Alibaba’s Singles’ Day was a brilliant idea.
Pick a relatively minor “holiday” that’s memorable and people are familiar with. Offer massive discounts. Associate your business with said day. Eventually take over said day and make it part of your overall brand. Profit.
Singles’ Day has been many things for Chinese internet giant Alibaba. It’s been a massive publicity stunt, a driver of massive sales numbers, and a powerful flex to the rest of the world. In the last few years, Singles’ Day has traveled far beyond China’s borders as a signal of Alibaba’s huge scale compared to US rival Amazon.
This latest Single’s Day was no exception, drawing in a record US$38 billion worth of sales – although the day’s annual sales growth continued slowing as it has done for the past years and disappointed co-founder Jack Ma.
On the back of (a still pretty successful) Singles’ Day, NYSE-listed Alibaba has moved closer to its long-awaited secondary listing in Hong Kong. The company is now set to start trading in Hong Kong on 26 November, to raise US$13.4 billion.
Strong Sales, Healthy Fundamentals
Other than the publicity momentum that Singles’ Day always gives the company, why would it go ahead with this listing now?
Insight Providers on Smartkarma, including Sumeet Singh and Arun George, point out that Alibaba is in a good enough position financially not to need the extra cash. “With strong cash generation metrics and net cash of US$13 billion in 2QFY20, Alibaba does not need to raise money,” writes George.
Read Arun George’s full Insight: Alibaba HK Listing Bear View: HK Raise Will Worsen the past Poor Capital Allocation
Most of the company’s fundamentals are pretty sound, as Rickin Thakrar points out in an Insight.
The company showed significant top-line growth of around 40 percent in 2Q19/20. “While it is a step down from FY18/19 [growth] of 51 percent, this remains robust in our view, especially given the macro environment as well as continued robust competition in both commerce and cloud,” Thakrar writes. Unlike competitor Tencent, Alibaba reports its interest and revaluation income below the EBIT line, he adds, which means Alibaba has a clearer line in terms of operating results.
Read Rickin Thakrar’s full Insight: Alibaba HK Listing: Do the Fundamentals Stack Up?
Sumeet Singh singles out the lack of a price range as particularly strange. “The lack of a price range might mean that the ADRs continue to languish,” he notes. “In my view, the company is trying to do all it can to protect the ADR from being impacted. However, […] the ADR was always going to go down as people would look to pocket whatever discount was being offered for the Hong Kong listing.”
The ADR still dropped 2.4 percent on the day this Insight was published (14 November), while Alibaba finally set a price of no more than HK$188 per share. “It doesn’t really tell you anything about the company’s willingness to give on pricing apart from the fact that they don’t want to give a sizeable discount. To sum it up in one word, I would call it cheeky,” Singh adds in a subsequent discussion.
Read Sumeet Singh’s full Insight: Alibaba IPO/Secondary Listing – Not Good for the ADR, Should Have Put a Price Range to It
The most prominent reason for the secondary listing is that investors in Hong Kong and China have been hotly anticipating the move. The Hong Kong listing finally gives the local retail investment community (and loyal consumer base) an inroad into the firm.
Plus, thanks to Stock Connect rules that allow HKSE-listed stocks to trade in the exchanges of Shanghai and Shenzhen, investors from China can take part in one of their country’s most successful companies.
The US Factor
The other reason is a common denominator for a lot of international market developments over the past couple of years: The trade war between the US and China has generated a lot of mistrust and bad blood for Chinese companies operating and/or listed in the US. Brands like ByteDance’s TikTok and Huawei are synonymous with national security threats to many American legislators.
In a recent Insight, Travis Lundy draws attention to a proposed bill in the US Senate that seeks to prevent the US federal pension fund from investing in Chinese-listed shares. This ties into a broader conflict between US regulators and China over transparency in auditing Chinese companies listed in the US.
Taken far enough, such moves by US politicians “could mean that the same politicians would wish for companies listed on US exchanges, which are not able to have their audit work or subsidiary audit work fully inspected, to have their right of US listing removed,” Lundy writes.
Read Travis Lundy’s full Insight: Anticipating the Alibaba HK Listing
In such an event, “companies like Alibaba would want to have another listing where US-listed ADRs would be fungible to trading on a different venue,” he adds. This is especially important for Alibaba given its top position: “If successful, Alibaba will be the largest company to have a secondary listing in Hong Kong with a primary listing in the US,” writes Arun George.
Whatever the case, with the Hong Kong listing going ahead, Alibaba is set for another public market record (its 2014 NYSE listing, raising US$25 billion, is still the world’s largest at the moment). The secondary listing is still expected to be the biggest of the year, almost double that of Uber’s US$8.1 billion flotation… at least until Saudi Aramco’s IPO gets going.
Lead image by Foundations World Economic Forum / Ben Hider