Alibaba increases IPO price range

At the top end of the range, the web company could raise up to $1.49 billion, but some investors say the deal is starting to look expensive., the provider of ChinaÆs leading online trading platform, has raised the price range for its initial public offering by 12.5% at the top end of the range following strong demand during the first week of the institutional bookbuild.

The new price range of HK$12 to HK$13.50 will allow the company to raise up to HK$11.6 billion ($1.49 billion) pre-greenshoe, and possibly as much as $1.7 billion if the greenshoe is also exercised in full. The company initially offered the shares in a range between HK$10 and HK$12.

Sources say the deal was covered within minutes of the books being opened on October 15, which has brought back memories of the massive interest that Chinese search engine provider generated when it listed on Nasdaq in August 2005. That stock jumped 353% on its first day of trading, and currently trades more than 1,000% above its $27 IPO price.

Observers say the downturn in the Hong Kong equity market yesterday is unlikely to dent the interest in Alibaba, which stems primarily from expectations that it will be able to continue to tap into the massive market opportunity offered by ChinaÆs 42 million small and medium enterprises. At present, the company has merely scratched the surface of this pool of potential future revenues with its 260,000 or so paying customers.

Historical data also paint a positive picture with an 87% gross margin last year, revenue growth of 105% in 2005 and 85% in 2006, and strong operating cash flows. However, it is no secret that part of the attraction is also down to AlibabaÆs founding chairman Jack Ma and the companyÆs involvement with Yahoo!. The US-based search engine, which already owns just under 40% of AlibabaÆs parent company Alibaba Group, will buy $100 million worth of shares in the IPO, giving it a stake of about 10% in the Hong Kong-listed online business if the deal is priced at the top end of the range.

However, some market watchers argue that the new price range makes the stock look pricy and that there are really no guarantees either that the company can extract more revenue out of its current customers or that it can capture new customers at the same rate.

One investor says the valuation looks stretched for what appears to be ôessentially a plain vanilla advertising businessö as the company isnÆt involved in the transactional element of the business, i.e. it doesnÆt receive any commissions from the trades that take place between buyers and sellers on its two platforms.

ôI think there is considerably less room to dream with regard to the forecasts on this one versus Baidu because it is a steady good business already with less scope for dramatic growth,ö the investor says, adding; ôIt would have been a must have in a portfolio at a lower valuation level. With the revised price range we are still evaluating our options.ö

The new price range values Alibaba at 47.8 to 53.8 times its projected 2008 earnings, based on the syndicate consensus before stock-based compensations. This represents a discount of about 28%-36% versus which trades on Nasdaq and is currently quoted at a 2008 P/E multiple in the mid-80s. Hong Kong-listed Tencent, which is the provider of an online social networking site trades at about 46 times.

Ahead of the launch of the retail portion of the deal today, Alibaba has also brought in two more cornerstone investors, bringing the total line-up of such investors to eight. Including YahooÆs $100 million, they will now invest a combined $300 million in the deal and will be subject to a 24-month lock-up.

The additional two cornerstones are US-based Cisco Systems, which will buy $20 million worth of shares, and Foxconn Far East, which is a wholly owned unit of TaiwanÆs Hon Hai Precision. Foxconn will buy $35 million worth of shares.

The cornerstones that were already in place last week are investment firm AIG Global, ICBC (Asia), which is the Hong Kong arm of Industrial and Commercial Bank of China, and the families behind the Wharf Group, the Kerry Group and Sun Hung Kai Properties.

Alibaba is offering 858.9 million shares of which 26.5% are new. The rest will be sold by the parent group as it seeks to monetise part of its investment.

Like many other large listing candidates with a free-float that is likely to go above HK$10 billion, Alibaba has sought and received a clawback waiver from the stock exchange that will limit the retail portion of the offering to 25% of the total rather than the usual 50%.

However, the 25% limit is slightly higher than the 20% that is the common practise for such waivers and unusually the retail portion will also start off at 15% instead of 10%. This compromise may have been agreed because with the initial price range there was a theoretic possibility that the portion of stock in public hands could end up below the HK$10 billion threshold if the price wasnÆt fixed close to the top end of the range. If the retail offering is more than 10 times covered the size will increase to 17.5%, if itÆs more than 20 times covered the size will go to 20% and for the retail tranche to reach the full 25% it needs to be more than 40 times covered.

In addition, the cornerstone tranche will be adjusted downwards in line with any potential clawback of the institutional tranche, meaning these investors could end up with only 88% of their pre-agreed allocations if the institutional portion is reduced from 85% to 75%. Yahoo! will not be affected by any potential clawback, however,

Alibaba operates two online trading platforms û one in Chinese that caters to Chinese buyers and sellers and one in English that is set up to facilitate trading between Chinese manufacturers and international importers - and according to, its B2B e-commerce marketplace out-ranks all Chinese competitors both in terms of the number of registered users and user traffic and on revenues and profits.

Deutsche Bank, Goldman Sachs and Morgan Stanley are joint bookrunners for the offering with the latter two also acting as joint global coordinators.

The books will close on Friday, October 26 and the trading debut is set for a week later.
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