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What Does Alibaba’s Recent Investment into Singapore Post Mean for Shareholders of the Latter?

Talk about a shock in Singapore’s share market. Last month’s announcement that China-based e-commerce giant Alibaba Group will buy 10.35% of postal and logistics services outfit Singapore Post (SGX: S08) in a private placement had surprised the market. This led to a 9% jump in Singapore Post’s shares the day the announcement was made.

Although it is great that the largest e-commerce company in China has chosen to invest in Singapore Post, what does it actually mean for investors in the company? How will Singapore Post be different with or without the investment from Alibaba?

The deal

Alibaba will buy a total of 220,096,000 ordinary shares of Singapore Post at S$1.42 per share. That is about 10.35% of the enlarged share base of the company. The S$312.5 million raised from the placement will be used by Singapore Post for 3 main purposes: 1) Expansion of its e-commerce logistics business; 2) future mergers, acquisitions, or property development projects; and 3) general working capital.

From service provider to partner

Singapore Post has long been a service provider for Alibaba Group for some of its business in the region. The deal will bring the two companies closer together and might even see Singapore Post benefitting from Alibaba’s network and platform.

Those benefits can manifest in a couple of ways. Firstly, Alibaba might assist Singapore Post by directing more business volume to the latter. In addition, Taobao, an online retail platform from Alibaba that connects buyers and sellers, has started to make inroads into Southeast Asia. If that takes off and Singapore Post gets to help Taobao with its logistical needs, the logistics outfit might stand to profit tremendously.

The negatives

However, due to the fact that Singapore Post had to issue new shares, investors need to be prepared to face some dilution in the short run at least. For instance, based on the pro-forma financial figures for the financial year ended 31 March 2014, Singapore Post’s earnings per share will decrease from 6.75 cents to 6.05 cents following the private placement. At the company’s current price of S$1.680 per share, that translates into a price to earnings ratio of 28 times.

Foolish Summary

We have to note that Alibaba is set for an initial public offering this year and has been investing heavily in many other companies as well; Singapore Post is hardly the only logistics-related company Alibaba has invested in. Therefore, for investors interested in Singapore Post, they’ll have to decide if the growth prospects that Alibaba might potentially bring to Singapore Post is worth 28 times its current earnings.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.