Alibaba's Hong Kong secondary listing gives Asia's Taobao users a chance to own stakes in China's biggest technology champion

Chad Bray, Enoch Yiu chadwick.bray@scmp.com

Five years ago, Alibaba Group Holding chose New York over Hong Kong in what would be the world's biggest initial public offering ever " worth a whopping US$25 billion.

The listing on the New York Stock Exchange made the Chinese technology and e-commerce giant a globally recognised name " American pop star Taylor Swift performed several of her newest songs as part of a record Singles' Day shopping event on Monday " and turned its founders into billionaires many times over. It also propelled Jack Ma, the company's former chairman and a one-time English teacher in Hangzhou, to the global stage.

The company's stock has nearly tripled from its IPO value in 2014, but the decision to list in the United States has been a mixed bag, as some analysts believe its shares remain undervalued and heightened tensions between Beijing and Washington have raised questions about whether Chinese companies would be restricted from accessing American capital markets in the future.

Alibaba, the owner of South China Morning Post, is hoping that a secondary listing of up to US$13.86 billion in Hong Kong would help it unlock that value by tapping investors closer to home in Asia, who are more familiar with its business, including the mainland Chinese, who could soon have their first opportunity to invest in the company and partake in its future growth.

"When Alibaba Group went public in 2014, we missed out on Hong Kong with regret," Alibaba's group executive chairman Daniel Zhang wrote in a letter to staff after the filing of the company's listing plans. "We always said that if given the chance, we hope to come to Hong Kong. Over the last few years, there have been many encouraging reforms in Hong Kong's capital market. During this time of ongoing change, we continue to believe that the future of Hong Kong remains bright."

Despite being the most valuable Chinese company listed in the US, Alibaba's market capitalisation significantly lags Amazon.com, the American e-commerce powerhouse run by Jeff Bezos with which Alibaba is most often compared. As of Tuesday's close, Amazon's capitalisation was US$881.5 billion, compared with Alibaba's capitalisation of US$487.8 billion.

Alibaba remains committed to its US listing, and believes Amazon is more highly valued because its American customers have been able to invest directly in the company, according to a person familiar with the company's thinking. Following the Hong Kong listing, Alibaba's shares will trade nearly round-the-clock and be available to a large, untapped pool of investors in Asia, the person said.

The secondary listing also helps soften a lingering sting among Hong Kong's financial officials after Alibaba spurned the city in 2014 over a legacy regulation that barred companies with weighted voting rights, or dual-class shares, from raising capital.

The company, whose businesses range from e-commerce to big data, financial services and cloud computing, among dozens of other divisions, went to New York instead, sparking disappointment and spurring discussions about modernising the city's listing requirements.

Last year, Hong Kong radically overhauled its listing rules to allow technology firms with dual-class shares and pre-revenue biotechnology firms to list in the city. Biotechnology firms have embraced the new listing rules, but fewer technology firms have used the changes to pursue new offerings. The reforms also added a framework for technology companies already listed in the US or United Kingdom to seek a secondary listing in Hong Kong. Alibaba will be the first to use this framework.

Alibaba's return to Hong Kong is most welcomed, said Carlson Tong Ka-shing, who was chairman of the Securities and Futures Commission when the company chose New York in 2014.

"The listing of Alibaba in Hong Kong shows the resilience and strength of the Hong Kong capital market, [since] our exchange can successfully support such a major fundraising exercise [despite] the ongoing social unrest," said Tong in an interview after his retirement last year.

Having a foot in Hong Kong's capital market is an important part of Alibaba's commitment to globalisation, Zhang said.

"Hong Kong is an important global Centre for finance and trade, and one of the world's most important physical hubs for the flow of global goods," said the Alibaba chairman, known in the company as xiaoyaozi , or the "Free and Unfettered Spirit". "We must learn from the mature concepts and practical experiences of the diverse participants and stakeholders in Hong Kong and other global markets to further develop a unique path for Alibaba's globalisation. We believe the development of Alibaba's diverse talent pool will be further advanced."

Still, Alibaba's listing in Hong Kong comes at a sensitive time in US-China relations.

The world's two biggest economies have been embroiled in a trade war for more than a year, with US President Donald Trump trying to use tariffs to force Beijing to change decades of industrial and trade policy.

