Alibaba share price slips as Hong Kong rating gets cut

The last two days have been rough for Alibaba Group Holding Limited's Hong Kong listing, as share price has plunged over 2.6% since Monday, 21 January.

Things had gotten off to a good start at first, with share price rising above HK$222 per share in early trade. However, things soon took a turn, as the market reversed sharply in the afternoon, taking share price down as much as 2.25% on the day to close in the HK$220 vicinity.

Tuesday was not much better, as share price fell another 1.8% from Monday’s closing price to hit a two-week low of HK$215.80 as of 4PM.

Part of a wider downtrend

Alibaba is not alone in this latest downtrend; the Hang Seng Index – the benchmark indicator of all listings on the Hong Kong Exchanges and Clearing Limited – also slipped an estimated 3.75% in these two days of trading.

On Monday, a majority of Hang Seng components were also hit by the negative investment sentiment, with property, leisure and entertainment, hospitality, and aviation companies among the ones losing newly-gained ground.

In particular, Hong Kong property developers had found themselves driving much of the short selling momentum, with all 11 listed companies either trading flat or negatively. China Overseas Land & Investment Limited was down as much as 2.87% to HK$28.80 from a starting price of HK$29.50, China Resources Land Limited lost 2.81% to HK$36.35, and Country Garden Holdings Co Ltd erased 2.15% to finish the day at HK$11.82.

Technology was not spared either, as Alibaba’s closest rival Tencent Holdings Limited's market value is also down nearly five percent since the trading week began.

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Why is a slump happening?

Evidently, based on these other figures, the problem is not with Alibaba itself, but the overall sluggishness of the market.

Part of the weakened trading sentiment is due to a recent downgrade of Hong Kong’s credit rating from the widely-referenced US credit rating agency Moody’s Investors Services. On Monday, the agency reduced the city’s long-term issuer and senior unsecured rating by one notch, from Aa3 to Aa2, on the basis that ‘Hong Kong's institutions and governance strength is lower than previously estimated’.

‘The absence of an effective response by Hong Kong's executive and legislative branches of government to the concerns that have contributed to the ongoing protests, and the inertia which has increasingly characterised the legislative and executive branches, indicates weaker Institutions and Governance Strength than Moody's previously assessed,’ the report added.

This is the second credit rating cut facing the city in six months, after Fitch Ratings’ drop in September.

Meanwhile, the Wuhan pneumonia virus outbreak is not making matters any better, taking down aviation and tourism-related stocks with it on fears of fewer visitor arrivals. Air China, for instance, descended as much as 7.6% to HK$7.20, while China Eastern Airlines fell seven percent to HK$3.98. In tourism, Macau casino operator SJM Holdings Limited lost 6.7% of its share value, while MGM China Holdings Limited shed six percent to HK$13.88.

Furthermore, the market is now back in regular mode, with the phase-one US-China trade deal already signed and no new geopolitical event on the horizon, according to Alan Li, portfolio manager at investment management firm Atta Capital.

Long-term investor prospectus

Despite this recent slump, Alibaba’s Hong Kong share price is still up over three percent so far in 2020.

One observer - Alice Yap, Managing Director & Head of Pan-Asia Internet Research, Citigroup Global Markets Asia – is adamant that in the long run, the group’s US share price – fungible with Hong Kong shares – could eventually top US$280, especially with the ‘Alibaba Digital Economy’ strategy now in full swing.

As part of its digital economy vision, the e-commerce group expects to achieve over ten trillion Chinese yuan in annual gross merchandise volume and serve one billion active customers through its China consumer business alone in the next five years.

This roadmap includes the cloud computing business, which grew almost 66% year-on-year in the June 2019 financial quarter on the back of US$1.13 billion in revenue.

As R.J. Hottovy, Sector Strategist, Morningstar Inc., wrote in a December analysis: ‘While AliCloud will remain in investment mode near-term, we believe accelerating revenue per user trends suggest a migration to value-added content delivery and database services that can drive segment margins higher over time.’

Beyond that, the financial services division – which includes Ant Financial and Alipay – is also expected to continue boosting cash flow for the group, with Ant Financial reportedly reviving IPO plans.

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