Alibaba first listed on the New York Stock Exchange in September 2014 and has maintained a secondary listing in Hong Kong since November 2019.
Alibaba to apply for primary stock listing in Hong Kong
The company has just announced its intention to seek a primary listing in Hong Kong by this year end, converting from its secondary listing status and thus becoming a dual primary listed company. With any significant move such as this, there will be implications which we will look at in detail.
Alibaba explains that in the six months ended June 30, 2022, the average daily trading volume in Hong Kong was approximately US$0.7 billion, compared to an average daily trading volume of approximately US$3.2 billion in the United States. Given the substantial presence of its business operations in China, the company expects that its dual-primary listing status would allow it to broaden its investor base, and facilitate incremental liquidity, in particular expand access to China- and other Asia-based investors.
At present, Mainland Chinese investors can only invest in companies with a primary listing in Hong Kong on Stock Connect, the cross-border investment channel.
The Stock Connect consists of two parts, Northbound and Southbound. As the name implies, Northbound is for Overseas and Hong Kong investors to invest in China and trades are settled in Renminbi while Southbound is for Chinese investors to invest in Hong Kong and trades are settled in Hong Kong dollar.
This move will allow Alibaba to be included in the Stock Connect link with Chinese stock exchanges such as the Shanghai Stock Exchange and Shenzhen Stock Exchange and will allow Mainland Chinese investors direct access to purchase Alibaba shares as Chinese investors cannot buy into secondary Hong Kong listings or US ADRs. We have a table below of the types of Chinese shares and the accessibility to Chinese investors.
3 reasons this would benefit Alibaba (and shareholders)
1) Investor base expands
It is estimated that there are about 200 million retail investors in China. With poor western sentiments on Chinese stocks since the regulatory crackdowns and many western institutions indicating that they have pulled out from China, it is clear that if Alibaba is on the Southbound stock connect, there is much more potential investor monies inflow from China.
Although Alibaba is a global company with operations in many parts of the world and with entities such as Lazada and Trendyol focused on certain regions such as Asia and Turkey, most of Alibaba’s revenue is still generated in China. With a primary listing in Hong Kong, Chinese investors who are very familiar with Alibaba’s suite of offerings such as Taobao, AliExpress, Cainiao, Alibaba Cloud, and Dingtalk can now invest in Alibaba.
2) The application and subsequent approval is a positive signalling of turnaround
In China (and Hong Kong), significant moves such as this are not made without some form of prior implicit approval.
This is another indication that China welcomes the homecoming of Chinese ADRs and also further supports our belief that the worst of regulatory actions are over. The homecoming talk has been around for many years and this move by one of the biggest Chinese tech companies not only shows support from the Chinese government but also Alibaba’s belief that the primary listing will benefit the company.
We previously wrote about why we think the regulatory crackdown is over and why it is time to buy into China now.
3) China is currently in a state of monetary easing
Unlike the first two reasons which have longer term structural implications, this is a reason that will benefit investors in the short term.
China is currently in a stage of expansionary monetary and fiscal policy while many parts of the western world are in the tightening phase in a bid to combat inflation. Since western countries commenced its monetary tightening, Chinese stocks have outperformed.
Of course, this is after a prolonged regulatory crackdown in China. With a primary listing in Hong Kong, Alibaba may see more astute investors who switch their positions based on the near term potential share price appreciation of the stock.
2 reasons why it could be a negative change for Alibaba
1) Volatility from change in investor mix
Institutional investors are generally perceived as rational and cool headed investors as they are exposed to a variety of news reports which put them in a better position to evaluate fundamentals. Comparatively, retail investors are viewed as irrational and tend to destabilise the stock market.
Many western institutional investors have exited Chinese stocks and the shift in primary listing may exacerbate the move.
According to estimates, local retail investors account for some 86% of trading volumes in the A-share market. This is somewhat lower in Hong Kong with estimates ranging from 57% to 61%. Retail investors tend to be on the hunt for quick capital gains and are susceptible to panic selling which would increase volatility.
Hence, Alibaba’s shares could be prone to bouts of shifting sentiment driven by retail speculation and sustained by momentum trading.
2) Valuation discount
A home coming listing would align Alibaba closer to China and further from the western world.
Chinese stocks have historically traded at a discount to its Western peers due to the country risk premium allocated to China over concerns of ESG factors. This means that Alibaba may not ever reach the all time high valuation where share prices went above $300.
Currently, China is still part of many stock indices representing emerging and developing markets instead of developed markets which also causes a valuation discount.
Should you keep Alibaba in your portfolio?
Ailbaba’s share price was up nearly 5% during trading in Hong Kong after the news was released, showing that there is positive investor sentiments over this move.
Although we have listed three reasons why the primary listing in Hong Kong benefits Alibaba, we have also thought of two reasons which may make investing in Alibaba more challenging in the future. Investors should constantly review their portfolio, especially in light of major news with long term structural implications such as this so as to remain diversified.