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The rumours are really gathering steam. In recent months, it’s been speculated that the mainland-based internet giant Alibaba Group (NYSE: BABA) has been considering an initial public offering (IPO) on the Hong Kong Stock Exchange.
We don’t yet know for certain whether this is true. But the company has pulled off an audacious IPO before (in the US). Also, some of its recent moves, plus credible media reports, suggest the company either has started the motor already or is just about to do so. Let’s go over what we know, and don’t know, about this potentially very auspicious market debut in Hong Kong.
Rumours of capital raising
Reports published in mid-June in various media assert that Alibaba has filed an official application for an IPO with the Hong Kong Stock Exchange (HKSE). The filing was made confidentially, those articles claim, citing sources who are not identified.
Underwriters for the IPO are apparently lined up already – the reports named China International Capital and Credit Suisse specifically as belonging to this syndicate. It seems that the company will seek to raise up to US$20 billion (HK$157 billion) in the issue, although it’s not clear whether that’s a gross or net amount.
If the application is accepted – and these days, who wouldn’t greenlight a proposed listing from the likes of Alibaba? – the IPO would occur in the third quarter of 2019 at the earliest. Understandably, Alibaba has not (yet) commented on any of this speculation.
Alibaba carrying out stock split
Another piece of evidence supporting the Hong Kong IPO hypothesis: the company officially served notice to its stockholders that it is proposing a share split. This split, which would cleave the stock into eight shares for every one share currently outstanding, will be voted on at Alibaba’s annual general meeting on July 15. If ratified, the split would be enacted within one year.
One phrase in the proxy statement Alibaba issued about the proposal is garnering a lot of attention in the financial press. The company says that its board of directors (emphasis mine):
“Believes that this will increase flexibility in the Company’s capital raising activities, including the issuance of new shares.”
A stock split, of course, divides an existing share – along with its price – into smaller pieces. With this it establishes a new, lower baseline for the stock. It’s very possible that Alibaba wants to do this in order to establish a relatively inexpensive point of entry for retail investors so they can have ready access to the company in a Hong Kong IPO.
A dramatic debut
Alibaba, facing a slowing economy at home in mainland China, and the potential fallout from the US-China trade war, surely loves the idea of raising more capital to bolster its finances. Of course, it has gone the IPO route before, and boldly – its 2014 issue was the largest IPO in history in terms of proceeds raised, at nearly US$22 billion.
Actually, listing on the New York Stock Exchange was Alibaba’s second choice. Number one was… well, Hong Kong. At the time, though, the HKSE had fairly strict rules and limits on IPOs, and the company was not in compliance. So it took its business across the Pacific.
Accessing a Chinese tech giant
Since then, however, the exchange has relaxed those rules – we can assume the prospect of attracting tech monsters like Alibaba was a major reason why. Regardless, Alibaba is a company that could use some cash, and a stock market in Asia is a solid choice.
We should also remember the kind of access mainland investors have to the Hong Kong market. An Alibaba listing would allow them to buy into one of the most highly-valued and sought-after Chinese companies that they previously couldn’t own (given capital controls) due to its sole US listing. This access would come through the Stock Connect programmes that let mainland Chinese investors buy a number of Hong Kong-listed stocks.
So in the end, the company’s moves and informed speculation strongly suggest that a Hong Kong IPO for Alibaba is coming. If it happens, we can imagine it’ll be sooner rather than later because no company wants to wait a long time for capital as the Hong Kong exchange looks ready to welcome another blockbuster listing.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Eric Volkman doesn’t own shares in any companies mentioned.