Alibaba Hong Kong IPO: Implications for potential and existing investors

Chinese e-commerce platform Alibaba Group Holding Ltd could potentially raise up to US$12.9 billion at its upcoming listing on the Hong Kong Stock Exchange (HKEX).

A share price of HK$176 (US$22.49) for institutional investors has been hinted at, sources close to the matter have revealed. This update will mean the company, which has an estimated market capitalisation of US$483 billion, is now looking to raise an estimated US$12.9 billion, representing a drop of US$0.96 billion from initial projections.

An over-allotment option, called a ‘“greenshoe’”, if exercised, could lift the final amount to US$13.4 billion.

If the institutional price is realised, this would mean the company is offering corporate clients a 2.8% discount from its November 18 closing price on the New York bourse.

It was previously revealed that a total of 500 million shares would be up for sale, of which 12.5 million would be allocated to private investors at a proposed cap of HK$188 per share (US$24).

Shares oversubscribed despite recession

As Hong Kong continues to battle its socio-political issues, the Alibaba listing remains surprising to many industry observers, and a welcomed move for others.

With street protests at its most violent last week, the Hang Seng Index also fell five percentage points in the same time span, the second worst performance globally among all indexes for the week ending November 15.

The government also announced that the city has entered what some analysts referred to as a ‘deep’ recession, with GDP contracting 3.2% for the third quarter – the city’s weakest quarter since 2008.

Still, despite ongoing tensions and a receding market, current demand for the Alibaba shares do indicate a level of confidence typically seen by the more reputable companies.

In fact, so confident are investors in the offering that demand for the new batch of equity has now surpassed the planned supply, with shares reportedly oversubscribed. Bloomberg also reported that Alibaba could potentially usurp another China conglomerate Tencent Holdings Ltd as the largest listed corporation in Hong Kong, when trading ends next Tuesday.

This fervour for the Hong Kong stocks is not entirely surprising, especially considering Alibaba’s growth trajectory over the years. Since its IPO in September 2014 on the New York Stock Exchange, Alibaba equity has been a steady winner for investors, achieving triple digit growth rates. Ahead of this year’s Singles’ Day shopping extravaganza (which ultimately generated over US$30 billion in sales revenue), US shares hit a US$184.23 buy point, close to its historical peak of US$208.00 achieved on June 15, 2018.

The impending flotation, the biggest in over a decade on the Hong Kong bourse, is also expected to reverse these trends and bring the Hong Kong market back to healthier ground. As it stands, the HSI rebounded a decent 1.6% to close Tuesday’s (November 20) market at a healthy 27,093.8.

Implications of Hong Kong listing for existing US shareholders

With interest going strong for the Hong Kong IPO, expected to start trading on November 26, one question that is looming large on the minds of both prospective and existing shareholders is how their investment portfolios and strategies will be affected.

According to IG Asia Market Strategist Jingyi Pan, with the Hong Kong IPO being Alibaba’s second listing, a “significant rally” is seemingly “unlikely”.

“Investors who had wanted to participate in the company’s growth would have had the access through the NYSE. That said, this certainly opens up the avenue for investors in Asia, particularly Chinese investors through the Hong Kong stock connect, who may not have had the means previously,” Pan noted.

“A slight boost to prices should not be ruled out here and that may be the catalyst to provide prices with a break on the upside through the ascending triangle resistance,” she added.

Certainly, the Hong Kong listing will give more Chinese nationals the opportunity to invest in a homegrown company, and widen the pool of local and regional investors, all of which are in line with the company’s roadmap.

It also supports another theory out there that should the US-China trade war worsen and disrupt relations on both sides, then the Hong Kong market could serve as a ‘back up plan’ to soften any potential collapse from the other side of the Pacific.

For existing US shareholders, it should be noted that the influx of Hong Kong-listed shares could also lead to a value dilution of about 2.8%, since each Alibaba American Depository Share represents eight ordinary shares that can be exchanged with the Hong Kong stocks.

Overall, however, the overwhelming demand for the Hong Kong shares is expected to benefit investors in both markets, at least in the medium haul.

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