Alibaba, wake up China Tech’s long-dormant IPO machine

(Bloomberg) – Alibaba Group Holding Ltd. and Inc. have begun preparations for a trio of the year’s biggest Chinese debuts, ushering in a wave of IPOs that promise to breathe new life into the ailing tech industry and Hong Kong’s stock market.

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Cainiao Network Technology Co., Alibaba’s logistics arm, has started talks with banks over what could be the first of several IPOs of units of the e-commerce giant. On Thursday, two JD affiliates filed the first stock sale in the city. Those three listings together could raise about $5 billion, people familiar with the matter said.

The moves raised hopes that Beijing — which is keen to revitalize the world’s second-biggest economy — will unleash the private sector and allow its biggest names to get back to business and fundraising. Alibaba got the ball rolling this week by unveiling a six-way split that could bring several companies — including Cainiao — to public markets. This restructuring realizes Beijing’s broader goal of carving up tech titans and reducing their grip on parts of the economy — while potentially unlocking billions of dollars in value.

The revival of the Chinese tech IPO train ends a year-long drought that began after regulators pulled the plug on Ant Group Co.’s record-breaking IPO. The business that was once among the world’s most lucrative investment banking games dried up around 2021 as Beijing launched a savage attack on internet sectors from online retail to gambling and tightened requirements for overseas listings.

“For the big techs, spin-offs can undoubtedly increase shareholder returns, unlock enterprise value and allay regulatory concerns related to antitrust,” said Willer Chen, senior analyst at Forsyth Barr Asia Ltd. “For more than a year or so, there has been very little demand on the deal side as market conditions have been weak and investors have been discouraged. Now the environment for valuations appears to be friendlier, which makes sense for large tech subsidiaries with a mature business and strong liquidity needs to consider IPOs.”

A number of Chinese tech names have submitted or resubmitted their applications to list in Hong Kong just in the past week: Lalatech Holdings Ltd., another tech-driven logistics giant in China, social media app Soulgate Inc. and fitness app Keep Inc. But there are bigger contenders: TikTok owner ByteDance Ltd., ride-hailing giant Didi Global Inc., and social media player Xiaohongshu may be raring to go.

Read more: China Launches 2023 Leading Global Peers in Equity Fundraising

Alibaba’s announcement coincided with the return of its billionaire co-founder Jack Ma to China, as well as a series of official statements of support for the private sector. But many entrepreneurs and technology leaders, traumatized by nearly two years of relentless scrutiny, remain wary of Beijing’s intentions amid the Xi Jinping government’s distrust of powerful private companies. And there’s no guarantee that the split and spin-off will propel companies forward over the long term.

But Alibaba and JD are fueling a trend that has emerged this year. Chinese companies beat their US and European peers in equity financing earlier this year, buoyed by hopes of China’s post-Covid reopening as the rest of the world grapples with a potential recession.

It “shows Beijing’s support for more buoyant capital market activity within China’s tech sector,” said Catherine Lim, an analyst at Bloomberg Intelligence. “This should help lift overall market sentiment and anticipation of listings for other mammoth companies within the sector.”

Tapping into the IPO market is key for Chinese companies to expand their funding base and broaden their investor base. A surge in listings will also benefit Hong Kong, which had long been the premier venue for Chinese debuts until Beijing cracked down. The city has raised just about $852 million through IPOs so far this year, a fraction of the $4.1 billion raised during the same period in 2022.

Cainiao, meaning amateur or rookie in Chinese, is on track to be first to market, partly because it has a long track record as a standalone company supporting other parts of the Alibaba empire. Despite making losses, the unit has consistently posted double-digit sales growth and is one of the company’s best-known brands, a nationwide logistics giant that helps ship more than a billion packages during the company’s Singles’ Day shopping festival.

Longer-term, Alibaba’s burgeoning cloud business is drawing outsized anticipation. Group Chief Executive Officer Daniel Zhang will personally take the helm and underlines the hope that artificial intelligence will lay the foundation for future growth. This entity houses their Slack-like DingTalk app and offers cloud computing and data processing services worldwide. Similar to Amazon Web Services, it was born out of the need for massive computing power to support e-commerce and is now a leading regional player in the business of providing cloud and data services to enterprise customers.

For JD, it had spun off businesses in previous years, including JD Health International Inc., which raised nearly $4 billion in a Hong Kong IPO in 2020. JD Technology, its fintech arm, may want to be listed in the Asian financial hub.

There has also been speculation that Tencent Holdings Ltd. could possibly take a page out of Alibaba’s book.

It operates China’s largest mobile wallet and payments platform, as well as four main businesses with spin-off potential: gaming, cloud computing, WeChat, and online content such as videos. The company has already listed music and online literature.

“There is a positive impact on the sector as investors are reminded that Chinese internet platforms are significantly undervalued and these companies will continue to seek to bridge the gap,” said Vey-Sern Ling, Managing Director of Union Bancaire Privee. “It also shows that the regulatory environment is supportive.”

–With the support of Lin Zhu.

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