Secondary listings

Alibaba’s Hong Kong secondary listing plan: it isn’t worth it

The e-commerce giant’s idea of a secondary listing in Hong Kong may not deliver the much-hyped boost in liquidity some bankers are touting; it could also call forth unwanted volatility.

Alibaba would face an uphill struggle to maintain trading activity if it pushes ahead with plans for a secondary listing in Hong Kong, say market participants. Maybe the Chinese e-commerce giant shouldn’t even try.

The Hangzhou-headquartered company is mulling a listing in the financial hub, according to two people familiar with the company’s plans. Bloomberg first reported the news and added that Alibaba would file an application in the second half of this year to raise $20 billion. 

Such a move is unlikely to be beneficial for the company in the long term as most institutional investors can already access Alibaba’s shares quoted on the New York Stock Exchange, investors and bankers told FinanceAsia. As a result, a secondary listing is neither likely to broaden its shareholder base significantly nor deliver a valuation uplift for its New York-quoted stock.

Based on past precedents, liquidity in a secondary listing gravitates swiftly to the primary listing, largely because Hong Kong has higher transaction costs than other trading hubs, including New York.

Chinese Nasdaq-listed BeiGene raised $903 million in a secondary listing in Hong Kong in August last year, the first under new exchange rules. Liquidity rapidly dried up in the stock, however, and didn’t deliver any valuation arbitrage for its New York listing. “Now you have to make an appointment to trade the stock,” quipped one banker. 

Last month, the biotech company reported about $47 million of trading value in Hong Kong, which was only about 8% of the $560 million worth of shares traded on Nasdaq.

Some investment bankers say that Stock Connect, a trading link between the Hong Kong, Shanghai and Shenzhen Stock Exchanges, could funnel investment from mainland China directly into an Alibaba listing in Hong Kong. Stock Connect was launched in November 2014, shortly after Alibaba’s September 2014 IPO in New York when it raised $20.5 billion.

A secondary listing in the Asian time zone would make Alibaba’s shares available for trading almost around the clock. By holding the same class of Alibaba shares in Hong Kong, investors could react on a real-time basis to any price-sensitive news and information released during Asian hours if Alibaba and its advisers ensure fungibility between the Hong Kong and US stocks.

With most of Alibaba’s operations located in China, Chinese investors will likely understand its business better than their US counterparts and, so the argument goes, they will value its stock more highly as a result.

Mainland Chinese institutional investors and the wealthier mainland Chinese retail investors, however, can already set up trading accounts to buy stocks listed in New York. It’s true that the average retail punter in mainland China may not be equipped to trade in the US, but these largely momentum-driven investors often increase volatility in Hong Kong-listed stocks. Alibaba’s Hong Kong-listed rival Tencent has been buffeted violently over the past couple of years, dropping from a high of HK$471.20 in January 2018, to a low of HK$260 by October 2018. That’s the kind of trouble Alibaba should avoid. 

There may well be a small set of investors that only have mandates to own Hong Kong-listed shares and Hong Kong retail investors that haven’t organised a trading link, but such relatively small pockets of money are unlikely to move the needle considerably for Alibaba, which has already amassed a market capitalisation of $402 billion in New York, or deliver an uplift in valuation for Alibaba’s New York-listed stock.

Other secondary listings in Hong Kong have a patchy history. Issuers have watched liquidity drain away while they remain lumbered with the cost of maintaining the listing.

Commodity trader Glencore and Coach brand owner Tapestry Inc. surrendered their listings in Hong Kong in 2017 due to low volumes of trading to refocus on their primary listings. 

Companies that raise capital during their listing have a greater chance of sustaining liquidity in Hong Kong. Brazilian iron ore miner Vale listed through introduction in 2010, meaning it did not sell any new shares. It delisted from Hong Kong in 2016. Japan's Fast Retailing, owner of Uniqlo, is another example of a secondary share listing without raising capital. Since coming to Hong Kong in 2014, its secondary listing has floundered too.

Alibaba is, of course, reportedly raising a far larger amount of capital, and $20 billion could anchor a critical mass of trading.

An exemplary large-cap, dual-primary listed stock would be British bank HSBC, but even in this case, Hong Kong has captured just 43% of average daily trading volume as a percentage of global volume after decades of nurturing local investment, while London retains the larger pool of liquidity in the stock. The Hong Kong listing of HSBC’s peer, Standard Chartered’s only captures about 13% of its global trading activity.  

With billions of dollars on its balance sheet, the ability to raise more equity in the US and easy access to bond markets, Alibaba does not need to raise capital urgently in Hong Kong even if it is buying more offline companies to complement its digital retail empire.

The mooted plans for a secondary listing in Hong Kong do, however, come at a time of escalating trade tension between the US and China, which is starting to hurt Chinese technology companies such as Huawei.

SMIC, China’s largest chipmaker, said on May 24 in a filing that it would delist its ADRs from the NYSE.   

One clear winner if Alibaba does push ahead with a secondary listing in Hong Kong would be the local exchange.

The NYSE has long butted heads with the Hong Kong Stock Exchange (HKEx) in the pursuit of mega IPOs. The two bourses have dominated the world’s IPO market in the past decade, with each of them topping the list five times.

HKEx amended its rules last year to allow “innovative” companies to list on its exchange even if they have weighted voting rights structures.
While there are 30 Hong Kong-listed companies – including Tencent, HSBC and HKEx itself – trading in the form of American Depositary Receipts in the US, the trading volume is generally so thin that it does not necessarily bring meaningful transaction fees for the US exchanges.

Hong Kong would be able to share a slice of the huge trading volume of Alibaba shares, as well as the massive trading fee behind them, if it is able to host the secondary listing of the Chinese e-commerce giant.

Over the past three months, about $2.75 billion worth of Alibaba shares were traded every day. That is about 6.5 times Tencent’s daily trading value in Hong Kong and more than a fifth of HKEx’s average daily trading value of $13.3 billion.

An Alibaba spokesperson declined to comment on market rumours. 

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