Alibaba’s listing in Hong Kong expected to lure more Chinese companies
Despite protests Beijing wants to show 'business goes on'
Alibaba Group Holding is expected to increase its over-subscribed share offering to the tune of up to 12.9 billion dollars, which is expected to lure additional Chinese companies to list in Hong Kong, boosting the city’s position as a global financial hub amid months of aggressive anti-government protests.
At 176 Hong Kong dollars ($22.48) each, Asia’s most valuable company priced its new shares in the world’s most substantial capital increase so far this year. That’s a 2.9% discount on Tuesday’s closing price of Alibaba’s New York shares.
The strong demand and favourable reception for the listing has already encouraged the U.S. blacklisted Chinese artificial intelligence firm Megvii to seek approval for an initial public offering in Hong Kong of up to $1 billion.
The stronger-than-expected demand for the Alibaba transaction, launched last week amid this year’s most violent protests, shows that the markets of Hong Kong are open to business and the financial status of the city remains intact, said a person familiar with the offer.
“China wants to show business goes on in Hong Kong,” said Andrew Sullivan, director of Pearl Bridge Partners, a Hong Kong-based investment firm. “China wants a lot of its companies to be listed close to home, and the most logical place to list is Hong Kong as it is the only place in its territory where it can access U.S. dollars. Alibaba seems to have gone extremely well, and it could have a bit of a snowball effect and bring in more companies.” Some of the biggest banks on Wall Street are both involved in the Alibaba and the mooted Megvii listings.
The strong demand for Alibaba stock has surprised even its lead arrangers as the benchmark stock index of the city, Hang Seng, fell by nearly 5 per cent last week as Alibaba opened the share sale.
Nevertheless, the offer was flocked by sovereign wealth funds and institutional investors from the mainland and the rest of Asia, leading to a level of bids that exceeded several multiples of the shares on offer, said people familiar with the proposal.
Alibaba’s retail portion of the offer was “heavily” over-subscribed, and as such, 10 per cent of share sales will be allocated to small investors, a source said. Initially, only 2.5 per cent of the shares on offer were allocated to local investors.
“From an investors point of view, the protests aren’t exactly interfering with the market, and for investors, these offerings are a play on the second-largest economy,” said a portfolio manager for a Hong Kong-based global fund.
“The only thing, in my opinion, that can derail this thesis is if the People’s Liberation Army was deployed on the streets, and most reasonable people know that won’t happen. If it does, Hong Kong loses its special status and China doesn’t want that to happen.” Hong Kong shares have edged 2.4 per cent ahead this week.
Local and international pressure is building on Hong Kong and Beijing, and China is unlikely to take further steps to aggravate it, the person said.
Last week, though, Chinese soldiers went out of the People’s Liberation Army garrison to clear roads blocked by anti-government demonstrators in what officials identified as voluntary work as not in uniform.
China’s top legislature also said this week that Hong Kong courts have no power under the Basic Law of the City to rule on the constitutionality of legislation, which includes a proposed ban on face masks, reported state news agency Xinhua.
The U.S. Senate approved the Hong Kong Human Rights and Democracy Act overwhelmingly on Tuesday, allowing Washington to examine periodically whether the principle “one government, two systems” of the region is sufficient. It also calls for sanctions against those in the former British colony who abuse human rights.
The U.S. House of Representatives approved last month’s version of the measure. Both pieces of legislation must be reconciled, followed by a final vote in each chamber before heading to President Donald Trump’s desk to sign the law. China condemned the bill.
Although the protests have intensified and become increasingly violent, Hong Kong’s equity capital market activity had revived after a summer lull when companies including Ab InBev and Alibaba deferred their fundraising plans amid the protests that started in June.
Since the beginning of September, however, more than $10 billion has been raised, including an initial public offering of $5.75 billion from AB InBev’s Asia business Budweiser, making the city the busiest equity market in the world. This position will be further extended by Alibaba’s Hong Kong debut scheduled for Nov. 26.
The company, which has no pressing need for money as it has about $30 billion in cash on hand and only $21 billion in debts, originally aimed at raising $20 billion when it filed for listing in June. It plans to use the proceeds of the offer to fund the expansion of online consumer service platforms and for “digital transformation.” Eight shares in Hong Kong will be the equivalent of one American Depository Receipt listed in New York. Selling 500 million stocks at HK$176 a share would earn $11.3 billion.
If lead managers use a so-called “greenshoe” option to sell an additional 75 million shares, the value of the deal will rise to $12.9 billion. This would occur on or within 30 days after the day of the listing.
The share sales are led by Credit Suisse and CICC, with Citigroup, Morgan Stanley and JPMorgan Chase taking on roles as well.