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Alibaba’s Hong Kong IPO is a big deal, here’s why

By Connor Freitas

Alibaba shares have listed in Hong Kong, meaning they’ll soon be available for mainland Chinese investors. That means 2020 will be a year to watch.

Alibaba had always wanted to list on the Hong Kong stock exchange, so when talks on a blockbuster $60bn listing fell through in 2014, it was a body blow for the Chinese e-commerce giant.

The company went on to list in New York instead. A total of $25bn was raised- shattering records to become the largest IPO in history. But for Alibaba’s enigmatic co-founder, Jack Ma, Hong Kong remained unfinished business.

That is no more. Alibaba has now completed a secondary listing on HKEX- managing to raise $11.3bn, more than what any other flotation has managed this year. It seems there was some regret at how things had ended the first time around, with HKEX chief executive, Charles Li Xiaojia saying the listing was like “a family member coming home”.

The flotation was a big deal for Hong Kong. Crippled by months of unrest, with pro-democracy protests turning increasingly violent, the Alibaba’s IPO value serves as a vote of confidence in the territory. Alibaba benefits too- listing on an exchange geographically close to its headquarters in the Chinese city of Hangzhou.

How Alibaba’s secondary listing works

With Alibaba already listed on the New York Stock Exchange and performing well (with a share price almost treble the $68 set during the IPO), many have wondered exactly how the secondary listing will work.

The new agreement will mean that one US share is worth approximately eight HKEX shares. Dual listing means consumers and traders in Hong Kong and mainland China will finally be able to invest in one of the country’s most profitable enterprises.

Alibaba’s Hong Kong IPO is also of note because the company is the first to make use of new rules enabling Chinese companies listed overseas also to list in Hong Kong. Some analysts have even claimed that this new rule- known as Chapter 19C- was specifically written to enable the e-commerce company to make its grand entrance.

The development has attracted some critics. Previous restrictions meant that every shareholder had equal voting rights, thus preventing executives from having a separate class of stock that would ultimately give them disproportionate power.

The type of arrangement now in force in Hong Kong is much more common in the US, where it is regularly deployed by tech giants. Some analysts fear that Hong Kong has compromised its reputation for upholding good corporate governance as a result.

Alibaba IPO in Hong Kong: Performance so far

Despite the fact that Alibaba’s Hong Kong shares were offered without equal voting rights, investors flocked towards the IPO. At the close of the first day’s trading, shares on HKEX had risen by 6.6 per cent. Few companies on the exchange have performed as healthily on their debut.

A deep dive into Alibaba’s financials helps to explain the frenzy. At the start of November the company astounded analysts by revealing that sales had soared by 40 per cent in the three months to the end of September, with profits tripling.

The company’s commerce unit is its bread and butter, reliably bringing in the profits. Its base of 755 million users is comfortably more than the entire US population- twice over. When it comes to online retail sales, Alibaba commands 58 per cent of the market in China, a share that Amazon can only dream of in the US.

Alibaba has been attempting to diversify and expand into other areas,but these ventures have seen mixed success. Food delivery in China is already a saturated market with tight margins, and the e-commerce giant’s efforts in the sector so far have only eaten into its bottom line overall.

Some have been left scratching their heads as to why Alibaba pursued a secondary listing given that it is already sitting on a huge cash pile. The company says its goal is to embark on ambitious plans to grow its user base even further, as well as to explore long-term investment opportunities.

Alibaba 2020 predictions

When it comes to the performance of Alibaba’s shares on the Hong Kong stock exchange, 2020 could be a year to watch. Although the IPO has now been successfully completed, Alibaba’s voting rights structure means the stock will only be added to the Hang Seng Composite Index after seven months of trading. Given that Hang Seng delivers crucial trading links between the former British colony and the Chinese mainland, shares will remain out of the reach of many Chinese investors until the middle of 2020.

Analysts seem relaxed about the impact that this sizeable delay will have on appetite for Alibaba stock. Some say that shares in the e-commerce giant will become an essential part of portfolios on the mainland anyway- so long as they are at the right price.

FURTHER READING: Alibaba plans Hong Kong’s first paperless IPO

FURTHER READING: Alibaba uncovers secret to Q2 success

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