SINGAPORE (Aug 12): Why would a hugely profitable, cash-flush firm raise more money than has ever been raised by a listed company? That is the question befuddling investors. Hangzhou-based, New York-listed e-commerce behemoth Alibaba Group Holding, China’s largest company by market capitalisation, currently has nearly US$30 billion ($41.46 billion) in cash and cash equivalent on its balance sheet. Two months ago, Alibaba filed with Hong Kong’s Securities and Futures Commission to raise at least US$20 billion more in a secondary listing in Hong Kong later this year.

At the same time, the Chinese e-commerce icon remains committed to raising up to US$10 billion in Shanghai as part of China’s plan to get its homegrown tech champions, including Hong Kong-listed super-app operator Tencent Holdings and US-listed search engine giant Baidu, to list on the mainland, allowing local shareholders to partake in their success.

You do not have to be a maths wizard to add up the numbers. If Alibaba raises US$20 billion in Hong Kong and another US$10 billion or so in Chinese domestic markets, as it has previously committed to do, it will have more than US$60 billion net cash on its balance sheet. Does a profitable company that has been consistently boosting the profitability of its core e-commerce businesses need US$30 billion additional cash when it has almost that much lying idle in the kitty already?

To be sure, few companies have soaked in as much capital from public markets in five years as Alibaba. The world’s biggest secondary listing in history follows the world’s largest-ever IPO in September 2014, when Alibaba raised US$25 billion. It is not a rights issue because existing shareholders will not be allowed to buy the shares being offered in Hong Kong or China.

E-commerce trailblazer

Alibaba is changing how Chinese, and increasingly Southeast Asians and Indians, shop on the internet and pay for anything they buy online or in physical stores or watch videos. Founded by Jack Ma, the world’s largest e-commerce platform has transformed into a humongous internet conglomerate. Its Taobao, Tmall, AliExpress and 1688.com account for 60% of all online sales in China with 600 million active users. Through Lazada and Alipay, it has a growing footprint in Southeast Asia. It is also expanding its food delivery platform Ele.me. 

Little wonder, then, that Alibaba is growing far faster than Amazon.comApple, Facebook and Google’s parent Alphabet. Its total revenues grew 52% y-o-y last year and are forecast to grow 38% this year and 35% next year. Alibaba is riding China’s e-commerce boom. E-commerce now accounts for more than 20% of the country’s retail sales. China’s online shopping business is forecast to grow 18% this year and 17% in 2020, with Alibaba gaining market share as it grows faster than the market. It is also a big China cloud player and a venture capital giant in Asia. Ant Financial, its affiliate, is a global digital payment powerhouse.

There are many perfectly legitimate reasons why a profitable firm, even one already sitting on a ton of cash, might suddenly want to raise a truckload more. It might need greater access to capital or want to boost liquidity or, in the case of a Chinese company that has New York-listed American Depositary Receipts, prefers a larger shareholder base. The company might even want a better valuation, particularly if its management feels that its ADR holders, for some unfathomable reason, are not properly valuing its shares. Clearly, no one would blame a company’s board for wanting a dual listing in another market that is known for better corporate governance or political stability.

Unfortunately, none of these apply to Alibaba. Even if, for some reason, Alibaba needs access to additional capital, it does not need to have a dual listing in Hong Kong. It could easily do a rights issue in New York or wait until Beijing approves its secondary listing in Shanghai. One reason mainland listings of Alibaba, Baidu and other companies have been delayed is that tech companies listed in New York or Hong Kong adopt the so-called “variable interest entity” structures to bypass the Chinese government ban on foreign ownership in sectors such as the internet and communications. Until now, China has banned VIE structures for listed firms on the mainland, but regulators have indicated that rules will be tweaked to accommodate homegrown champions such as Alibaba and Tencent. Another issue is size. The largest capital raising in China was the US$10 billion Shanghai portion of Agricultural Bank of China’s 2010 listing.

Not for liquidity

Clearly, Alibaba does not need a Hong Kong listing just to boost liquidity. Its daily average trading volume in New York is already more than three times that of Tencent, which is the most heavily traded stock in Hong Kong. Indeed, on a good day, Alibaba’s turnover might even match or exceed that of Netflix or even Facebook, two of the world’s most widely held and heavily traded tech stocks.

