Insight

The significance of Alibaba’s Hong Kong listing

13 February 2020
William Lam
William Lam
Co-Head of Asian and Emerging Markets Equities
The significance of Alibaba’s Hong Kong listing

C
hinese ADRs1 have a specific set of risks, but we’ve worked hard to make sure we understand them. This is important given many major Chinese internet companies are only listed in the US. Alibaba’s decision to list its shares in Hong Kong as well as New York represents a significant milestone for holders of Chinese ADRs, particularly given the threat of US-China trade tensions spilling over into capital markets. NetEase are actively considering a secondary listing, while JD.com and online travel agency Trip.com are also reported to be doing so.

Alibaba’s H-share is fully fungible with the ADR and according to Credit Suisse over 20% of outstanding shares are now held in Hong Kong. This allows Asia-based investors to trade the shares during business hours, but also provides a solution should the US authorities seek to block investment into Chinese companies. Even more significantly, it reduces the risk of being ‘squeezed out’, given that ADR holders have little to no recourse to challenge lowball management buyout offers, prior to a relisting elsewhere.

This is a course of action we have first-hand experience of. The charts below illustrate a couple of full examples, using stocks which have made the move from the US to HK/China, both of which have been part of the Asia Pacific strategy.

Figure 1: Mindray Medical, market capitalisation (US$bn)
Mindray Medical, market Capitlisation
Source: Bloomberg, date 31 August 19.

Mindray Medical listed on the Shenzhen Stock Exchange in October 2018, three years after being taken private at a valuation of $3.4bn, a significant discount to its IPO valuation. Just over 12 months later its market cap has risen to over US$31bn, with the shares on a P/E of 50x.

Figure 2: Wuxi Pharma, market capitalization (US$bn)
Wuxi Pharma, market capitalization
Source: Bloomberg, date 31 August 19.

Wuxi PharmaTech was taken private in December 2015, with an equity value of US$3.2bn. The company has since relisted as 2 separate entities — one in Hong Kong and one in Shanghai — with a combined market cap of a staggering $40.3bn. Wuxi Biologics has a market cap of US$16bn and a P/E of 108x; Wuxi Apptec’s market cap is US$23bn and a P/E of 63x.

As shareholders in those companies, we missed out on some significant upside, even if their subsequent relisting in a way ‘proves’ we were right on them. With Alibaba’s H-share being fully fungible, and other US-listed Chinese companies actively looking to copy this course of action, the risk of being squeezed out from any of our Chinese ADRs has largely been removed. Furthermore, Alibaba’s H-share is expected to be admitted into Stock Connect at some point after July 2020, opening it up to domestic Chinese investors with appetite for the shares likely to be high. While the Asian Pacific equity strategy is underweight in Alibaba, we are overweight in US-listed Chinese shares and may stand to benefit from the higher multiple awarded to these listings.

Footnotes

  • 1 An American depositary receipt (ADR) is a certificate issued by a U.S. depository bank representing a specified number of shares—or as little as one share—in a foreign company's stock. The ADR trades on markets in the U.S. as any stock would trade.

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. As a large portion of the strategy is invested in less developed countries, you should be prepared to accept significantly large fluctuations in value. The strategy may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of a portfolio. The Manager, however, will ensure that the use of derivatives does not materially alter the overall risk profile of the strategy.

Important information

  • Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

Related insights