Open sesame (once again)

The debut of Alibaba’s shares in Hong Kong in November 2007 was a record-smashing moment. The territory’s benchmark Hang Seng Index was already trading at historical highs when the Chinese e-commerce firm spun off its B2B (business-to-business) marketplace (Taobao, its consumer sales platform, wasn’t part of the offering). The public tranche of the $1.7 billion IPO was oversubscribed 258 times, freezing HK$450 billion ($57.8 billion) of funds across the city and breaking the previous IPO record set by state banking heavyweight ICBC just a year earlier. On its first day of trading Alibaba nearly tripled from its HK$13.5 offering price, making it the first Chinese internet firm to carry a market value of more than $20 billion.

There was limited understanding of how Alibaba made money, however. “How many investors, do you think, genuinely understand your company’s business plan?” was the final question put to Jack Ma at a press conference following Alibaba’s trading debut. “Not many… but they have all made money,” he replied, adding that many investors seemed to think that Alibaba was a taxi operator because it had pasted its logo on local cabs in a pre-IPO public relations push.

Ma concluded by advising investors to do their own research simply by speaking to Alibaba’s clients.

No one was confusing Alibaba with a taxi franchise this week when it completed its second major share sale in Hong Kong. Daniel Zhang, who succeeded Ma as executive chairman earlier this year, did not even need to hold a press conference this time around either. Yet why is Alibaba making – what is being termed – a “homecoming” to Hong Kong and what impact is it likely to have on the local market?

Why was a second listing in Hong Kong needed?

Alibaba was just eight years old back in 2007. Its founder Ma wasn’t the global celebrity he is today and journalists certainly weren’t as accustomed to taking his often-metaphysical remarks quite so seriously.

Back at the press conference held after Alibaba’s IPO, Ma had emphasised that going public was just the beginning. His company would be devoting its energies to building a broader e-commerce industry in China, he said, and working hard for the next 94 years. His goal for Alibaba to prosper for “102 years” might have sounded odd to some in the audience. Yet Ma’s remark wasn’t even picked up by the Hong Kong newspapers the following day. Local media focused on another figure instead: that Alibaba was trading at 300 times its earnings.

In share price terms, that was pretty much the peak for Alibaba’s Hong Kong listed unit, however. The company was soon mired in a scandal linked to fraudulent sale of goods, which led to the resignation of then-CEO David Wei (see WiC96). Its B2B business also began to decline as more companies opted to set up their own websites and pay search engines to promote them in online queries.

Worse, the bull market in Hong Kong ran out of steam, turning sharply for the worse when the global financial crisis started to unfold. Alibaba’s share price dropped as low as HK$3.46 in October 2008, even earning a monicker as “the HK$40 thief” (the decline from its peak value) among local investors.

In 2012, the parent group made an offer to take its Hong Kong unit private, valuing it at HK$13.5 a share. The offer was exactly the same as the price at IPO in 2007. Many investors were disappointed: they had been hanging onto their shares in the hope that Alibaba might inject some of its more valuable assets, such Taobao and Alipay.

Alibaba was turned down on another share sale in 2014?

The buying out of its Hong Kong-listed unit was part of the group’s wider restructuring. This included taking back shareholding control from Yahoo, an early investor that owned 40% of Alibaba’s parent firm (see WiC125), as well as introducing a dual-class shareholding structure (where a small group of founders and key executives controlled the boardroom, despite not owning a majority stake).

This paved the way for a bigger flotation of the entire group. However, memories of the first IPO in Hong Kong seemed to have lingered when Alibaba came knocking on the bourse’s door again two years later. The city’s financial regulators decided to reject its request to return to Hong Kong on the grounds that its dual-class shareholding structure fell foul of the territory’s listing rules (see WiC237).

That saw the Hong Kong Stock Exchange (HKEx) miss out on the world’s biggest IPO, with Alibaba going public in New York in September 2014 instead. Indeed, the city’s stock market bosses came to regret snubbing Alibaba, whose market value has since grown 170%, and surpassed the $500 billion mark.

Its stock became the fifth most actively traded in New York this year, averaging $2.6 billion a day, data from Refinitiv shows.

Keen to make amends HKEx changed the rules to allow companies with a dual-class shareholding structure to go public in the city. The move, many analysts believe, was tailor-made to lure Alibaba back.

“After five years, Alibaba has finally returned home to Hong Kong and China,” Charles Li, HKEx’s chief executive, celebrated at the listing ceremony on Tuesday, referencing the rejection of the company’s IPO request in 2014.

How has Alibaba’s return been received this time?

The company’s secondary listing looks likely to raise as much as $13 billion (after an over-allotment tranche is issued), making it the world’s largest share offering of 2019.

Should the greenshoe be used in full, 575 million new shares will have been issued at HK$176 apiece, a slight discount to its price in New York as of last week.

Only 10% of the shares were set aside for retail investors. According to the Hong Kong Economic Times, this tranche received nearly 200,000 applications from local investors, making it one of the most popularly received offerings ever in the territory (the record is still held by ICBC, which drew up to 970,000 applications).

That’s despite difficult market conditions in Hong Kong. US stocks have been trading at historically high levels but the Hang Seng Index has been dropping since April, brought down by political unrest in the city, as well as the uncertainties of the trade row between Beijing and Washington.

