Atlantic Equities Initiates Coverage On Alibaba, Cites 80% Market Penetration

Alibaba Holdings Group Inc. is expected to maintain its 80 percent market share of China's electronic commerce although its lack of order fulfillment facilities presents a risk to investors, an analyst said Monday.

Alibaba, expected to launch its initial public offering September 18 at $60 to $66 per share, got an Overweight rating and $100 price target in coverage initiation by Atlantic Equities' James Cordwell.

With China's e-commerce market expected to post compound annual growth of more than 30 percent for the next three years, Cordwell said Alibaba's current scale, its broad penetration beyond major cities and its strong brand support will enable the company to fend off ongoing and intense competition from the likes of Tencent Holdings Ltd., Baidu Inc. and others

Related Link: Bernstein Says Yahoo! Inc. Likely To Extend Gains On Alibaba IPO

The gross merchandise value of goods moved by Alibaba in the year ended March 31 was $270 billion, compared with about $20.5 billion for eBay Inc.

Alibaba doesn't own fulfillment facilities, but plans a joint venture to be initially financed by third parties, Cordwell said. The project won't hurt Alibaba's margins but "if it doesn't pan out there's a risk Alibaba's competitiveness will be impaired," Cordwell said.

Alibaba, like all major Chinese Internet companies listed on U.S. exchanges, is set up as a so-called variable interest equity, The New York Times noted Sunday.

The Times' report noted that the U.S China Economic and Security Review Commission in June warned that such investments are "excessively risky" for a host of reasons, not least because of their complete reliance on rudimentary and "undeveloped" Chinese law.

Cordwell's report didn't analyze Alibaba's variable interest equity structure.

Traders are attributing much of Yahoo!, Inc.'s YHOO movement in anticipation of the Alibaba IPO. Yahoo traded recently at $41.72, up 5.4 percent.