2014. The year Alibaba smashed records to become the largest IPO with a $21.8 billion capital raise.
It was not until 2019 that Aramco broke the record raising $25.6 billion.
Alibaba was about to better Aramco’s record where its associated company, Ant Group, was seeking a $34 billion capital raised in an IPO. Only it didn’t. The IPO irked the Chinese authorities and set the stage for the regulatory backlash on Chinese tech companies.
Now Alibaba has been added to the delisting list by the Securities Commission (SEC) in the U.S.
What a fall – from the largest IPO to delisting disgrace in a span of 8 years.
What should shareholders do? Let’s explain the situation and explore your options.
(Below is a video if you prefer to watch, else read on)
What is this SEC delisting list?
The US laid out a law in 2020 known as Holding Foreign Companies Accountable Act (HFCAA). Quoting our previous article on this delisting issue,
To recap, HFCAA aims to delist foreign-jurisdiction companies from US stock exchanges if they fail to meet American auditing standards for three years in a row. According to the statute, publicly listed companies that refuse US regulators’ audits can be delisted after three years of non-compliance.
There are over 150 companies on the list and majority are Chinese companies. You have big names such as Baidu and JD.com, who didn’t manage to satisfy the authorities in terms of getting their books inspected. Now Alibaba has just been added and it is the highest profile of all and hence the attention and significance.
What is China doing about the delisting issue?
China has been negotiating with the U.S. regulators and was open to allow on-site audit inspections in China.
Press releases have showed a difference in attitude – China was positive about achieving a resolution but the U.S. side sounded apprehensive.
Given that the negotiations have been going on for months with zero progress, we can say the likelihood of delisting of these companies is high.
What happens when a company gets delisted?
It might sound like a disaster if the stock you are holding gets delisted and you might worry that it will be worthless or maybe not being able to sell it.
That’s not true. We use DiDi as an example.
It was on the HFCAA list and was delisted from NYSE on 14 Jun 2022. But the stock continue to trade in the over-the-counter (OTC) market. The ticker was changed from DIDI to DIDIY to reflect the change.
If you were holding DIDI and didn’t sell, your holdings will automatically convert to DIDIY. You are still able to buy and sell DIDIY in the OTC market without any trouble.
What will happen to Alibaba (BABA)?
Since we have established a resolution between U.S. and China over this matter is unlikely, we should assume Alibaba will eventually be delisted.
The situation is rosier than DiDi because at least Alibaba has a secondary listing in Hong Kong with the ticker 9988. DiDi had no alternatives.
Those holding 9988 won’t need to sweat about it as it has no risk of delisting. That said, expect the share price to decline since the selldown in BABA would also affect 9988.
In hindsight, we now know why Alibaba wants to upgrade its secondary listing in Hong Kong to a primary listing – the insiders probably knew Alibaba would be added to the HFCAA list. They needed to act.
I believe the likely scenario is that Alibaba will have an OTC version trading in the U.S. while 9988 becomes the primary counter, replacing BABA.
This is similar to Tencent where the primary trading takes place in Hong Kong with the ticker 700 and the OTC counter is trading in the U.S. with the ticker TCEHY.
What are your options if you are holding BABA?
You have four options:
- convert your BABA to 9988. One BABA share can be converted to eight 9988 shares. But it will involve fees so please check with your broker and see if the fees make sense. If I am not wrong, it would cost about few hundred dollars to convert.
- sell BABA and buy 9988. This would incur the usual brokerage fees. Since both BABA and 9988 move in tandem due to their fungibility, you should not suffer large spread losses. Moreover HKD is pegged to USD so forex losses are minimal too.
- just sell your BABA shares if you no longer wish to hold it anymore. In this case you don’t need to worry about the future of Alibaba or the delisting risk it is facing.
continue to hold BABA and have it converted to the OTC counter. You can still trade it during U.S. trading hours.
If you are holding other stocks on the HFCAA list, you can refer to this post for other approaches.
Life goes on
Although the delisting news sounded bad, it is not the end of the world. There have been precedences where their shares continue to trade even after delisting. DiDi is one example.
Alibaba is looking to upgrade its listing status in Hong Kong and that would help transit its primary trading from the U.S. to Hong Kong.
In fact, you have many options to deal with this. Alibaba will continue to be tradable one way or another.