China’s meteoric rise to the top of the global financial food chain has been one of the main topics of conversation amongst economists — both professional and amateur — for the last decade and a half.
In that time, the nation was transformed from what was popularly perceived to be a vast, mysterious, and technologically backward communist nation into the image of a 21st century superpower.
One of the driving forces behind that ascent, as well as one of the effects of it, has been the rise of the Chinese middle class.
Middle class — a term more commonly associated with 20th century America — now applies more and more to a rapidly expanding population of Chinese who, in the last generation, left their villages, moved to the cities, and adopted a modern lifestyle in order to participate in the burgeoning economic potential of the nation.
More than doubling in the first decade of the 21st century, China’s industrialized, city-based economy brought a quarter billion new inhabitants from China’s rural countryside into urban areas.
In the process, disposable per-capita income for the average Chinese also shot up, quadrupling within the same timeframe and creating in China something that would have seemed unthinkable to those who were old enough to remember the times of Mao: a consumer class.
And that consumer class continues to grow today.
In 2011, for the first time ever, more Chinese lived inside urban centers than outside of them… Today, that figure stands at 54%.
Impressive progress, but still a full 20-40% behind the U.S., members of the EU, or Japan.
Scrambling to Catch Up
But for investors, this is a good thing, because what we’ve got is a pattern with an already established outcome.
You see, China will eventually reach urbanization rates of 70% and 80%, and the 300–450 million new city dwellers taking part in that exodus will all take up the habits that current city-dwelling Chinese have been enjoying since the turn of the century…
Namely, buying stuff online.
It’s the one habit that tends to unify modern, middle-class people from around the world. Those with disposable income, a credit card, and an internet connection all do it, and at an increasing frequency.
There’s one company right now operating in China that has followed the national rise to modernity just about every step of the way… And as the nation continues to modernize, so will this company continue to draw nourishment and growth from the increasing flow of online commerce.
The company is Alibaba, and it’s the biggest online retailer operating in China.
Packages shipped through its two main websites, Taobao Marketplace and Tmall.com, now account for a full 60% of the packages shipped through the Chinese postal system.
Sounds like market saturation, right? Well, in most cases with numbers like these, you’d be correct.
Alibaba accounted for an astonishing 70% of market share for all online transactions executed in China as early as 2005 — making this rate of growth utterly unsustainable in the future.
However, keep in mind that this is a society that still required ration tickets for some supermarket items as recently as the 1980s.
As China produces new consumers at a rate far outstripping anything seen in the West — even at the peak of the industrial revolution — Alibaba’s prospects for the future are as bright as they come.
2014’s Biggest IPO?
This makes the company’s news from earlier this week perhaps the most important stock-related event of the year.
On Tuesday, Alibaba filed papers for an initial public offering, seeking to raise at least $1 billion.
For a company that had $7.5 billion in revenue last year, the $1 billion filing is nothing but a placeholder on its registration papers with the Securities and Exchange Commission.
This announcement sets the stage for the technology industry’s biggest IPO since Twitter and its early investors collected $1.8 billion when the social networking giant went public last fall.
According to rumors, Alibaba could try to raise more money and even surpass the $16 billion Facebook and its early investors raised in the social networking leader’s IPO two years ago.
In my mind, however, comparing Alibaba with either of the last two superstar tech IPOs is arbitrary and valid only because all three happen to deploy their services via the internet.
Yes, Alibaba is an online-based operation, but it serves as a retailer with a very broad and predictably expanding market — not as a social network with a revenue model that is nebulous at best.
I think a better comparison would be with Wal-Mart, which gave an entire class of American consumers access to one-stop convenient shopping at bargain prices when it took its chain from regional to national two and half decades ago.
The differences, however, might put the Alibaba story into its own class.
Chinese outnumber Americans by about 5 to 1. Just under half of China’s citizens are still waiting to be assimilated into 21st century consumerism, and when they are, it will be largely thanks to the instant-gratification potential available with online services just like Alibaba’s.
With growth potential driven by forces like these, profit potential for investors will be titanic.
In fact, analysts recently polled by Bloomberg News valued the company at nearly $170 billion, while some expect that valuation to reach as high as $250 billion once trading commences.
Whatever happens, expect this IPO — whose debut date is still a mystery — to be the biggest one of the year for the tech sector.
Keep a very close eye on this one.
To your wealth,
Brian Hicks
Check us out on YouTube!Brian is a founding member and President of Angel Publishing. He writes about general investment strategies for Wealth Daily and Energy & Capital. For more on Brian, take a look at his editor’s page.
