HONG KONG (BLOOMBERG, REUTERS) - Alibaba Group chairman Daniel Zhang said Hong Kong’s “future is bright” as the company launched its US$13.86 billion (S$18.88 billion) secondary listing in the city gripped by increasingly violent protests and recession.
“Over the last few years, there have been many encouraging reforms in Hong Kong’s capital market. During this time of ongoing change, we continue to believe that the future of Hong Kong remains bright,” Zhang wrote in the chairman’s letter included in the company’s supplementary prospectus.
Four thousand people have been arrested in Hong Kong since June and the territory’s economy has sunk into recession for the first time in a decade as the anti-government demonstrations disrupt business and deter tourists.
Alibaba priced the retail portion of its Hong Kong share sale on Friday (Nov 15), issuing an appeal to retail investors in Hong Kong. The largest Chinese e-commerce company capped the 12.5 million shares available to individual investors at HK$188 (S$32.70) apiece - an auspicious number in Chinese culture - making it the most expensive first-time share sale in Hong Kong. The public offering which began on Friday will close at noon on Wednesday (Nov 20).
Alibaba said it may price the remainder of its 500 million-share offering above that ceiling, signaling that it aims to raise at least US$12 billion ($16.4 billion) in what would be one of the world’s largest sales of stock this year. The international offering tranche of 487.5 million shares will be set by November 20 after a marketing process.
Asia’s largest corporation is proceeding with what could be Hong Kong’s biggest share sale since 2010. Slated for late November, it’ll be the Chinese e-commerce juggernaut’s official Asian coming-out party - half a decade after snubbing the financial hub for a record Wall Street debut. Alibaba’s return hands a much-needed victory to a city wracked by protests since the summer, and will please Chinese officials who’ve watched many of the country’s largest private corporations flock overseas for capital.
If the deal goes through, Alibaba will challenge Tencent Holdings for the title of the largest Hong Kong-listed corporation.
“The listing in Hong Kong will allow more of the company’s users and stakeholders in the Alibaba digital economy across Asia to invest and participate in Alibaba’s growth,” the company said. “During this time of ongoing change, we continue to believe that the future of Hong Kong remains bright,” Zhang, who is also chief executive officer of Alibaba, said in a letter to investors.
Bloomberg Intelligence analyst Steven Lam said Alibaba’s secondary listing in Hong Kong could lead to a shake up of the Hang Seng Index, the city’s main stock benchmark. The 50-member index is heavy on financial stocks, when comparing weights to other leading equity indexes in the world. Meanwhile, IT, industrials and consumer discretionary stocks are severely underrepresented.
A marquee name like Alibaba’s could also draw investors and boost trading liquidity for Hong Kong Exchanges & Clearing, which just incurred its biggest profit slump in more than three years.
For Hong Kong, it’s bit of welcome news following half a year of often violent protests that have at times paralyzed the city and its service industry. Efforts to court Alibaba emanated from the very top, with Chief Executive Carrie Lam herself exhorting Ma to consider a listing in the city.
Alibaba has considered a Hong Kong listing for a long time, Michael Yao, head of corporate finance at Alibaba, said on a call with investors this week. The deal size hasn’t changed as a result of the protests, he added.
Listing closer to home has been a long-time dream of billionaire Alibaba co-founder Jack Ma’s. A successful Hong Kong share sale could help finance a costly war of subsidies with Meituan Dianping in food delivery and travel, and divert investor cash from rivals like Meituan and WeChat operator Tencent. It will also be a feather in the cap for Zhang, who took over as chairman from Ma in September. The former accountant is now spearheading the company’s expansion beyond Asia but also into adjacent markets from cloud computing to entertainment, logistics and physical retail.
The IPO comes as China's e-commerce industry is slowing, with Alibaba's annual Singles' Day shopping blitz recording its weakest sales growth since its 2009 debut, and Hong Kong's business district paralysed by demonstrations.
"The listing reflects politics more than business strategy," said Brock Silvers, managing director at Hong Kong-based Adamas Asset Management, adding the trade war was an "added incentive".
Alibaba has found itself in Washington's crosshairs after a US government panel last year blocked on national security grounds its plan to acquire MoneyGram International Inc.
In June, a bipartisan group of US lawmakers introduced a bill that would force US-listed Chinese companies to allow third-party regulators unrestricted access to auditing reports, something Beijing has long resisted, citing national security.
And in September, there were reports that US President Donald Trump was considering forced de-listing of US-listed Chinese companies on similar grounds.
"Trump has threatened to restrict China's access to US capital markets, and Alibaba's Hong Kong listing could help blunt that leverage," said Silvers.
'RICH ALIBABA ECONOMY'
Staying closer to home could help the US$475 billion retailer boost its valuation.
"Investors in the Hong Kong stock market are less influenced by the political atmosphere and have a more objective view of the richness of the Alibaba economy," a former Alibaba senior executive, who declined to be named, said.
While its 17.1 per cent operating profit margin and over 50 per cent revenue growth rate are the envy of many Western retailers in mature economies, Alibaba trades at a deep discount to them.
It trades at just 25 times forecast earnings, compared to 85 times for Amazon, even though the US firm's margin is just 4.5 per cent and revenue growth around 30 per cent, Refinitiv data shows.
Alibaba's plan to expand beyond its core e-commerce to cloud, entertainment and artificial intelligence will help reduce some of the gap with the US$869 billion giant.
Alibaba said in a filing it would use the Hong Kong proceeds to invest in food delivery services, video streaming platforms, cloud computing and machine learning.
The overwhelming majority of Alibaba's revenue comes from advertisements and related services it offers on its e-commerce sites, but growth from this revenue stream has steadily slowed.
It sits on a US$33 billion cash pile and the share sale will boost its coffers above Amazon's US$43 billion, sharply enhancing its financial firepower for expansion into new sectors.
"While the added access to capital should prove to be extremely useful, it isn't a necessity," Silvers said.