Alibaba Group Holding will finalize its long-awaited shift to a primary listing on the Hong Kong Stock Exchange today. This move, which upgrades its status from a secondary to a primary listing, could prove to be as significant for Hong Kong’s financial market as it is for Alibaba itself. The conversion is the culmination of a two-year journey for the e-commerce giant and represents a milestone for the city’s stock exchange, underscoring Hong Kong’s role as a global financial hub.
Hong Kong Exchanges and Clearing Limited (HKEX) has been experiencing a remarkable period. The April-June quarter marked its best performance on record, driven by a surge in stock trading and initial public offerings. HKEX reported a net profit increase of 9%, reaching HK$3.16 billion (US$405 million), equivalent to HK$2.49 per share. The Alibaba primary listing is poised to provide an additional tailwind, potentially enhancing the exchange’s momentum.
While a single company rarely defines the fate of a stock exchange, Alibaba’s sheer scale and its pivotal role in the narrative of China’s tech economy could be a unique exception. The primary listing in Hong Kong positions Alibaba to attract substantial flows of mainland capital, potentially channeling billions into the broader Hong Kong market.
Access to Mainland Capital: A Strategic Shift
One of the most significant implications of Alibaba’s move to a primary listing is its eligibility to join Stock Connect. This program connects the Hong Kong Stock Exchange with markets in Shanghai and Shenzhen, facilitating easier access for mainland Chinese investors to buy Alibaba shares. Analysts estimate that this could lead to capital inflows of up to US$20 billion into Alibaba over the next six months, creating a positive ripple effect across the broader market.
Marvin Chen, an analyst with Bloomberg Intelligence, notes that Alibaba’s inclusion in Stock Connect could stabilize market sentiment. “We think the addition of Alibaba to the Stock Connect would have a positive impact on the stock and can help stabilize sentiment given that it is a household name among mainland investors,” Chen explains. He predicts that mainland holdings of Alibaba stock could surge by double-digit percentages, leading to broader gains in tech-sector shares.
Despite its move to a primary listing in Hong Kong, Alibaba will retain its primary listing on the New York Stock Exchange (NYSE). This dual listing strategy offers several advantages. Hong Kong stocks often exhibit a muted response to rallies in mainland China. By maintaining a strong presence in the U.S. market, Alibaba can capture the upside of a bull run in New York, potentially boosting investor confidence and stock performance in Hong Kong.
Alibaba’s initial public offering (IPO) on the NYSE in 2014 was a landmark event, raising nearly US$22 billion, the largest IPO in U.S. history at that time. The successful listing brought global attention to China’s growing tech sector and served as a point of pride for the Chinese government. In 2019, Alibaba launched a secondary listing in Hong Kong, raising an additional US$13 billion. Last week, shareholders approved the company’s plan to elevate its Hong Kong stock to primary status, paving the way for today’s milestone event.
A Year of Change and Challenges for Alibaba
Alibaba’s primary listing in Hong Kong comes at a time of significant transformation and uncertainty for the company. Over the past year, Alibaba has undergone some of the most substantial changes in its 25-year history. In March 2023, the company announced its split into six distinct units, each focusing on different aspects of its core business: domestic e-tailing, international e-commerce, cloud computing, local services, logistics, and media and entertainment.
This restructuring aimed to allow each unit to operate independently, with the flexibility to pursue separate public listings. As former CEO Daniel Zhang remarked, “The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready.” This reorganization reflects a broader effort by Chinese regulators to manage risks and curb the monopolistic tendencies of tech giants, even as they seek to stimulate economic growth and job creation.
Alibaba’s evolution is set against the backdrop of an increasingly complex regulatory environment. The Chinese government has intensified its scrutiny of the tech sector, emphasizing the need to balance innovation with risk management. This regulatory tightening has posed challenges for Alibaba, especially in the wake of the canceled US$35 billion IPO for its fintech affiliate, Ant Group, in 2020, after Alibaba co-founder Jack Ma openly criticized Chinese regulators for stifling innovation.
