One of the most gripping, puzzling, and fascinating sagas has been that between Alibaba (BABA  ) and the Chinese government. A few months ago, Alibaba was expected to spin off its fintech unit - AliPay in an IPO that was estimated to fetch a valuation of $200 billion.

However, the IPO was cancelled after Alibaba founder Jack Ma made critical comments about Chinese regulators' inability to understand AliPay's business model. Essentially, regulators were treating Alipay like a bank that would require some sort of capital reserves rather than a tech company which is how Ma saw Alipay.

As a result, the IPO was pulled. Ma disappeared from public life for a few days. Alibaba's stock sank 25%. Now, it finally seems like the saga is coming to an end as the government issued a $2.75 billion fine, and Ant Group is being restructured as a financial holding company which may bring with it higher levels of regulation.

New Regulations and Restrictions

The change in classification for Ant Group is expected to negatively affect the company's valuation and profitability. It seems to be part of a larger effort by authorities to reduce the size and influence of tech companies that have become quite massive over the past decade. Alibaba looked poised to continue its dominance given its large market share in numerous fast-growing categories like B2C ecommerce, B2B ecommerce, cloud computing, and fintech.

In fact, many believed that Alibaba had a chance to become the most valuable company in the world given that it has more market share in its markets, and these markets are less mature than European and American markets, implying more growth potential.

Some other measures are that Ant Group will set up a personal credit reporting business and combine its lending businesses into its consumer finance brand. Essentially, it will sever the connection between AliPay, consumer loans, and credit cards.

It also mandates that AliPay will have to share information about its customers with credit bureaus. It will also limit the company's ability to use leverage and manage liquidity as a bank does with proper amounts of reserves.

Stock Price Outlook

Alibaba is down about 25% from its high in October of last year. Currently, it's hard to assess how much damage this ruling will do to the company's earnings and multiples. However, stocks tend to rally once these risks are resolved. Further, the ruling was much less severe than many were predicting.

Even if AliPay is less attractive as a business due to these developments, the company retains a leading position in many industries. It's also quite attractive from a valuation basis given its forward PE of 20, 25% profit margins, and 37% sales growth. Analysts are forecasting that EPS over the next 12 months will be $11.55 which is a significant improvement from last year's $8.83.