Now, Alibaba.com faces revamp

HONG KONG, CHINA: Shares of Alibaba.com tumbled as much as 10 percent after an increase in fraudulent transactions prompted two top executives to resign and threatened to tarnish the Internet company's reputation.

China's biggest e-commerce company, founded by former school teacher Jack Ma, now must cope with the replacement of its chief executive and chief operating officer and with revamping its payment and credit-ranking system to prevent the fraud it revealed on Monday.

Alibaba.com's shares fell by as much as 9.6 per cent to HK$15.08 and ended down 8.6 percent, their biggest decline since September 2009, during the global financial crisis. Shares of Yahoo! Inc, which has a large indirect stake in Alibaba.com, fell 4 per cent to $16.95 on Nasdaq.

Alibaba.com, which dominates China's business-to-business Internet space, needs to rework its business model, but most analysts say the latest management shake-up will have limited impact on its financial performance in the next few quarters.

"It may shake up some of the confidence level of the buyers, mostly international buyers," said Alicia Yap, an analyst with Citi in Hong Kong.

Volume in Alibaba.com surged to 71 million shares, nearly five times the average traded over the past 30 days. Before Tuesday's fall, the shares were up 20 percent so far this year.

Morgan Stanley cut its Alibaba rating to equal-weight, while Mirae downgraded it to hold due to challenges faced by the new CEO to revamp the company's payment and credit-ranking systems.

"It's not the departure of the two guys -- it's the reason why they departed. ... It's a blow to the reputation of the company," said BGC Partners analyst Colin Gillis.

However, CLSA and Yuanta Research retained their buy recommendations on the stock, while Macquarie held on to its price target of HK$12.50.

Jonathan Lu, a 41-year-old who heads up unlisted online retailer Taobao, will take over as CEO of Alibaba.

Analysts said a key challenge that Lu faces is to train employees to winnow out risky suppliers.

"It's also to do with the integrity of the employees. Without the help of the internal employees, a lot of these accounts will actually not be able to pass," Yap said.

Standard Chartered analyst Don See said in a report the move could possibly pave the way for a possible injection of Taobao's assets into Alibaba.com.

On Monday, Alibaba.com CEO David Wei Zhe and COO Elvis Lee Shi-huei resigned after a noticeable increase in fraudulent transactions at the Chinese e-commerce company's website.

The company said Lee and Wei were not personally involved in any of the claims and that they had made good faith efforts to address the problem, but were resigning to take responsibility for a "systemic breakdown."

"We are concerned that the company's overseas customers will be less willing to transact business with the company's CGS (China Gold Supplier) members as the level of trust in the platform declines," said Paul Wuh, an analyst at Samsung Securities.

Alibaba.com's China Gold Suppliers is a network of high-volume members.

Alibaba.com, a unit of Alibaba Group, 40 percent-owned by Yahoo! Inc, focuses on connecting small and medium-sized companies at home and abroad on sourcing for goods, such as garments, computers and machinery.

The company competes with Global Sources in China's roughly 1.7 billion yuan business-to-business marketplace.

China's e-commerce market is growing rapidly, with online retail sales expected to surge to $159.4 billion by 2015 from $48.8 billion, according to industry forecasts.

In November, Alibaba.com reported a record quarterly profit of 366 million yuan ($55 million) in July-September, though the company said it sees slower growth due to new service price hikes and as China's export growth eases.