The Trump administration has also reportedly considered whether to limit the ability of Chinese companies to list in the US and American pension funds from investing in Chinese firms until Beijing agrees to reforms, an idea broached by former Trump adviser Steve Bannon this summer.

The stakes are high, with 156 Chinese companies capitalised at a combined US$1.2 trillion on American bourses at the end of February, according to the US-China Economic and Security Review Commission, a government body that monitors the trade between the two countries. They include China's dominant internet search operator Baidu, online retailer JD.com, online travel agent Ctrip.com and Alibaba.

Their share prices have fallen amid the rising tensions wrought by the year-long US-China trade war, with Alibaba's shares falling to a two-year low in early January. Its share price has recovered over the course of 2019, increasingly 33.1 per cent since the beginning of the year. Alibaba shares fell 2.4 per cent to US$182.48 at the end of Wednesday's trading in New York.

Against this shifting political environment, investor appetite for exposure to Chinese markets still continues to increase, with several index providers, including MSCI, increasing the weighting of Chinese A shares in their emerging market indices this year.

"As China grows as a financial powerhouse that exerts more and more influence for investors globally, as the [country's] capital account slowly opens up, you will see more capital being been deployed in China," said James Ashley, head of Goldman Sachs Asset Management's international market strategy team. "[In the] long term, I think China will become a focal point for more and more investors, not just those who are investing in [emerging markets] more broadly."

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The offering could open the door for additional listings in Hong Kong by mainland Chinese technology companies, which would help expand the Stock Connect cross-border investment channels for mainland Chinese investors to own more Hong Kong-listed stocks, said Laurence Li Lu-jen, chairman of the Financial Services Development Council, a government-appointed body that promotes the financial status of Hong Kong.

"It will add to the case for Hong Kong to play a bigger role as a trading hub for mainlanders to trade the stocks of Chinese companies they are familiar with,' Li said. "This will help Hong Kong to lobby Beijing to further widen the Stock Connect schemes."

To be sure, mainland Chinese investors will need to wait for as long as six months to get their hands on Alibaba's Hong Kong-listed shares.

"[Investors] will need to wait for Beijing's [financial regulator] to decide when Alibaba can be added to the Stock Connect for mainlanders to trade," said Clement Chan, managing director of accounting firm BDO.

Chinese smartphone maker Xiaomi and food deliverer Meituan Dianping were included in the Stock Connect in October, more than a year after their respective listings in Hong Kong, after Chinese markets amended their rules to allow Chinese investors to own technology companies with weighted voting right, or dual-class, shares.

Alibaba's listing is also a shot in the arm for Hong Kong Exchanges & Clearing (HKEX), the bourse operator, and the city itself after months of protests and unrest have sent its economy into a technical recession and forced some companies this year to delay their IPOs.

Hong Kong's benchmark Hang Seng Index has risen 2.9 per cent this year, making it the sixth-biggest loser out of the 14 stock markets in Asia-Pacific. HKEX shares, which are traded on the exchange, have risen by 7.8 per cent this year.

The city's bourse slipped behind the NYSE and Nasdaq this summer in the annual race for global fundraising capital, but the Alibaba listing, if it raises at least US$10 billion, would push the Hong Kong stock exchange back into the lead for global fundraising, according to Refinitiv, the financial data provider.

Several companies, including Budweiser Brewing Company APAC and logistics real-estate developer ESR Cayman, delayed their listings this recent summer as Hong Kong's worst political crisis in decades intensified.

Following interest rate cuts in August and September by the US and Hong Kong monetary authorities, a floor was found for the valuation of IPOs, prompting both Budweiser, ESR Cayman and a dozen other companies to dust off their shelved listings.

Seeing the window of opportunity, Alibaba seized the chance to go to market. Its offering would be the largest to come to the market anywhere in the world this year, topping the US$8.1 billion IPO in New York by Uber Technologies in May.

The record, however, is unlikely to last for long, as Saudi Aramco " the Saudi oil giant and the world's most profitable company " is planning an IPO on the Tadawul exchange in Riyadh, which could raise as much as US$60 billion. Aramco's offering has been anticipated for several years, with the kingdom seeking a valuation of as much as US$2 trillion for the company. Shares in the company may start trading in December.

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This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.