(Bloomberg) — Alibaba Group Holding Ltd. will seek a primary listing in Hong Kong, entrenching the financial hub’s status as an alternative to US markets ahead of a potential exodus of Chinese companies from New York.
The switch could provide a template for the roughly 200 US-traded Chinese companies from JD.com Inc. to Baidu Inc. that face delisting should Washington and Beijing fail to agree on allowing US regulators to review their financial audits. It also paves the way for investors in China to directly buy shares of the country’s most prominent e-commerce company for the first time.
A primary listing would allow Alibaba to seek inclusion in the Stock Connect link with the Shanghai and Shenzhen exchanges. That could expand the $285 billion giant’s investor base after a year-long selloff triggered by China’s economic slowdown and Beijing’s crackdown on its most powerful internet firms.
The move, expected by year-end, will grant hundreds of millions of investors in mainland China direct access to one of the country’s most storied names, which in 2014 made waves when it debuted in New York as the largest-ever initial public offering. Alibaba’s action could encourage peers to follow suit, helping cement Hong Kong as an alternative venue now that American regulators are threatening to toss Chinese companies off US bourses unless they comply with auditing rules.
Alibaba rose as much as 6.5% in Hong Kong on Tuesday, while its US-listed stock rose 3% as trading opened in New York. Bourse operator Hong Kong Exchanges and Clearing Ltd. climbed more than 3.9%. SoftBank Group Corp., Alibaba’s largest shareholder, rose more than 3% in Tokyo.
“The timing may be right for investor interest as it aligns with the fading of the tech regulatory crackdown,” said Marvin Chen, a strategist at Bloomberg Intelligence. “More broadly, Alibaba is paving a path for US ADRs to move away from US exchanges, introduce domestic capital, and to be less reliant on global foreign investors.”
The US and China have been at odds for two decades over a legal requirement that American regulators get full access to inspect audit work papers. That measure is meant to protect investors from accounting fraud and other malfeasance. Securities and Exchange Commission Chair Gary Gensler said this month it’s unclear if American and Chinese authorities will reach a deal to avoid a congressionally imposed 2024 deadline for kicking businesses off the New York Stock Exchange and Nasdaq.
The threat of losing direct access to US investors has weighed on Chinese stocks. Alibaba itself has shed some two-thirds of its value since a 2020 peak, pummeled by a regulatory crackdown that sought to rein in anti-competitive behavior across the internet sector. It currently has a secondary listing on the Hong Kong bourse, but has seen a rise in public float and transaction volume on the exchange there, it said in a statement on Tuesday. Its average daily trading volume in Hong Kong was about $700 million, compared to about $3.2 billion in the US.
“Alibaba’s move might point to internet companies preparing for a fall-back position, in case they have to delist from the US,” said Redmond Wong, market strategist at Saxo Capital Markets.
HKEX Chief Executive Officer Nicolas Aguzin has said more companies with secondary shares in Hong Kong are considering primary listings, while others may be forced to do so by market rules as more of their volume migrates to the city.
The prospect of Stock Connect inclusion for companies like Alibaba has been a subject of intense speculation among traders in Hong Kong, which currently excludes companies with both secondary listings and weighted voting rights from its mainland trading links. It highlights the urgency to seek new investors ahead of possible delistings from American exchanges.
Alibaba filed its annual financial report in a form 20-F to the SEC on Tuesday. The filing could signal that Alibaba might be added to the SEC’s list of companies that may be removed from US exchanges as a result of Beijing’s refusal to allow US officials to review their auditors’ work. Firms are added to the list in a rolling process based on when they report their annual financials through an auditing firm.
What Bloomberg Intelligence Says
Alibaba’s proposed primary listing in Hong Kong would facilitate stock purchases by mainland Chinese via a Stock Connect program, and over time could lead to a significant rise in mainland money in the stock vs. levels with its current secondary listing. Management will therefore showcase the firm’s growth engines and developments on the mainland more actively, we believe; this could help allay concern about Alibaba’s longer-term outlook amid uncertainty over the Chinese economy and regulation.
– Catherine Lim, analyst
Click here for the research.
While some market participants had hoped the exchange would relax rules that bar such companies, a primary listing is emerging as an alternative path. Bilibili Inc. in July won shareholder approval to convert its secondary Hong Kong listing status to dual-primary, while Zai Lab Ltd. completed the procedure in June before joining the Stock Connect scheme in July.
A dual-primary listing on the Hong Kong Exchange is often more costly and requires stricter reporting rules than a secondary listing. Companies need to provide to the exchange an expected date when they will fulfill requirements, and a detailed plan for and arrangements on how it will comply with the rules.
Unlike companies with a primary listing, firms with a secondary listing in the city are exempted from certain rules and don’t have to disclose things such as financial guarantees provided to affiliates and stock pledges made by the controlling shareholder.
But more stringent regulations shouldn’t be the main reason to prevent Chinese firms from seeking dual primary listings because they need exposure to international investors, according to Ken Wong, Asian equity fund specialist at Eastspring Investments.
Alibaba’s move “is nothing that we are totally surprised about,” Wong said. “A lot of other companies will want to do the same,” he said, “especially now with such a large name doing so.”
Other Chinese companies have opted to list directly in Hong Kong under dual-primary status. That was the case for electric vehicle makers XPeng Inc. and Li Auto Inc., which began trading in the Asian financial hub over the past year.
“This is a massive move for Alibaba, given it is the biggest secondary listing in Hong Kong,” said Willer Chen, an analyst at Forsyth Barr Asia Ltd. Inclusion in the Stock Connect “can lead to a more diversified investor base for Alibaba.”
(Updates with filing form 20-F in 12th paragraph)
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