Mainland e-commerce giant Alibaba has joined a recent wave of corporate investments in little-known listed firms, providing a much-needed boost for Hong Kong's lacklustre stock market before the Lunar New Year break.
Alibaba and Yunfeng Capital, a mainland private equity firm co-founded by Alibaba chairman Jack Ma Yun, said they had agreed to buy a controlling stake in Citic 21CN, a loss-making drug data firm, for HK$1.33 billion. They will get 4.4 billion new shares in Citic 21CN - a 54.3 per cent stake.
Alibaba's acquisition of the thinly traded company, coming shortly after internet rival Tencent's HK$1.5 billion investment in China South City this month, pushed shares in Citic 21CN to a record high yesterday, with the stock rising 372 per cent to HK$3.92.
Given persistent weakness in global stock markets as investors fret over growth momentum on the mainland and the United States' shaky recovery, investors have switched focus to small-cap stocks with special investment stories.
Earlier this month, Henry Cheng Kar-shun's International Entertainment Corp attracted investor attention after it said it was in talks to buy 70 per cent of Suncity International, a leading junket operator in Macau, for HK$7.35 billion. Shares in IEC have risen more than fivefold in the past six months.
Alibaba's acquisition of the unprofitable data firm, partly owned by mainland conglomerate Citic Group, had some market watchers suggesting that Alibaba could be planning a back-door listing or reverse takeover.
"In a reverse takeover, Alibaba would want to retain extra board control of the listed company, and this listed company can be restructured within the ambit of the listing rules," said Jeffrey Mak, a partner at law firm DLA Piper.
However, investment bankers said Alibaba was keen on conducting a formal Hong Kong listing.
David Webb, a shareholder activist, said Alibaba's acquisition would not lead to a back-door listing because of Alibaba's sizeable assets.
Under the Alibaba-Citic 21CN deal, all five members of Citic 21CN's board will be replaced by people nominated by Alibaba.
Market participants will keep a close watch on whether Citic 21CN will raise funds in the short term, after China South City raised US$396 million through a bond less than a week after Tencent announced its investment in the logistics company, according to Dealogic.
Ben Kwong Man-bun, the chief operating officer of KGI Asia, said shares in Citic 21CN were going for "absurd" prices given there was not much clarity about whether Alibaba would inject fresh assets into the unit or if there were any meaningful synergies between the parties.
"Investors should be aware of that once red-hot small-cap stocks, including gaming and internet, have been under selling pressure," Kwong said.