Alibaba tells investors its revamp will make the company more “agile” to market shifts

In a call on Thursday Alibaba Group tried to reassure its investors that its decision to overhaul its organization and split it into six entities was aimed at making the company “more flexible” to market changes.

“We believe this will enable all of our companies to become more agile, improve their business decisions and react more quickly to market changes,” CEO Daniel Zhang told investors.

China’s regulatory crackdown on its tech companies since 2020 has resulted in about $1 trillion in wipe-outs of the country’s biggest companies, but Alibaba’s restructuring is seen as a sign Beijing is softening that stance, analysts told CNBC.

Zhang told investors on Thursday’s conference call, “We have been emphasizing the idea of ​​agility for a number of years and emphasizing that we are a more nimble and agile organization,” adding that Alibaba’s board of directors will continue to have control over its entities .

“Alibaba Group will have the character of a holding company, which will be the controlling shareholder of the group’s companies,” Zhang said. “As the controlling shareholder, Alibaba’s board will continue to have control over the boards of these new companies.”

shares of Alibaba The Hong Kong-listed stock rose nearly 3% at market open on Thursday, about an hour after the earnings call concluded. The stock closed up over 12% on Wednesday, having its best day since Nov. 11, 2022.

Chief Financial Officer Toby Xu added that Alibaba will ultimately determine which companies will retain control.

“We will continue to assess the strategic importance of these companies to Alibaba and, based on that, decide whether to retain control,” Xu said. “That will be an important strategic consideration.”

Zhang added that the group has been working on Alibaba’s “transformation” for years and that the separation of the entities will eventually lead to a change in the relationship with their companies.

“One of the biggest changes will be that each of the segments within today’s company will each become an independently operating company – hence the relationship between the group and the group company will change,” Zhang said.

When asked about the timing of Alibaba’s restructuring, Zhang said that “strategic and business planning for the business groups will start immediately.”

CFO Tony Xu said separating the companies from Alibaba would allow the company to determine each company’s performance.

“We believe the market is the best litmus test for each company in the group to conduct independent fundraising and IPOs as soon as they are ready post-IPO,” he said.

CreditSights said in a statement Wednesday that the Chinese government may implement similar strategies at other big tech companies.

“We believe that Alibaba’s new organizational structure could serve as a blueprint for other Chinese Big Tech companies by Chinese regulators,” write analysts Zerlina Zeng, Stephanie Sim and Hanna Ang Siew Min.

“We expect Chinese big techs to scale back their acquisitions significantly due to the ongoing antitrust scrutiny, helping them save cash for debt service,” they wrote.

CreditSights maintained its “Outperform” rating for Alibaba after announcing its overhaul plans, adding that the plans will not have a major impact on the company’s creditworthiness.

“We see a limited short-term impact of the restructuring on Alibaba’s debt metrics as all six entities are consolidated and controlled by the group,” CreditSights said in a statement.

The move is expected to have a positive impact on the broader group’s creditworthiness.

“We believe the company’s restructuring will reduce the risk of Alibaba burning cash to fund unprofitable businesses,” the statement added.

“We anticipate that the potential separate fundraising (including IPOs) of these businesses will help reduce cash burn for Alibaba, which we believe represents positive credit quality,” it said.