Alibaba IPO poised for reality check as internet stocks decline

Mainland internet stocks expected to experience short-term fluctuations after surging in value

PUBLISHED : Saturday, 05 April, 2014, 1:07am
UPDATED : Saturday, 05 April, 2014, 1:54am

Red-hot optimism over e-commerce giant Alibaba Group's upcoming initial public offering in the United States could give way to a reality check after shares of Tencent, Asia's largest listed internet company, reached a two-month low in trading yesterday.

Shenzhen-based Tencent saw its share price fall to HK$512 in early trading, but finished down 3.93 per cent to HK$525. That marked a big drop from its record close of HK$635 on March 6 this year. Shares of Tencent have taken a tumble in the past several weeks amid market concerns that internet stocks are overvalued, a development that could pour cold water on exuberant investors awaiting Alibaba's float in New York.

Alibaba, founded in Hangzhou in 1999 by English teacher-turned-entrepreneur Jack Ma Yun, has seen recent market estimates of its valuation range from US$200 billion to US$250 billion. Its IPO is widely expected to be launched either this quarter or next.

Ricky Lai, a research analyst at Guotai Junan International, said worries about a potential bubble in internet stocks would have no major impact on Alibaba.

"Despite the concerns about overvaluation, the general view of Alibaba's IPO is still very positive," Lai said. "We think it is better that the market correction is happening now than at the time of the company's US listing."

Speculation has been rife that Alibaba, which is the mainland's leading online retail and payments provider, could raise about US$15 billion from its IPO.

Lai, however, predicted that other major Chinese internet players will continue to experience short-term fluctuations of their share prices, following the strong surge in their value last year.

Baidu, the leading Chinese-language online search service, has also seen its shares on the Nasdaq stock market take a hit. The Beijing-based company's stock slipped 1.88 per cent to US$157.45 on Thursday, down from its high of US$184.64 on March 6.

Daniel So, a strategist at CMB International Securities, said the correction in Tencent's share price reflected how overvalued the stock became, following its much-publicised expansion into mobile messaging and online financial services, as well as strategic acquisitions.

"I think there is a big chance that Tencent would trade lower than HK$500. I expect it to fall to HK$450 in the second quarter, which is a proper price in my view," So said. In the first quarter, the high end of market analysts' share price target for Tencent reached HK$660.

Francis Lun Sheung-nim, the managing director at Lyncean Securities, pointed out that Tencent's growth has slowed down, so it would "be hard for the stock to go up to HK$700" as had been previously speculated.