Shares in Alibaba Group Holding HK:9988 and (BABA) soared in Asian trade today, after China's e-commerce market leader said it would splinter into six separate entities in a bid to become more "agile." Some of those entities are likely to then go public as standalone companies.
Alibaba ended the day up 12.2%, leading gains in the Hang Seng Index, and in fact saw gains that almost doubled the next-best performer, the property manager CG Services HK:6098, which rose 6.7%. The Hong Kong benchmark finished the day with a 2.1% advance.
Investors have been waiting for the "Buy" sign to start flashing on a beaten-down BABA, and clearly see the neon blinking now. Today was the first chance for Asia-based investors to respond to the reorganization, the Hong Kong performance not quite matching the 14.3% rise in its New York shares on Tuesday.
Alibaba announced the reorg via a Hong Kong stock-exchange filing after the Asian close on Tuesday. Each new business will have its own CEO and board of directors, a shift that the company says will allow for faster decision making, quicker responses to capital markets, and greater innovation. It's also expected to result in a higher valuation for the sum of the parts.
We don't have a lot of detail yet on what the restructuring entails. We do know that the six entities will be:
The cloud-computing group including Artificial Intelligence and its DingTalk corporate-messaging business; the Taobao and higher-end Tmall e-commerce sites (the heart of the business); the "local services" group including food-delivery app Ele.me; the global digital business group that includes Singapore-based e-commerce site Lazada, a leading e-commerce site for Southeast Asia; Cainiao Smart Logistics, its courier service; and the digital media and entertainment group that includes video streaming service Youku and the movie studio Alibaba Pictures.
The Taobao Tmall Business Group, the bedrock of the company, will always remain wholly owned by the group. The other entities will be free to raise capital on their own, with Alibaba saying they're free to pursue initial public offerings independently.
Alibaba will hold an investor call at 8 a.m. on Thursday Hong Kong time, which is 8 p.m. on Wednesday for New York. You can register here to participate and see a live videolink if you like.
Those businesses are of course already functioning as separate entities. What this partition does is help the companies navigate difficult capital markets while also reassuring regulators who are concerned about the scope and power that Alibaba commands.
There was no formal demand for this kind of split, according to the Financial Times, but the company approached regulators with this potential change, and received positive feedback. Regulators are keen to curb the extent of power that Big Tech wields in China, where Alipay is used everywhere and you can execute virtually any transaction online.
Alibaba Group Chairman and CEO Daniel Zhang will retain a position as chairman and CEO of the overall group. He will also head the cloud-computing business.
I explained on Monday how Jack Ma has made a surprise trip back to his hometown, his first appearance inside mainland China after a long spell living in exile. He reportedly reappeared within China at the request of China's new premier, Li Qiang, who was concerned that the absence of China's most-famous entrepreneur was damaging corporate and consumer confidence.
While his decision to return to China will no doubt hearten Communist officials, I noted on Monday that Ma reappeared in China to visit a school that he helped set up. He has been forced out of the company that became so synonymous with his name by that same Chinese Communist Party, which became concerned that Big Tech in China was starting to wield greater power than the dictatorship sitting atop the country's leadership.
There should be plenty of room for the shares to run if Alibaba is really "back, baby." We shall see. The Chinese Communist Party often reminds me of a gangster network who don't contribute anything to the private sector, solely engaging in "rent-seeking behavior" of bribes, penalties and kickbacks. Should they feel Alibaba is again getting too big for its boots, they'll pay a visit to look around the shop. "Nice company you've got here," they'll say. "Or six companies. Shame if something were to happen to any of them."
Then again, Big Tech in China certainly had issues with how it operates, just like Big Tech all over the world. Alibaba and rival JD.com HK:9618 and (JD) engaged in policies such as "Pick One from Two," forcing big merchants to sign exclusive contracts only to sell their goods on one e-commerce platform or the other. Tencent Holdings HK:0700 and (TCTZF) and Alibaba formed two corporate camps, forcing investors to pick between the ventures established by one or the other if those investors wanted access to future startups and spinoffs from the same group.
The rally in Alibaba shares is so far company-specific. Tencent shares rose 1.8% on Wednesday, with JD.com up 1.9%.
Alibaba shares bottomed in October at US$63 and change, leaving them down by four-fifths from the levels of their US$310 peak in October 2020. It was at that time that Jack Ma took the stage at a financial conference in Shanghai, making bold claims that China's banking industry was not dynamic enough and was failing to support entrepreneurs. He was full of bravado as Ant Group prepared for what would have been a world-record initial public offering. His corporate empire then came under sudden attack, with the listing blocked at the last minute by Chinese President Xi Jinping.
Alibaba ended up paying a record US$2.8 billion fine for anticompetitive behavior, as I explained in April 2021. The company promised to mend its ways, and the limelight-loving Ma disappeared from the public eye, eventually surfacing while living in Tokyo.
BABA shares then almost doubled in the three months through late January. Ma gave the rally legs when he said he would surrender control of Ant, as I noted in January, suggesting the company that runs Alipay would revisit a listing. But BABA shares had dipped again, down 28.0% from that January peak until this two-day rally, the enthusiasm over China's opening up giving way to the realization that consumer confidence is fragile. The shares closed in New York on Tuesday at US$98.
JD.com and Tencent have both spun out and listed several divisions, such as online pharmacy JD Health International HK:8618 and courier company JD Logistics HK:2618, as well as streaming service Tencent Music Entertainment HK:1698 and (TME) .
Goldman Sachs estimates that the six Alibaba businesses are worth a combined US$137 per share. That's another 39.2% higher than Tuesday's U.S. close. China's economic rebound from Covid is spluttering and uncertain, particularly since export demand is weak from the West and consumer confidence is weak at home. But if the political skies have cleared for Alibaba, shareholders could end up holding six very valuable entities indeed.
