It’s been a difficult month for Asian ecommerce giant Alibaba (NYSE:BABA) as investors backed away from the firm amid rising trade tensions between the U.S. and China. As such a high-profile company, Alibaba stock is getting the brunt of the reaction.
This week, Bloomberg reported that BABA stock is considering listing shares in Hong Kong, a move that spooked investors even further and took the stock price down 7% in just a few days.
Here’s a look at four things you need to know about Alibaba stock’s potential Hong Kong IPO.
It’s Not out of the Blue
Alibaba’s debut on Wall Street was a celebrated event as investors toasted CEO Jack Ma and praised his vision for the company. The firm has become one of the most valuable companies on the exchange and the firm’s position in China makes it a unique tech play for investors looking to capitalize on the impressive growth happening in China right now.
However, Alibaba wasn’t always set on listing in the U.S. The firm allegedly wanted to list in Hong Kong but wasn’t able to do so because its corporate structure didn’t conform to the rules. The Hong Kong exchange has since relaxed those restrictions, thus making it possible for Alibaba stock to list without changing its shareholder voting rights.
It’s Happening Soon
One of the most surprising things about the news that BABA stock was mulling over an IPO in Hong Kong was the fact that the offering is seen taking place in the back half of 2019. That means if it does happen, it will go quickly.
The timing suggests that Ma and his team have been considering this possibility for some time, and that they’re likely to go forward with it.
It Could Be Useful
Many analysts say the $20 billion Alibaba hopes to raise by listing on the Hong Kong exchange could be extremely useful for the firm. First of all, Alibaba is battling competitors from a range of different industries and the firm’s rapid growth is becoming difficult to sustain. Additional cash could be a welcome way for BABA to invest in its future growth and maintain its liquidity.
Not only does Alibaba stock have the potential for better valuation on the Hong Kong exchange, but a listing there could be a useful way to divert investor money away from rivals.
It’s Likely Political
However, while there is an argument for BABA to be raising additional capital, most agree that the move is largely political. The firm generated $22 billion worth of operating cash flow in fiscal 2019 and the company was holding on to $29 billion worth of cash as of March. BABA has a relatively well-stocked cash coffer.
The Hong Kong listing does, however, make a few very powerful political statements. First and foremost, it underscores BABA’s loyalties to Asia. Many are calling a Hong Kong listing a “homecoming” for Alibaba. The move reinforces Alibaba’s ties to Beijing and will likely be considered by Chinese officials as a power play for their side.
More important though, a move onto the Hong Kong exchange can be seen as an insurance policy of sorts for Alibaba stock as President Trump and his advisors continue to escalate the trade war with Beijing.
The U.S. government has become increasingly hostile against Chinese firms- especially in the tech sector where American firms have been banned from working with Huawei Technology at all. Plus, there’s been chatter about whether or not the U.S. should restrict China’s access to Wall Street, a strategy that could harm Alibaba eventually.
The Bottom Line on Alibaba Stock
The most important takeaway for investors is that the trade war is becoming more hostile. BABA is unlikely to be the only Chinese firm on the NYSE making moves to align itself with its home country so be prepared. Uncertainty is likely to continue plaguing BABA shares for the remainder of the year unless trade tensions are resolved, but that outcome is starting to look less and less likely.
Until then investors holding on to Chinese securities should buckle up for a bumpy ride as politically-driven moves are likely to dominate the market for the foreseeable future.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.