Alibaba’s dual primary listing in Hong Kong does more than improve trading liquidity

A primary listing for the e-commerce company in Hong Kong would not only expand Alibaba’s investor base, but also make the tech giant’s share price a better risk barometer for domestic sentiment in China.

Alibaba’s decision to file for a primary listing in Hong Kong comes three years after issuing secondary shares in 2019 and eight years since its initial public offering in New York. Though transitioning to a primary listing entails additional compliance costs and management oversight compared to a secondary classification, success would enable the company’s shares to become eligible for Stock Connect, linking its equity to the Shanghai and Shenzhen exchanges.

Last month, an announcement issued by the Hong Kong Exchange and Clearing Market (HKEX) acknowledged the tech giant’s request, with completion – subject to final approvals – expected to take place by the end of the year. 

The move by Alibaba is likely to set the tone for other oversea listed Chinese companies, Stephen Chan, Hong Kong based partner at Dechert, told FinanceAsia. He explained that the dual primary listing might serve as a sufficient policy hedge for US-traded Chinese stocks, where regulatory uncertainty continues to linger.

As previously reported, back in February, China’s Cyberspace Administration of China (CAC) stipulated that companies handling the personal data of more than a million users would need to seek state permission before raising capital overseas. This was followed in March by regulatory retaliation by the US Securities and Exchange Commission (SEC), through the publication of a provisional list of Chinese companies using a financial auditor not recognised by its Washington-based Public Company Accounting Oversight Board (PCAOB). Failure to comply with the appointment of a recognised auditor, would result in delisting, the regulator threatened.

Since then, neither Washington nor Beijing has reached a comprehensive auditing agreement for US listed Chinese companies, which could see some Chinese companies delisted as soon as 2024. “If the US delisting risk intensifies, Alibaba’s primary listing status in Hong Kong would help mitigate the risk of the company from being completely removed from the stock market,” said Chan.

With the end of the year approaching, pressure to respond appears to be intensifying. “We have seen a number of secondary listed issuers exploring the possibility of undergoing such conversion amidst the delisting risk faced over the fulfilment of US audit requirements,” he added.

Hidden optimism

Earlier this year, HKEX implemented new reforms allowing dual listed companies to join Stock Connect, extending efforts to attract Chinese companies to raise capital in Hong Kong, rather than head to the deeper capital markets in New York.

While the voluntary change of equity classification for Alibaba may not have been unexpected, the timing was, noted Christopher Wood, equity strategist at Jefferies, who in a research note suggested that the only surprise about Alibaba’s decision was that the move did not come earlier. In fact, the real pathfinder was electric vehicle (EV) manufacturer, XPeng, which sought a dual primary listing in Hong Kong in July 2021 and successfully raised a total of HKD 15 billion ($2 billion), on the back of modified rules for those companies with weighted voting rights (WVR).

Key change

But Alibaba’s decision could signal a turning point in the form of a more accommodative regulatory tone emerging from China. Wood’s research highlights that back in February, the CAC provided an important undertaking of support for the technology sector, with some material policy actions implying that any heavy-handed regulatory clampdown may have already peaked.

In August, Ant Group, the fintech company backed by Alibaba, announced plans to re-shuffle its executive board in order to reassert its independence from its parent company, in a move to set it on a path towards going public. The reorganisation assuages those larger investors that had either abandoned their shareholder interests or contributed to Ant Group’s weakened valuation amid concerns that overlapping executive boards blurred the policy line and would invite close scrutiny from China’s regulators.

“To re-attract those institutional investors surprised by the Ant Group IPO episode, takes a massive reform plan – one which Ant has been diligently working on,” Alex Wong, Asia Head of Structured Solutions at FTI Consulting in Hong Kong, told FA.

“The single biggest factor that holds back institutional investors from investing in China is regulatory risk,” explained Wong, underlining that this key change is either a strong greenlight, or represents an extended period of quiet in which tech groups are no longer the main targets of regulatory scrutiny.

The rise of retail

Access to Stock Connect would also open up Alibaba’s shares to China’s retail investor base, which accounts for at least 80% of the programme's trading activity, according to a report by The Asian Bureau of Finance and Economic Research. Chinese retail investors typically hold stocks for shorter periods than the institutional community, and their investment preferences are often characterised as being more sensitive to daily news flow, it explained.

In addition to its significant market capitalisation, Alibaba’s numerous business touch points, which include its online stores, payment platforms, and social media channels, make the company susceptible to various policy announcements and economic developments.

“We should never underestimate the substantial volume of onshore investors,” said Wong. Although retail investors would still only account for a small percentage of its total trading volumes, through their access to the firm, Alibaba’s share price movement would incrementally become more attuned as a sentiment barometer for Chinese markets.

This sentiment gauge becomes more valuable as China continues to grapple with a slowing economy and a tense regulatory environment set by Washington and Beijing.  Indeed, in July, the International Monetary Fund (IMF) downgraded China’s growth outlook to 3.2% amid an investment decline in the property market and a liquidity squeeze in the banking sector.

Any retail-driven rally in Alibaba’s share price could underscore rising optimism in China that has not yet been recognised by economic data. Asset prices, including new home valuations continue to slide lower – as has been the case throughout most of 2022, while markets are trading at near historical lows according to various performance metrics.

While retail investors may work to shorter-term investment time horizons, they may also have an information advantage and fret less about any ambiguity surrounding Alibaba’s fundamental value. It makes sense therefore, that Alibaba would want to be closer to them.


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