Alibaba to Enter Mainland Stock Market, Long-Awaited by Investors

The long-awaited anticipation of countless mainland investors is finally about to become a reality! Today, Alibaba officially announced the addition of Hong Kong as a primary listing venue, with a primary listing on the Main Board of The Stock Exchange of Hong Kong Limited (SEHK) on August 28th, while maintaining dual primary listings in both Hong Kong and New York. Dual primary listings mean that both capital markets serve as the first listing venues. Alibaba was previously listed in the U.S. stock market and later returned to the Hong Kong stock market as a "secondary listing." Now, by also considering the Hong Kong stock market as a primary listing venue, its status is completely different.

More importantly, it can now truly obtain a ticket to the Stock Connect program. The market expects Alibaba to officially enter the Stock Connect on September 9th. At that time, the two kings of the Chinese internet technology sector, along with internet giants such as Meituan, Xiaomi, and Kuaishou, will finally be able to gather in the Stock Connect.

This will be a grand moment for mainland investors to officially "become" Alibaba shareholders through the Stock Connect, and it will also be a significant moment for the revaluation of Alibaba's value.

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01 The Much-Anticipated Major Moment for Everyone

The Stock Connect has become the most dynamic trading channel in the Hong Kong stock market and is indispensable for Hong Kong enterprises. To date, since its launch, the southbound funds of the Stock Connect have cumulatively净流入3.34 trillion Hong Kong dollars. Now, the average daily trading volume of the Stock Connect is around 30 billion Hong Kong dollars, sometimes even accounting for nearly half of the total transactions in the Hong Kong stock market, providing Stock Connect enterprises with considerable valuation support and trading activity.

Therefore, being included in the Stock Connect is the greatest honor that all Hong Kong-listed companies are most concerned about.In our previous article "Alibaba is Regaining Confidence," we mentioned that for internet giants entering the Hong Kong Stock Connect, the Southbound capital holding ratio to total share capital during stable periods generally exceeds 10%. Taking Alibaba's current market value of approximately 1.45 trillion yuan as the base, the Hong Kong Stock Connect could potentially bring in an additional 145 billion Hong Kong dollars for Alibaba in the future.

Marvin Chan, an Asia Securities Analyst at Bloomberg Intelligence, believes that Alibaba's inclusion in the Hong Kong Stock Connect will have a positive impact on the stock, as the mainland investors' holding ratio of the stock may reach double digits, similar to other tech giants.

A research report from Morgan Stanley points out that in the first six months after being included in the Hong Kong Stock Connect, the incremental inflow from the Southbound may reach as high as 12 billion US dollars, accounting for about 7% of Alibaba's total circulating shares. In the long run, this percentage may stabilize in the low teens.

Even at the initial stage of inclusion, the Southbound capital can quickly bring in tens of billions of additional funds for Alibaba. For Alibaba, which has an average daily transaction volume of over 3 billion Hong Kong dollars, this will be a very substantial supporting fund and is sufficient to drive its stock price to rise in the long term.

Taking Tencent, Meituan, and Xiaomi, three representative large-cap companies, as examples, their average stock price increase exceeded 20% at the beginning of entering the Hong Kong Stock Connect. In fact, two months before Meituan was included, the markets began to predict that Xiaomi and Meituan would soon be included after the three exchanges in the two places reached a consensus on the conditions for including companies with different voting rights structures in the Hong Kong Stock Connect.

Meituan's stock price then began to rise continuously, and during the period from the rumor to the final inclusion two months later, Meituan's stock price actually accumulated an increase of over 70%. Similarly, Xiaomi also accumulated an increase of about 50%.

In fact, recently, speculation that Alibaba is likely to be included in the Hong Kong Stock Connect has been ongoing for a while, and Alibaba's stock price has also shown a clear upward trend as a result. So, the initial performance when Alibaba is included is also highly anticipated.

Not only that, but Alibaba is expected to attract a large amount of Southbound capital purchases when it enters the Hong Kong Stock Connect, which will also attract other institutional funds and international capital and investors to form new expectations for it.

