HONG KONG -- The dizzying rise of Alibaba.com Ltd.'s shares in their debut here yesterday offers investors a tough choice: Balk at the skyscraping valuation or believe in the technology growth story.

 

The shares nearly tripled from their initial-public-offering price, exceeding market expectations at levels some analysts and investors warned could be unsustainable.

Alibaba.com, the flagship business-to-business unit of China's Alibaba Group, raised US$1.5 billion when it sold 17% of its enlarged share capital in the biggest IPO ever by a Chinese Internet company. Yesterday's closing price of HK$39.50 (US$5.09) a share brought the company's market value to US$26 billion.

 

But analysts and fund managers said the current share price, at 320 times the company's forecast 2007 earnings, was far removed from Alibaba.com's fundamentals. That price/earnings ratio, for example, compares with a P/E of about 177 for Chinese search engine Baidu.com Inc. and 52 for rival business-to-business search engine Global Sources Ltd., both of which trade on the U.S.'s Nasdaq Stock Market.

 

Yet others said it may be too early for the IPO's investors to take profits, because technology stocks sometimes trade much higher on growth expectations. This year, shares of Baidu have surged 256% as of yesterday morning in Nasdaq trading, while Hong Kong-listed Tencent Holdings Ltd., a provider of online-chat services in China, is up 117%.

 

"It is hard to say whether Alibaba.com prices have topped yet," said Y.K. Chan, a strategist at Phillip Capital Management. "People buy technology stocks for their growth, and sometimes these stocks do beat expectations."

 

Alibaba.com, which connects small manufacturers in China and elsewhere with potential customers, leads the B2B market in China, with a 69% share, according to second-quarter trade-value numbers from technology-consulting firm Analysys International. Web-site tracker Alexa.com ranks it as the most visited import/export site. Parent Alibaba Group's other units include Taobao.com, the leading online-auction site in China, online-payment system Alipay, and Yahoo China, and it is one of the few Chinese Internet companies to establish a global profile.

 

Alibaba.com, founded by its chairman, Jack Ma, in June 1999, sold 858.9 million shares at the top end of its indicative price range. Demand from both institutional and individual investors was robust during the offering, with the individual portion 257 times subscribed. That level of interest triggered a reallocation of the individual-investor portion to 25%, from 15% originally.

 

Alibaba.com's shares opened yesterday at HK$30, more than double their IPO price of HK$13.50, and reached an intraday high of HK$39.95. It was the most heavily traded stock in Hong Kong, with shares valued at more than HK$17.5 billion changing hands. Meanwhile, the benchmark Hang Seng Index closed up 1.7%, or 495.81 points, at 29438.13, a day after suffering its largest single-day point drop.

 

Analysts had called even the IPO price somewhat expensive, though many had predicted it would double when it hit the market because of the investor demand for the strongly branded company. There are few Internet companies listed on Hong Kong's stock exchange, because most of the Chinese listings in this sector have gone to Nasdaq, where they have historically enjoyed higher valuations. But a maturing investor base in Hong Kong, along with continued demand for Chinese offerings, carried through to Alibaba.com's market debut.

Company executives defended the stock's valuation, noting the growth potential of the company.

 

"Buying Alibaba.com stock is like investing in the e-commerce infrastructure in the fast-growing Chinese economy," said Chief Executive David Wei. "Our core customers are the 42 million small-to-medium enterprises in China that are growing very fast."

Analysts said they expect Alibaba.com to post a 63% rise in net profit next year to 1.02 billion yuan (US$136.8 million), and a 44% increase in 2009 to 1.47 billion yuan, saying the company has yet to fully tap the vast customer base it has.

 

Only 1% of Alibaba.com's 24.6 million registered users are now paying members, and analysts said they believe that portion will stay roughly the same in the next two to three years.

 

The company will focus on increasing overall user numbers in an effort to provide more value to its existing premium customers, who pay annual fees ranging from 2,800 yuan to 60,000 yuan to set up online "storefronts" with Alibaba.com's help.

"We are not in a rush to monetize the supplier community yet," Mr. Wei said.

Alibaba.com is looking to expand into key Asian markets such as India and Japan, according to Mr. Wei.

 

While Alibaba has grown rapidly since its founding in 1999, the company has also become susceptible to sellers listing counterfeit, gray-market, tainted or unsafe products -- a problem that could damage the company's image and become a source of legal troubles as it has for other online-trading platforms, including eBay Inc. The company says it has cooperated with brand owners to delist products that violate their rights.

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