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Will Alibaba's Hong Kong listing end in tears?

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam • 4 min read
Will Alibaba's Hong Kong listing end in tears?
SINGAPORE (Nov 25): Farmers have prospered by making hay while the sun shines. Alibaba Group Holding, the e-commerce giant, is following suit. Its Hong Kong listing on Nov 19 is impeccably timed. It is raising US$13 billion ($17.7 billion) to fund its exp
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SINGAPORE (Nov 25): Farmers have prospered by making hay while the sun shines. Alibaba Group Holding, the e-commerce giant, is following suit. Its Hong Kong listing on Nov 19 is impeccably timed. It is raising US$13 billion ($17.7 billion) to fund its expansion.

There has been a stampede for the issue, despite the US-China trade war and the crisis in Hong Kong. Media reports suggest that the book is already covered multiple times.

Alibaba is in the pink of health. It recently broke records during Singles Day — the world’s largest 24-hour shopping event.

The annual event takes place on Nov 11 and celebrates the virtues of singlehood in a culture in which youth face parental pressure to marry. Gross merchandise value (GMV) on Singles Day easily exceeded last year’s record of US$30.5 billion.

In 2QFY2020 ended Sept 30, income from operations was RMB20,364 million ($3,942 million), an increase of 51% y-o-y; adjusted earnings before interest, taxes, depreciation and amortisation rose 39% y-o-y to RMB37,101 million. Net income attributable to ordinary shareholders was RMB72,540 million, and net income was RMB70,748 million, which included a significant one-time gain recognised upon the receipt of the 33% equity interest in Ant Financial. Excluding this one-time gain of RMB69.2 billion and certain other items, non-GAAP net income was RMB32,750 million, an increase of 40% y-o-y.

The listing offers mainland investors a chance to invest in Hong Kong. The Stock Connect program facilitates mainland investment in the Hong Kong market. Previously, only Chinese with money parked outside the country could trade the country’s most valuable company.

The Hong Kong protests have not dented the pipe that connects Hong Kong to the mainland. US$18 billion has flowed into Hong Kong since the protests began.

Alibaba has been resilient in the face of intense competition from Tencent Holdings, Meituan Dianping and Baidu. The proceeds from this issue would be used to consolidate Alibaba’s expansion in cloud computing, entertainment as well as investment in start-ups.

The US-listed Alibaba is up 34% so far this year, which explains the management’s rush to the market.

But, there are non-financial reasons for the listing. For one, it is an act of solidarity with Beijing. The Chinese authorities are facing persistent protests in Hong Kong. Listing one of the largest Chinese companies in Hong Kong would cement the city state’s position as a leading financial centre.

Also, the trade war looms large on Chinese e-commerce. The US may close the door on Chinese companies. There could be restrictions on Chinese companies that operate in the US as well as accessing the capital markets.

In September, Bloomberg reported that Larry Kudlow, head of President Donald Trump’s National Economic Council (NEC), was considering restrictions on Chinese companies that used US financial markets. By listing in Hong Kong, Alibaba insulates itself from the risk of those extreme measures.

The move is spearheaded by the new man at the helm — Daniel Zhang, an uncharismatic accountant. Unlike his heralded predecessor Jack Ma, Zhang rarely pontificates on the secrets of success. He does share Ma’s opportunism, as the timing of the listing shows.

However, there is an eerie anniversary that may haunt Alibaba. Alibaba is listing in Hong Kong as the 20th anniversary of the dotcom collapse looms. March 11, 2020 will mark 20 years since the violent convulsions that destroyed US$1 trillion (about 20%) of value on the Nasdaq in a month.

Tech listings used to routinely double on the first day in the late 1990s. Nasdaq was a wonderland where ideas could fetch in- stant fortunes.

Tiny start-ups such as Webvan and Pets. com had vast ambitions and valuations, but negligible revenues. These early e-commerce firms were burning their IPO proceeds in a year.

The brutal crash of 2000 exposed the fragilities of the sector. Today, the danger is that the risks are magnified. The current bubble is not with the listed e-commerce players. It is with the huge investments that start-ups are receiving from other e-com- merce players, VCs and angel investors.

The start-ups have unsustainable cash flows. Once this unpleasant fact becomes apparent, investors such as Alibaba will be stuck with illiquid investments.

Also, this year has seen many mega IPOs of cash flow-negative businesses. Uber raised US$8 billion, while its smaller competitor Lyft raised US$2.3 billion. These businesses promise to disrupt commerce, but they have universally lost money since listing. The market seems to be tiring of unprofitable, cash flow-negative companies, as the WeWorks collapse shows.

Already, the Chinese slowdown is affecting Alibaba’s competitors. Tencent has reported a 13% drop in earnings in its latest quarter, as a result of weaker advertising and gaming revenue. Alibaba must be heralded for its opportunistic listing but, for investors, the party could end in tears.

Nirgunan Tiruchelvam is head of consumer sector equity research at Tellimer (Exotix Capital)

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