As for getting a better valuation in a market closer to the mainland, most of the Chinese companies that are dual-listed in Hong Kong and New York enjoy higher multiples in the US except Chinese banks and financial firms, for instance, which boast higher multiples on the Hong Kong bourse than their New York-traded ADRs.

Yet, a Hong Kong listing ahead of an eventual China one might give Alibaba access to mainland shareholders through the Shanghai-Hong Kong Stock Connect, which allows Chinese shareholders to buy stocks listed in Hong Kong. So far, aside from the initial enthusiasm for Tencent, mainland shareholders have yet to take a liking to Hong Kong tech stocks. 

US$20 billion capital raised in Hong Kong would be less than 5% of Alibaba’s current US$410 billion market cap. And, oh, did I mention Alibaba’s free float is set to grow as one of its largest shareholders, New York-based Altaba, sells down its stake? Altaba, a closed-end investment firm formed from the remains of Yahoo! Inc after US cellular services giant Verizon acquired its internet business, owns a 16.3% stake in Alibaba and is now in the process of selling the entire stake and disbanding itself by year-end. 

Alibaba’s upcoming Hong Kong listing comes in the wake of the Hong Kong Exchange’s relaxing its listing requirements for dual-listed firms. Alibaba had sought to list in Hong Kong five years ago, but the territory’s exchange refused to bend its rules. In recent years, as Hong Kong lost its status as the IPO capital of the world, it has tweaked its rules to woo high-profile large companies to list there. Tech companies such as handset maker Xiaomi and e-commerce firm Pinduoduo listed in Hong Kong last year after the rules were relaxed.

If Alibaba does boost its cash pile to over US$60 billion soon, it will have the fourth-largest cash hoard in the world after Alphabet’s US$117 billion, Apple’s US$102 billion and Microsoft’s US$72 billion and more than the cash piles of Cisco Systems, Oracle and Facebook.

Pre-emptive move

Some analysts have speculated that Alibaba’s Hong Kong listing could be a pre-emptive move to avoid getting entangled in the ongoing trade war between the US and China. Beyond tariffs, the next shoe to drop in the conflict might be Washington’s tightening its rules regarding large Chinese tech companies, including their access to Wall Street. If that is the real reason, instead of raising all of the US$20 billion in new capital in Hong Kong, which would be dilutive, Alibaba could do a secondary listing, which could include some buybacks of its New York-listed ADRs. New Street Research’s internet analyst Jin K Yoon believes Alibaba could simply buy back US$20 billion worth of ADRs in the US and take those proceeds and relist in Hong Kong. In that case, Yoon notes, “existing ADR holders would not see any dilution, as the outstanding shares would remain the same, on the assumption that a similar amount is offered in Hong Kong”. Shareholders recently approved an 8-for-1 share split.

Where has Alibaba been putting its money to work? It has focused on six key areas, comprising artificial intelligence, video and entertainment through its Youku Tudou subsidiary, logistics unit Cainiao, food delivery, cloud infrastructure and driverless cars. It is also investing heavily in fintech ventures, mainly through Ant Financial, which operates payment network Alipay. Ant Financial now has more than a billion active users worldwide. With its trove of data and AI capabilities, Ant also provides instant credit assessment to financial institutions, helps insurers with claims and makes recommendations to asset managers. China’s cloud infrastructure business is forecast to grow 38% annually over the next three years, according to IDC. Thomas Chong, an analyst at Jefferies, expects Alibaba to grow its cloud computing revenues 67% this year. The cloud business currently makes up 7% of Alibaba’s total revenues, and Chong believes it could be at least 10% within two years.

Although China still accounts for over 85% of Alibaba’s revenues, Ma’s dream has been to make it a truly global player. Despite the looming clouds of trade war and slower growth in China, Alibaba is seen as a top-tier tech company alongside Amazon, Google and Facebook. Early last year, the US government blocked Alibaba’s purchase of MoneyGram International, a money transfer firm that it wanted to integrate into its digital payment platform. Alibaba’s dreams of global domination may be routed through emerging markets, and it would need to build on its on its presence in Southeast Asia and India.


Assif Shameen is a technology writer based in North America

 

This story appears in The Edge Singapore (Issue 894, week of Aug 12) which is on sale now. Subscribe here.