Source:
https://scmp.com/business/companies/article/3039859/explainer-what-fungibility-and-whats-big-deal-alibabas-fungible
Business/ Companies

What is fungibility, and what’s the big deal with Alibaba’s fungible shares on New York and Hong Kong exchanges?

  • One American Depositary Share (ADS) of Alibaba (BABA) on the New York exchange is equivalent to eight Alibaba shares (9988) on the Hong Kong exchange
  • A fully fungible stock can be bought or sold in one marketplace to be converted or sold on another, and pricing on the two are unlikely to diverge too much from each other
Alibaba’s mascots Tao Doll and Freshippo during the trading debut of the company’s shares on the Hong Kong stock exchange on 26 November 2019. Photo: Enoch Yiu

Alibaba Group Holding successfully raised as much as US$13 billion this week in Hong Kong, in the world’s largest initial public offering (IPO) this year.

The Hong Kong secondary listing under the stock code 9988, the first of its kind on the exchange, adds to the technology giant’s American Depositary Shares (ADSs) listed in New York (BABA) since 2014. Alibaba owns South China Morning Post.

Here’s an explainer for how the two fully fungible securities relate to each other:

Q: What does “fully fungible” mean?

Fungibility is the property of a good, typically a commodity such as oil, wheat or timber, whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another.

A fully fungible stock can be bought or sold in one marketplace to be converted or sold on another, and pricing on the two are unlikely to diverge too much from each other.

Q: How does it work?

Investors can buy Alibaba’s ADSs for US$200.82 (HK$1,572) each based on the November 27 closing price in New York, and convert the ADSs into Alibaba’s Hong Kong shares, where each ADS can be converted into eight Hong Kong-listed shares (9988).

Since the purchase price is equivalent to HK$196.5 per Hong Kong share, the conversion yields a paper profit of HK$7.5 compared with the November 28 closing price of HK$204 in Hong Kong.

Q: Do holders of Alibaba ADSs automatically get eight Hong Kong shares per ADS?

No, existing ADS holders don’t automatically receive eight additional Hong Kong-listed shares (9988) because this is not a bonus issue by the company.

It is a conversion that has to be executed by the shareholder, where each ADS is converted into eight Hong Kong shares that can either be held for long-term investment or sold in Hong Kong.

Q: How can the transaction be executed?

Any broker licensed by the US and Hong Kong exchanges can execute the transaction.

ADS holders who intend to convert their ADSs into Hong Kong-listed shares (9988) must first turn in their ADS to the depositary bank Citibank through their brokers. Upon payment of the relevant fees, applicable taxes or charges, Citibank will deliver the corresponding number of Hong Kong shares into a Hong Kong brokerage account designated by the investor, or the broker.

Shareholders of the Hong Kong-listed stock (9988) who want to convert their holdings into ADSs in New York must deposit them with Citibank Hong Kong, the custodian bank. Upon payment of relevant fees, expenses, taxes and charges, the depositary will issue the corresponding number of ADSs for delivery to the designated account, Alibaba said in its prospectus.

Q: What are the costs involved?

There will be an ADS cancellation/issuance cost of US$5 per 100 ADSs charged by the ADS depositary. The broker may charge additional fees for helping to facilitate the conversion. In addition, fees and taxes may apply to the trading of shares on the Hong Kong stock exchange and the settlement of such trading.

Q: How long will the conversion process take?

The transfer process will generally take two business days, and up to 14 days or more under certain limited circumstances.

Q: Who pays the transaction costs?

All costs attributable to the transfer will be borne by the investor requesting the transfer.

Q: What are the risks?

The prices of the Alibaba ADSs and Hong Kong-listed shares (9988) may fluctuate during the conversion and transfer process.