Recent events have led to a significant upheaval in the stock market, particularly for Gao Xin Retail, the parent company of the prominent supermarket chain, Da Run FaAt the start of trading, the company's shares plummeted nearly 30%, hitting a low of HK$1.60 per shareBy the end of the trading session, the decline moderated to around 16.5%, yet the company’s market value has seen a drastic contraction, now standing at around HK$19.7 billion—an alarming reduction from its peak valuation of nearly HK$130 billion during its primeThis marks an astounding loss of 85% in market cap over the years.

But what triggered this sudden stock collapse? Gao Xin Retail may not ring a bell for many readers, yet its associations with well-known sub-brands, Auchan and Da Run Fa, which are recognized for their mid-to-high-end supermarket chains, cannot be overlookedSince 2017, Alibaba has been a significant investor in Gao Xin Retail, gradually increasing its stake to over 50% by 2020, thus becoming the controlling shareholder

Now, four years later, this relationship has taken a surprising turn.

On the final day of 2024, Alibaba announced the complete divestment of its shares in Gao Xin Retail for a total transaction value of HK$11.637 billion, equating to HK$1.55 per shareThis news sent shockwaves through the market, primarily due to three key factors that I will elaborate on below.

1. The Impact of Alibaba's Sell-Off:

At first glance, the sheer act of a major shareholder liquidating their shares doesn’t always translate into a market downfall; the dynamics often depend on the credibility of both the selling party and the buyerAlibaba, known as China’s leading retail platform, possesses immense power in the e-commerce landscapeThey have also made significant acquisitions in traditional retail spaces, such as Gao Xin Retail itself and Intime Department Store.

However, the buyer in this scenario is Paragon Shine Limited, a firm registered in the Cayman Islands, with DCP Capital as the ultimate controller

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This private equity firm boasts a notable pedigree, having been co-founded by KKR’s global partners Liu Haifeng and Huayu EnergyThey have previously invested in reputable companies like Shengnong Development, Mengniu Dairy, and Qingdao HaierIn contrast to Alibaba, which symbolizes industrial capital seeking growth and profitability, DCP Capital is positioned firmly within the realm of financial capitalTheir focus may lean towards optimizing the transaction price allegedly over time.

Additionally, the selling price was significantly lower than expectedPrior to this transaction, Gao Xin Retail’s stock was trading at HK$2.48 per share, meaning that the sale price represented a 37.07% discountThe immediate impact of this discount provoked a nearly 30% drop at the market's opening, with shares dipping closely to the transaction price of HK$1.55.

At the beginning of the year, the price had briefly touched HK$0.93 per share—significantly lower than the transaction value

Before the tumultuous market conditions in September 2024, the shares hovered around HK$1.30, then rallied to HK$2.80 post-SeptemberYet, Alibaba’s decision to exit shares at such a low price represented a bleak outlook for the secondary market, making the drastic fall in stock price understandable.

2. Why Did Alibaba Opt to Sell?

The decision to sell is equally compellingBack in 2017, when Alibaba began investing in Gao Xin Retail, the company was on a robust growth trajectory, with revenues reaching RMB 250.3 billion—marking a 58% year-on-year increaseThey recorded a staggering net profit of RMB 61.4 billion, up by 49%. During that time, Alibaba’s chairman, Jack Ma, introduced the concept of New Retail, which was predicated on the confluence of online and offline shopping experiences leveraging advanced information technology.

As China’s e-commerce titan, Alibaba was keen on driving this integration by investing heavily in offline retail platforms

Gao Xin Retail, boasting brands like Auchan and Da Run Fa, fits neatly into this visionHowever, the results have been underwhelmingWhile Gao Xin Retail achieved a peak revenue of RMB 124.6 billion in 2020, the numbers have spiraled downward since, plummeting to RMB 88.1 billion in 2022 and further down to RMB 72.6 billion in 2023, with a 15% decrease in the first half of 2024.

Current evaluations place Gao Xin Retail’s earnings at levels reminiscent of 2010 and 2011. The situation worsened in 2021 when the company faced a net loss of RMB 740 million, which ballooned to RMB 1.6 billion in losses by 2023. Consequently, since reaching its peak in 2020, the stock price has tanked by approximately 93%. For Alibaba, Gao Xin Retail has become a 'liability' that pressures their aspirations.

Since 2021, Alibaba has experienced its share of hurdlesCompetition from platforms like Pinduoduo has eaten into their market share, coupled with the rise of short video platforms that have transformed consumer engagement online

At one point, their net profit plunged from over RMB 140 billion in 2021 to just RMB 70 billion the subsequent year.

With managerial changes—Jack Ma stepping down, Zhang Yong’s exit, and Cai Chongxin’s return—there has been a decisive push to refocus on core business areasThe consensus is clear: no matter how extensive Alibaba’s operations, retail remains central, primarily online retail and any non-core ventures that impede their main line of business should be restructured or divested.

3. Is This a Case of Cutting Losses or Sacrificing Assets?

Many observers alike have labeled this move as Alibaba 'cutting losses' given Gao Xin Retail's potentialHowever, such narratives can be biasedAs the financial data suggests, the supermarket chain’s profitability has been steadily eroding over the years, making it a declining asset for a company like Alibaba facing fierce competition

This begs the question of whether it is more prudent for Alibaba to let go of a liability that continues to accumulate costs.

Consumer behavior has also evolved, especially in the wake of the pandemicThe luxury moments for Gao Xin Retail occurred in 2020, surpassing RMB 120 billion in sales revenuesHowever, the subsequent changes in consumer expenditure patterns have been profound—shifts towards more economical outlets have dominated the landscapeIn contrast, Pinduoduo has thrived even amidst this downturn, generating over RMB 280 billion in quarterly revenue, expected to breach RMB 400 billion by year-end, coupled with net profits that surpass RMB 85 billion for the same period.

Among China’s supermarket chains, only a handful like Bangdonglai, which operates in three to four cities, have managed to flourish, albeit not replicable across the entire retail industry