Alibaba Group Holding Ltd. will complete its long-delayed conversion from a secondary to a primary listing on the Hong Kong Stock Exchange on Wednesday (Aug. 28), a move that could be as big for Hong Kong as the e-commerce giant itself.
The Hong Kong Stock Exchange ended a strong quarter, hitting a record high in the April-June period as stock trading and initial public offerings revived the exchange's vitality as a global financial hub. Net profit for the world's fourth-largest stock market rose 9 percent to HK$3.16 billion (US$405 million), or HK$2.49 per share.
Alibaba's move could be an additional boost: Generally speaking, one company rarely determines the success or failure of an exchange, but Alibaba's size and importance in mainland China's tech economy could unlock billions of dollars of new investment that is sure to ripple through the Hong Kong market.
Once its Hong Kong listing is upgraded to a primary listing, completing a two-year process, Alibaba will be able to tap into huge capital flows from mainland China, and its shares will be eligible to participate in Stock Connect, a scheme that links the Hong Kong stock exchange with markets in Shanghai and Shenzhen.
This could make it easier than ever for mainland Chinese investors to buy Alibaba shares, driving in some estimates as much as $20 billion into the company over the next six months, boosting overall market sentiment.
“Alibaba's inclusion in Stock Connect will have a positive impact on its stock price and help stabilize sentiment given that it is a well-known name among mainland Chinese investors,” said Marvin Chen, an analyst at Bloomberg Intelligence. He expects mainland Chinese holdings of Alibaba to grow by double-digit percentages, amplifying rally in tech stocks.
Of course, Alibaba also maintains its primary listing in New York, which could be to Alibaba's own benefit: Hong Kong stocks often react sluggishly to rallies in mainland China. If the New York bull market holds up, Alibaba's foothold in the U.S. market could provide further upside for Hong Kong.
The company, co-founded by Jack Ma and based in Hangzhou, China, first listed on the New York Stock Exchange in 2014, raising about $22 billion.
At the time, it was the largest IPO in U.S. history, gave Xi Jinping's Communist party major bragging rights, and put China in the global spotlight for all the right reasons.
In 2019, Alibaba launched a secondary listing in Hong Kong, raising an additional $13 billion. Alibaba's board then applied to convert its Hong Kong shares into a primary listing in 2022. Shareholders finally approved the conversion last week.
The timing is rife with opportunity as much as risk: In 2023, China’s largest e-commerce company experienced one of the most turbulent years in its 25-year history, even compared to the standards of 2020, when President Xi Jinping’s government cracked down on internet companies.
In March 2023, Alibaba split its core businesses of domestic e-retail, international e-commerce, cloud computing, local services, logistics, and media and entertainment into six divisions to realign and refocus.
At the time, the domestic cash cow e-commerce group, which includes the Taobao marketplace, was seeking to remain a wholly owned unit. The other five companies are each run by a different CEO and could each pursue a listing separately.
“The market is the best litmus test, and each business group or company can pursue independent fundraising or an IPO when they are ready,” Daniel Zhang, then CEO of Alibaba, said 17 months ago.
But the company is bigger than Alibaba, making it something of a case study for Chinese companies as President Xi's regulators seek to hedge against risk and rein in the monopolistic tendencies of big tech companies.
It's quite a balancing act, given that President Xi Jinping and Premier Li Qiang want private companies to take the lead in creating jobs and jump-starting the ailing economy.
Ma's Alibaba was a natural starting point: it has long been a global symbol of China's tech-forward ambitions and a weather vane for Beijing's openness to letting its tech billionaires spread their wings.
Those tensions were never more apparent than in October 2020, when Chinese financial regulators halted a planned $35 billion IPO for Ma's fintech unit, Ant Group, after he criticized them for stifling innovation.
Alibaba's turnaround effort is still underway: The e-commerce giant disappointed investors last year with falling profits and a weaker-than-expected 4% revenue growth in the second quarter.
The slump highlights two big problems that Chairman Joseph Tsai and Chief Executive Eddie Wu, who succeeded Zhang in September, have yet to solve: First, growing competition from rivals including JD.com and Temu's parent company PDD Holdings.
“Competition will remain a key issue for Alibaba,” said Sean Yang, an analyst at Arete Research. “Some investors may have high hopes for an increase in Alibaba's take rate as the company began testing new advertising tools last quarter, but the actual numbers coming out of the earnings call suggest that it may be some time before those efforts bear fruit.”
The other is a weak Chinese economy, which President Xi Jinping has yet to reinvigorate, plagued by weak consumption and a sagging real estate sector. Chinese consumers put less money into banks in July but didn't spend more either, and some worry that this bodes poorly for economic growth for the rest of 2024.
“The year-on-year decline in excess savings has not yet translated into increased consumption,” said Tommy Shih, head of Greater China research at OCBC Bank. “This may be related to households reducing debt by paying off loans early and shifting their savings into wealth management products.”
This debt reduction will impact Alibaba's bottom line: After all, Ma has built a company that combines Amazon, PayPal, eBay, travel agencies, matchmaking services and real estate, and has poured his attention into just about every sector imaginable to reach China's more than 1 billion internet users.
That makes Alibaba's quarterly results a better indicator of China's economic health than gross domestic product reports, and nothing could send Alibaba shares soaring faster than President Xi Jinping's reform team boosting consumer spending.
“Weak economic growth is likely to lead to further monetary easing by the People's Bank of China. Interest rates remain low and risk appetite for domestic assets remains limited, so capital outflow pressures remain,” said Lin Song, chief Greater China economist at ING Bank.
In the broadest sense, China's budget spending is shrinking at a time when local government land sales are falling at a record pace. Many economists believe this will put more pressure on President Xi Jinping and Premier Li Keqiang to take bolder action to stabilize China's $17 trillion economy.
The hope is that the policies put forward at last month's Third Plenum will prioritize expanding personal consumption. So far, there has been little movement in that direction.
Economist Zhang Ming has argued that Beijing should double or triple special national bonds this year to 3 trillion yuan ($420 billion) to finance growth and stimulate consumer spending.
“If the central government maintains the fiscal deficit at 3 percent at all costs, fiscal spending will inevitably shrink and become pro-cyclical,” said Zhang, deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences, a government think tank.
“Increasing the fiscal deficit ratio is an appropriate and effective policy measure,” said Liu Chenjie, chairman of Upright Asset Management.
“We expect fiscal financing to come under significant downward pressure this year due to years of debt deleveraging by state-owned enterprises known as local government financing vehicles (LGFVs), as well as lower tax and land sale revenues,” added Goldman Sachs economist Lishen Wang, who is expected to reduce China's exposure to off-balance sheet debt risks.
Progress towards achieving China's 5% growth target will make Alibaba's path to 2025 much easier, enticing more investors to buy Alibaba shares.
For now, Morgan Stanley analyst Laura Wang said, “we expect some inflows, but nothing significant,” translating to about $12 billion in the six months following the inclusion, or about 7% of Alibaba's total outstanding shares.
The good news is that Alibaba's big push into cloud computing is starting to pay off: The division grew modestly, 5.9%, thanks to CEO Wu's strategic overhaul of cloud computing and artificial intelligence, which helped offset a 1% decline in revenue from Alibaba's main platforms, Taobao and Tmall.
But given Alibaba's unique position at the forefront of fluctuations in China's GDP, any progress Beijing makes in accelerating economic growth would exponentially increase its attractiveness to global investors — and perhaps Hong Kong's as well.
Follow William Pesek at X at @WilliamPesek
