Caixin
Jun 12, 2019 10:00 PM
TECH TALK

What’s Driving Alibaba’s Hong Kong IPO Plan?

Is it politics, valuation or something else?

That’s the question that’s been weighing on China tech watchers these last couple of weeks, after Bloomberg reported that e-commerce juggernaut Alibaba was gearing up to make a second listing in Hong Kong to complement its primary listing in New York. The news caught many by surprise, since Alibaba is quite well represented by its current listing in New York that dates back to 2014.

There is quite a bit of history to this particular development, which could see Alibaba raise up to $20 billion through an offering whose formal application could land on the Hong Kong stock exchange’s desk as soon as the next few weeks. Such a listing could be the largest for Hong Kong in nearly a decade – something that would certainly be a feather in the cap of the former British colony that is now firmly part of China.

I polled a few contacts for their views on what’s driving this deal, and politics certainly seems to be a big part of the equation. Then there’s also the issue of valuation. Alibaba is currently one of the world’s most valuable companies with a market value of about $420 billion and a very respectable price-to-earnings (PE) ratio of 34. But the numbers are far behind Amazon, the company that Alibaba most aspires to imitate, whose market value and PE are both more than twice Alibaba’s.

A third factor that could be playing into the situation is the large volume of Alibaba shares that have come and could be coming into the market these days, as two of the company’s largest and oldest shareholders sell down their stakes. Against that kind of a backdrop, such a second listing in Hong Kong could act as a sort of “sponge” to soak up some of the billions of dollars in shares that may swamp the market with these particular two exits, which I’ll detail shortly.

At the end of the day, my personal feeling is that Alibaba’s biggest consideration in all of this is probably valuation – especially when one looks at how much it’s undervalued compared with Amazon. A number of U.S.-listed Chinese tech companies have expressed similar frustrations about low valuations over the last five years, and ultimately de-listed from New York to seek higher valuations by re-listing in China.

In most cases the strategy has worked pretty well for companies like Focus Media and Qihoo, though the process was probably a bit more complex than many realized.

More fundamental is the question of just how much Alibaba might be undervalued, if at all. I personally believe that Alibaba is a far riskier proposition than Amazon due to its almost complete reliance on one product, e-commerce, in a single market, China. By comparison, Amazon is far more geographically diverse, and is also quite good about getting itself into cutting-edge new areas like electronic readers, cloud services and connected devices.

So perhaps Alibaba really is worth just half of Amazon, or perhaps less. We would certainly get a clearer picture with a second listing in Hong Kong, which we’ll spend the rest of this column exploring.

Politics and lots of shares

We’ve already explored the valuation question and why it might be partly driving this particular second listing plan for Hong Kong, so let’s move on to the politics. The fact of the matter is that it’s always been just slightly embarrassing for China that most of its hottest tech names are listed in New York. Alibaba aside, a few of the many other examples include leading search engine Baidu, No. 2 e-commerce player JD.com, online game giant NetEase and social media pioneer Weibo.

By comparison, very few of the country’s big tech names are listed in China, whose stock markets have traditionally favored state-owned companies and whose strict profit requirements ruled out many such tech firms anyhow. Hong Kong has become something of a middle ground of late, especially after a few rule changes last year that favored Chinese firms that were previously going to New York. In addition to hosting game giant Tencent for more than a decade, Hong Kong has more recently become host to leading online-to-offline services provider Meituan Dianping, as well as smartphone major Xiaomi.

China tech historians will know that Alibaba actually also wanted to go the Hong Kong route when it made its record-breaking $25 billion IPO in 2014. But it was ultimately thwarted by local listing rules that prohibited the kind of partnership structure it wanted to use. The U.S. didn’t prohibit such structures, which was one of the primary factors that helped New York win the listing. Since last year Hong Kong has also allowed such structures, which give different voting rights to different classes of shareholders, clearing a major hurdle that kept Alibaba out in the first place.

With that regulatory roadblock now cleared, Alibaba would clearly win favor with Beijing through a second listing in Hong Kong while being able to use its current structure. It would also win favor with mainland Chinese investors, who would be able to easily buy the Hong Kong-listed shares through a 5-year-old program connecting mainland and Hong Kong stock markets.

Then there’s the issue of a flood of new shares coming and that could come into the market. That stream began in 2016 when longtime shareholder Softbank announced its plans to sell down its stake in Alibaba from 32% to 28% to raise cash. There’s always the possibility it might look to offload more of that as it pursues other goals.

More recently, Altaba, an entity left over from the breakup of former internet giant Yahoo, has announced it will disband, dumping the roughly 11% of Alibaba shares it holds. That overhang, plus the potential for more Softbank selling, could provide a steady flow of additional shares into the market in the next few years, positioning a Hong Kong listing to pick up some of that slack.

At the end of the day, a second listing in Hong Kong does seem to be killing quite a few birds with a single stone, despite its relatively unusual nature. Alibaba would win brownie points with Beijing and almost certainly gain millions of potential new mainland Chinese investors to soak up additional shares coming into the market with such a listing. Whether or not all of that will get it a significantly higher valuation is another question.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com


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