Alibaba Eyes Hong Kong Primary Listing as Hedge to U.S. Delisting Threat

Key Takeaways:

• Alibaba said it expects the upgrade of its secondary Hong Kong listing to primary listing status to be complete by the end of 2022
• The SEC has placed Alibaba on a list of Chinese firms facing potential delisting as the deadline nears for U.S.-listed Chinese firms to comply with American audit rules

By Ken Lo

Alibaba Group Holding Ltd. BABA applied for a “dual primary listing” on the Hong Kong Stock Exchange late last month to complement its U.S. listing. It has joined other Chinese companies, such as XPeng XPEV, Li Auto LI and Bilibili BILI, which have already chosen or are in the process of selecting Hong Kong as their primary listed market as they face the possibility of being booted from American stock exchanges.

Already present on the Hong Kong bourse with a secondary listing since 2019, Alibaba said it expects the primary listing in Hong Kong to be complete by the end of 2022, a move that will foster a wider and more diverse investor base.

Upon completion of the review process, Alibaba’s Hong Kong shares will be eligible for the “Stock Connect” link between China’s mainland markets and the Hong Kong Stock Exchange. Secondary listings in Hong Kong, like Alibaba’s current listing, are not allowed in the “Stock Connect” trade program under current rules. A dual primary listing in Hong Kong, Alibaba said, will broaden its investor base, particularly in China and other parts of Asia, by bringing in more liquidity.

Two days after Alibaba announced its intentions, the U.S. Securities and Exchange Commission (SEC) placed it on the list of Chinese firms facing potential delisting if they fail to file financial documents for three consecutive years, or if the documents filed don’t meet SEC requirements. This shows that Alibaba’s plan for a dual primary listing is indeed necessary. Alibaba’s stock plunged 11.1% to $89.37 in New York after the news broke.

Alibaba debuted on the New York Stock Exchange in September 2014 at a valuation of $25 billion, which was the largest ever IPO in the U.S. at the time. But times have changed. Washington and Beijing have been unable to strike an agreement on how to let U.S. regulators inspect the books and auditors of Chinese companies that are publicly listed in the U.S. More than 250 U.S.-listed Chinese companies worth $1.3 trillion face potential delisting from American stock exchanges if both countries cannot reach an agreement.

Hong Kong replacement for U.S.-listed China firms

Alibaba’s primary ─ rather than secondary ─ listing in Hong Kong will mark a new era, as China’s most vaunted technology company strengthens the role of the Hong Kong bourse as a replacement for Chinese securities listed in the U.S. If China-based companies are booted from American stock exchanges, it would make it more difficult for Americans to invest in Chinese companies.

In the first half of this year, the average daily turnover of Alibaba’s shares in New York was about $3.2 billion, compared with $700 million in Hong Kong. Once Alibaba converts its secondary listing into a dual primary listing in New York and Hong Kong, analysts expect a boost in trading and investment not only in Alibaba shares, but also in other Chinese stocks listed in Hong Kong.

In July 2021, XPeng completed its primary listing in Hong Kong, becoming the first China stock to have a dual primary listing in Hong Kong and New York. Li Auto landed in Hong Kong in the same way in August 2021. Bilibili, which was initially listed in Hong Kong as a secondary listing, announced in March this year that it would start the process of converting its Hong Kong shares into a primary listing, and the dual primary listing is expected to be implemented in the fourth quarter of this year.

Companies applying for a primary listing in Hong Kong must meet more stringent requirements than those that that apply for a secondary listing. Hence only companies that apply for a primary listing in Hong Kong qualify for “Stock Connect.”

Attracting billions in mainland capital

KGI Asia, a wealth management company, estimates that the Hong Kong Stock Exchange currently holds 691 million shares of Tencent (700.HK) and 600 million shares of Meituan (3690.HK), with a market value of HK$228 billion ($29.2 billion) and HK$113 billion respectively, equivalent to about 7.2% and 9.7% of their shareholding. Once Alibaba has access to “Stock Connect,” the Hong Kong Stock Exchange may hold about 5% to 10% of Alibaba shares – up to HK$2.2 trillion in terms of current market value. Alibaba is expected to attract HK$110 billion to HK$220 billion of mainland capital.

Analysts say a dual primary listing in Hong Kong and New York is the best option to safeguard the interests of investors while complying with current political tensions. Francis Lun, CEO of GEO Securities, said that almost all U.S.-listed Chinese stocks involved in big data processing are caught up in the controversy surrounding cybersecurity and data privacy. If U.S. authorities insist on viewing their audit records, and these companies do not comply with the request due to fear of sensitive data leaks, many Chinese companies may be delisted from American stock exchanges as the 2024 delisting deadline looms closer.

China is seeking a compromise that would see U.S.-listed Chinese firms divided into three categories: those that hold non-sensitive, sensitive and secret data, according to media reports. Beijing would likely allow those in the first category to open their books to American regulators. But companies holding what Beijing deems as sensitive and secret data would be required to delist from the U.S., as it wants to prevent foreign authorities from accessing such information.

Investors have criticized Alibaba for its dismal share performance. The company’s shares have fallen more than 70% since 2020, closing at $89.37 on July 29 on the New York Stock Exchange. According to Yahoo Finance, Alibaba’s latest price-to-earnings (P/E) ratio is about 11.5 times, lower than Tencent’s and JD‘s JD 25.5 times and 34.5 times respectively. Alibaba’s price-to-sales (P/S) ratio, at 2.2 times, is also lower than Pinduoduo‘s PDD 5.7 times. Investors will have to wait and see if news of the dual primary listing will boost Alibaba’s swooning share price in coming months.