw $2.3 billion in profits, taking out any one-time gains. Analysts at the banks working on the deal recently forecast that the company will grow its profit to nearly $7 billion by calendar-year 2015, people familiar with the figures said.
At that level, the middle of the price range proposed for Alibaba's potential $24 billion IPO values the Chinese e-commerce giant at about 24 times its future earnings—a discount compared with more than 29 times for rival Tencent, according to analyst estimates compiled by FactSet.