Alibaba looks set to pull off another coup. If the stars align — and with rocky markets, that is far from a given — the Chinese technology giant that executed the world's biggest flotation will notch up another marquee deal with its planned secondary listing in Hong Kong.
The genius with this deal is that it plays to a host of constituents. The US$25 billion ($37.9b) New York listing in 2014 rewarded investors (shares are up roughly 2.5 times); investment bankers (a US$250 million fee pool) and founders. But it left the spurned Hong Kong stock exchange miffed and Beijing chafing at its best and brightest going west.
This time the bounty will spread much further. Beijing gets one of its stars back closer to home turf; Hong Kong's exchange snags a mega-deal; and investors stand to gain again if the move delivers a valuation fillip on the more generously priced Hong Kong stock exchange.
It has been timed to perfection. With the ever broadening tech war rippling out to the capital markets, Alibaba — with a market capitalisation of US$416b — is reminding Washington that greater China is perfectly capable of providing financing too.
That fits neatly with the current mantra of self-sufficiency and delivers on Beijing's long-cherished aim of bringing its tech giants home.
Previous efforts have largely fallen flat. An attempt to launch Chinese Depositary Receipts fell flat on its face: the likes of Alibaba balked at acquiescing to mainland rules including market-phobic metrics for price setting.
But by now planting a flag for Team China, Alibaba is doing its bit to show when it comes to capital markets, it need not rely purely on New York for financing. Semiconductor maker SMIC helped underline the point by withdrawing its own (thinly traded) New York listing the week before.
For Alibaba that is a fairly cheap way of banking credit with China. It could use the credit: talk of friction between its shoot-from-the-hip founder Jack Ma and China's leadership never quite dies, and there is the irksome business of its mooted acquisition of a stake in affiliate Ant Financial still awaiting approval.
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It need not cost investors much either. At US$20b, the secondary listing would dilute existing shareholders by around 5 per cent. But Alibaba does not need the money. It is a prodigious cash machine, with Rmb104bn (US$15b) of free cash flow last fiscal year.
Instead, the smart move would be to buy shares back, neutering the new issuance.
Serendipitously, there are plenty of ways to do so right now.
Altaba, the Yahoo carve-out housing the group's investment stakes, is liquidating its Alibaba stake. SoftBank, owner of 25.9 per cent, has already pared off some of its Alibaba holding. Alibaba itself is in the midst of a US$6b buyback programme.
Even some founders may put their hands up: Last fiscal year Ma trimmed his stake from 6.4 per cent to 6.2 per cent while Joe Tsai, executive chairman, cut his from 2.3 per cent to 2.2 per cent, according to the group's latest SEC filing.
Assuming no dilution, investors may even look forward to a boost to their holdings. Hong Kong investors tend to value their companies more generously than their US peers.
Alibaba, which trades on 23 times forecast earnings, sadly lags behind its Hong Kong-listed rival Tencent's 31 times forward multiple, based on Bloomberg numbers.
Analysts attribute this to local investors' supposedly superior knowledge. Alibaba and Tencent are huge companies but they are terribly domestic.
An investor in Hong Kong is likely to shop on Alibaba's Taobao platform and pay with Alipay, or at least know someone who does. The same is unlikely to be true in the US.
Whether or not the reasoning is correct, the evidence is there. Lossmaking entities like Alibaba Health trade at 200 times next year's putative earnings, according to Bloomberg estimates; Alibaba Pictures 72 times.
Still, what may be good for Alibaba and pleasing to Beijing does not hide the fact that Hong Kong is far from replacing the US as a source of capital.
The total market capitalisation on the Hong Kong stock exchange is roughly one-seventh that of New York and Nasdaq combined. Average daily turnover last year was just 14 per cent of the New York duo.
Besides, Tencent owes at least part of its more generous valuation to scarcity value. If Alibaba — as some bankers and party faithful hope — heralds a wave of secondary listings from the US, that will not last long.
Written by: Louise Lucas
© Financial Times
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