Premium on Alibaba’s Hong Kong stock over US shares widens to seven times historical average after primary listing application

The spread between Alibaba’s Hong Kong stock and ADSs reached as wide as US$5.51 last week, compared with the historical average of about US$0.80
A primary listing in Hong Kong will reduce the risk for ADS holders in case the company is booted out from the US and allow it to join the Stock Connect programme

Hong Kong stock market

Zhang Shidongin Shanghai

Published: 7:13pm, 3 Aug 2022

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The premium Alibaba Group Holding’s Hong Kong-traded shares command to its American depositary shares (ADSs) has widened almost seven times to its historical average, signalling that more investors may have piled into the ordinary shares after the e-commerce stalwart said it plans to switch to a primary listing in the city.

The spread between Alibaba’s Hong Kong stock and ADSs reached US$5.51 on Friday, compared with the average of about US$0.80 since the Chinese e-commerce giant began trading in Hong Kong in November 2019, according to Bloomberg data. The spread has risen to US$1.364 since it applied for a change of listing status on July 26.

Alibaba’s New York-listed shares are fungible with the Hong Kong stock at a ratio of 1:8, and vice versa at the ratio of 8:1. The fungibility ratio of 8:1 is close to the current Hong Kong dollar exchange rate of 7.85 per US dollar. So that ties the stocks in a 8:1 ratio, where one gain will be reflected in the other, and one decline drags the other down.

Here’s how to convert Alibaba’s shares in New York, Hong Kong

The switch to Hong Kong, where Alibaba currently trades in the form of a secondary listing, will reduce global investors’ risk in case the company is booted out from the US and also pave the way for the stock to be exposed to mainland buying when it is added to the cross-border Stock Connect programme. An influx of funds from onshore investors, who tend to give local tech companies higher valuation, will give some impetus to Alibaba’s stock facing a renewed regulatory risk.

The company was added to a tentative delisting list by US securities regulators last week for failing to let American auditors access its audit papers, a long-standing issue between China and the US.

“For those investors with US-based exposure and intent on having Alibaba in their portfolio, it makes sense to switch to Hong Kong,” said Stephen Innes, a managing partner with SPI Asset Management. “And yes, the spread will widen due to forced sales by institutional risk management control authorities.”

Alibaba is the owner of the South China Morning Post.

A primary listing in Hong Kong will offer a leeway for Alibaba’s US-based investors, who hold about 40 per cent of its issued securities, and potentially boost liquidity of its shares in the city. The daily turnover in New York averaged US$3.2 billion in the first six months of the year, compared with US$700 million in Hong Kong, according to the company.

02:02

Chinese e-commerce giant Alibaba starts trading on Hong Kong stock exchange

After losing more than two thirds of its market value since Beijing initiated a regulatory crackdown, Alibaba’s stock has been on the mend. Its Hong Kong-traded shares have risen 26 per cent from a record low in March, while its ADSs have gained 21 per cent.

Alibaba is the third company to apply for a primary listing in Hong Kong this year, as US-traded Chinese companies seek to mitigate the risk of being booted out from American exchanges. Drug maker Zai Lab gained a primary listing status in June while live-streaming video operator Bilibili applied in March and is expected to complete the formalities by October.

Many US-listed Chinese firms not qualified for Hong Kong listing

Citic Securities, China’s biggest publicly traded brokerage, expects more companies to switch to a primary listing in Hong Kong, potentially adding HK$1.4 trillion (US$178.4 billion) in market cap and boosting the daily turnover by about 4 per cent.

One outcome of switching to a primary listing for Alibaba is that it will join a waiting list of companies to be added to the Stock Connect scheme, which typically spurs more liquidity due to participation by mainland traders.

The average daily volume of Xpeng shares has more than doubled since its addition to the stock connect scheme. Photo: Bloomberg

Take electric-vehicle maker Xpeng and Li Auto, for example. The average daily volume of Xpeng shares has more than doubled since its addition to the Connect scheme, while the quantum for Li Auto has jumped almost sixfold, according to Citic Securities.

The brokerage predicts that Alibaba will be eligible for trading through the programme by next June at the latest.

The shift in Alibaba’s listing status could be a boon for investors as it will allow them to navigate the delisting risk and ride on the stock’s increased liquidity, said Redmond Wong, a Hong Kong-based strategist at Saxo Markets.

“Theoretically speaking, US investors will have a plan to convert the ADSs to stock trading in Hong Kong, and that remains their primary choice,” he said. “On the other hand, that’ll also accelerate the pace of Alibaba’s stock being added to the southbound investment channel of the Stock Connect.”

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