Economic conditions in China have also added to the challenges facing Alibaba. In the second quarter of the previous year, the company reported weaker-than-expected revenue growth of just 4%, and profits declined. Alibaba’s leadership, now headed by Chairman Joseph Tsai and CEO Eddie Wu, faces two major hurdles: intensifying competition from rivals such as JD.com and PDD Holdings (owner of Temu), and a sluggish Chinese economy characterized by weak consumption and a struggling property sector.
“Competition will remain a key issue for Alibaba,” says Shawn Yang, an analyst at Arete Research. “Some investors may have high hopes for the increase of Alibaba’s take rate, as it began testing a new advertising tool this past quarter. But the actual numbers we are seeing in the results show it may take longer for that effort to pay off.”
China’s Economic Woes and the Impact on Alibaba
China’s economic performance is closely watched, and Alibaba’s financial results are often seen as a barometer of the country’s overall economic health. The company’s performance is intertwined with consumer spending trends and broader economic indicators. A notable issue for Alibaba is the Chinese population’s reluctance to spend. In July, Chinese consumers deposited less money in the bank but did not increase their spending, suggesting a cautious outlook for economic growth for the remainder of 2024.
“The year-on-year decrease in excess savings growth has not yet translated into increased consumption,” explains Tommy Xie, head of Greater China research at OCBC Bank. “This may be related to households deleveraging by repaying loans early and shifting deposits to wealth management products.” This trend has direct implications for Alibaba, whose business model spans e-commerce, financial services, cloud computing, and more, all catering to China’s massive base of internet users.
Economic policy reforms could be a turning point for Alibaba and the broader Chinese economy. As of now, Chinese policymakers have not taken bold steps to stimulate consumer spending, which could hinder Alibaba’s growth trajectory. Some economists suggest that China should increase its special sovereign bonds to finance growth and stimulate spending. Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, recommends a significant increase in sovereign bonds, potentially up to 3 trillion yuan (US$420 billion).
“If we adhere to the central budget deficit level of 3% no matter what it takes, fiscal spending will inevitably contract and become pro-cyclical,” Zhang says. Raising the fiscal deficit ratio, as suggested by some economists, could provide a much-needed boost to the economy and, by extension, benefit Alibaba and other consumer-driven companies.
Cloud Computing: A Beacon of Growth
Despite the challenges, Alibaba’s foray into cloud computing has shown promise. The company reported a modest growth of 5.9% in this sector, largely attributed to CEO Eddie Wu’s strategic focus on cloud services and artificial intelligence. This growth in cloud computing helps offset declines in other areas, such as a 1% drop in revenue from its core e-commerce platforms, Taobao and Tmall. Cloud computing represents a key area of future growth for Alibaba, with the potential to bolster its financial performance and investor appeal.
Alibaba’s shift to a primary listing on the Hong Kong Stock Exchange represents a pivotal moment for both the company and the city. As one of China’s most prominent tech giants, Alibaba’s performance will be closely monitored as an indicator of broader economic trends and investor sentiment. The success of this listing could attract other major Chinese companies to follow suit, further cementing Hong Kong’s status as a global financial hub.
Laura Wang, an analyst at Morgan Stanley, notes that while the initial capital inflows from mainland investors may be modest, they are expected to grow over time. “We expect some inflows but not major,” Wang says, estimating about US$12 billion in the first six months after inclusion, representing approximately 7% of Alibaba’s total outstanding shares.
As Hong Kong and Alibaba chart their course through uncertain waters, the hope remains that proactive economic policies from Beijing will spur consumer spending and economic growth. A revitalized Chinese economy would not only boost Alibaba’s fortunes but also enhance Hong Kong’s standing as a premier financial center. For now, Alibaba’s primary listing in Hong Kong marks a significant step in that direction, offering new opportunities and setting the stage for future growth.