In that context, Alibaba’s “homecoming” was widely described as a much-needed boost. CNN saw it as “a vote of confidence” in the Asian financial hub, for instance, and the Global Times praised it as a strong endorsement of Hong Kong’s role as “the Chinese mainland’s gateway to global financial markets”.

Alibaba’s arrival means more rivalry with Tencent?

Alibaba is trading under the stock code ‘9988’ – numerology that suggests long-lasting prosperity and wealth – and its shares started with a bang, climbing nearly 7% by market close on Tuesday.

Nearly $2 billion worth of its stock changed hands, or a fifth of average daily turnover on the entire bourse last month. Trading levels might subside after early investors take profits, yet there’s probably going to be strong demand from Asia-focused funds and Hong Kong retail investors that previously lacked access to Alibaba’s New York-listed shares.

With a market capitalisation close to HK$4 trillion ($511 billion), Alibaba also raced past fellow internet giant Tencent, which was worth HK$3.2 trillion as of Thursday. Tencent is one of the main market movers in the Hang Seng Index (HSI), given that it carries the heaviest weighting in the benchmark. That position could come under threat with Alibaba’s arrival, although the index compiler told Hong Kong reporters this week that Alibaba isn’t in the “eligible stock universe” for the HSI because of its dual-class shareholding structure. However, a market consultation is soon to be conducted that could see its inclusion as soon as May next year.

Although Alibaba is yet to acquire blue-chip status in Hong Kong, the bourse has already included it in less influential sub-indexes and trackers this week, thus making it eligible for southbound capital flows from Shanghai and Shenzhen via the Stock Connect schemes. Moreover, investment banks are likely to come up with a slew of new warrants and options linked to Alibaba, which would also challenge Tencent’s position as the most important stock in the city’s derivatives market.

Why did Alibaba need to raise funds?

“Why not?” Jiemian asked this week, noting that the e-commerce giant is sitting on a cash pile of $45 billion after its latest fundraising. “Alibaba certainly has a lot of cash but the best time to repair your own roof is on a sunny day,” the news portal added. Alibaba is still predominantly an e-commerce play and sales at the Singles’ Day shopping bonanza earlier this month climbed 30% to a new record of Rmb410 billion ($58 billion).

Jiemian noted that Alibaba is having to “burn a lot of cash” to fend off competitors such as Pinduoduo and JD.com on the e-commerce front. E-commerce is also the only profitable unit among its four main business segments. The other three – cloud computing, digital media and entertainment – are growing rapidly, but still require significant investment.

Alibaba trails only Apple as the world’s most cash-rich tech firm, Tim Culpan of Bloomberg wrote this week, wondering whether Alibaba might ape one of Apple’s more recent tactics in buying back its shares. “By using the Hong Kong money to cut the New York float, Alibaba can start to shift its investor base closer to home in China, which was a key purpose of this offering,” Culpan added.

This is an interesting proposition, especially in the context of the trade and tech rows between China and the US. Despite reiterating that a “phase one” trade deal is near, US President Donald Trump complicated the negotiations this week by signing a bill which requires an annual review of Hong Kong’s special trading status. It also means that Washington could freeze the US assets of individuals (including Beijing officials) deemed responsible for human rights violations in the former British colony.

If Sino-US relations continue to sour, pressure will increase to prevent Chinese firms from going public on Wall Street, or to impose fundraising sanctions on companies already listed in New York, such as Alibaba and JD.com. If this happens, a listing in Hong Kong could be an important fallback.

It also speaks volumes that Alibaba has shunned a homecoming to the A-share market, despite the launch of a much-vaunted tech bourse in Shanghai earlier this year (see WiC461). That’s another reason why HKEx has opened the door to Chinese firms with more complex shareholding structures (such as dual-class shares or those controlled by offshore vehicles known as variable interest entities). “From now on there will be a lot of prodigal sons, who have been travelling all over the world, returning home,” HKEx boss Charles Li said on Tuesday. “The return of iconic new economy firms, together with Tencent and other Hong Kong-listed firms, would help paint a rosier picture in the Hong Kong market together.”

So is it worth buying its new shares?

Binnie Wong, HSBC’s Asia head of internet research, thinks so, welcoming the share sale this week with a price target 30% above current levels. The rationale is that performance in Alibaba’s core e-commerce looks robust, while losses on newer initiatives in areas like cloud computing, entertainment and local consumer services will soon narrow as it entrenches its position as a leader in each field.

Taken together, they also allow for synergies and cross-selling across Alibaba’s expanding range of services, driving gains in the bottom line, she noted.

Alibaba’s customer retention is also better than its peers, aided by best-in-class technologies and deeper user insights. “If we revisit how Taobao transformed e-commerce 16 years ago, we expect another revolution to digital transformation in the next decade,” Wong added.

Of course, Alibaba has already been through a number of transitions in its business model and it has always talked about taking the longer-term view (including Jack Ma’s mentions of his 102-year plan after the Hong Kong IPO in 2007). There are parallels to this in some of its latest objectives, such as serving 2 billion consumers worldwide by 2036, creating 100 million jobs and providing the infrastructure to support the profitability of 10 million small businesses.

Yet the company is also widening its horizons, talking not just about dominating in China but doing so around the world (see WiC473 for more on the growth of AliExpress). That was made clearer in 12 separate references to its global reach in a letter to shareholders from Daniel Zhang, the chairman and CEO, this month. In short, Alibaba is leading the charge as one of China’s global brands, even as its stock ‘comes home’ to Hong Kong.

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