Especially many international institutions and overseas individual investors, who were previously concerned about the potential risk of Alibaba being delisted from the US stock market and did not dare to make a large allocation, now that Alibaba will achieve dual listing and eliminate this concern, it will definitely increase their interest in reallocating Alibaba.

Recently, international investment banks have started to take action. Based on the expectation that Alibaba will be included in the Hong Kong Stock Connect and the latest performance benefits, many institutions have also begun to significantly increase their positions in advance.According to the disclosure of institutional investors' holdings in the US stock market, HHLR, a subsidiary of Hillhouse, has made a significant purchase of 5.24 million shares of Alibaba, a staggering increase of 3638.32% compared to the previous quarter's holdings. This has made Alibaba the third-largest holding in its portfolio, with its share in the investment portfolio jumping from 0.02% in the previous quarter to 5.98%.

The well-known investor Duan Yongping's H&H International also increased its holdings in Alibaba in the second quarter, with an increase of 7.9%. Currently, Alibaba is its fourth-largest holding stock.

Michael Burry, the inspiration behind the movie "The Big Short," whose hedge fund Scion Asset Management is also "buying a lot" of Alibaba, has a corresponding market value of holdings reaching $11.16 million, accounting for 21.26% of its stock portfolio, making it the largest holding stock.

02 A Huge Opportunity for Value Reassessment

Alibaba's inherent value, which has always been underestimated, and a series of positive changes in recent years have given the market more confidence.

It is undeniable that in recent years, with significant changes in the macro environment, the weakening of the incremental dividend of China's Internet traffic, and the intensification of competition among e-commerce platforms, Alibaba has also faced many pressures.

However, Alibaba has not shied away from these difficulties and problems. In the past two years, Alibaba has continuously and timely made a series of strategic adjustments and innovations in its business and organizational structure.

In its 2024 financial report, Alibaba clearly stated that it wants to reorganize strategic priorities, reduce a large number of external non-core businesses and non-core investments, focus on its two major businesses of e-commerce and cloud computing, participate in market competition with a more proactive attitude, and improve operational efficiency and market response capabilities.

The effects of the reforms are immediate.

Alibaba's latest quarterly financial report shows that in this quarter, the revenue of the Tao Tian Group reached 113.373 billion yuan, with an adjusted EBITA of 48.81 billion yuan, and the profitability remains stable. At the same time, the number of people and frequency of product purchases in the Tao Tian Group are also increasing, and the order volume has achieved double-digit year-on-year growth. The GMV has a high single-digit growth, and the market share of Tao Tian is stable. Among them, the number of 88VIP members continues to grow at a double-digit rate year-on-year, with a membership scale exceeding 42 million.Alibaba's cross-border business has shown strong growth momentum, with its International Digital Commerce Group (AIDC) revenue increasing by 32% year-on-year to 29.293 billion yuan. Thanks to the growth in cross-border business and the increase in logistics fulfillment solution revenue, Cainiao's quarterly revenue increased by 16% year-on-year to 26.811 billion yuan.

In addition, due to improved operational efficiency and increased business scale, Alibaba's local life group has also achieved significant loss reduction, with revenue increasing by 12% year-on-year to 16.229 billion yuan.

At present, under the relatively unfavorable domestic and international macro factors, although Alibaba's overall profit still faces considerable pressure, it is commendable that these business revenues can achieve growth, reflecting the effectiveness of the company's strategic transformation.

As Alibaba Group CEO Wu Yongming said in a conference call, "We have seen significant improvements in the profitability of various businesses, and this trend will continue. It is estimated that most businesses will achieve breakeven within 1 to 2 years and gradually begin to contribute to scaled profitability."

Around the time Alibaba released its latest performance announcement, 15 domestic and more than ten international investment banking institutions including BlackRock, Nomura, Barclays Bank, Daiwa, and Bank of America Securities updated their ratings on Alibaba, almost all of which were positive ratings reaffirming buy, increase, or raise target price. This indicates that Alibaba's reform measures and performance improvements have been widely recognized.

In fact, for investors, Alibaba has another more noteworthy potential business - cloud intelligence business, which also includes the AI business that the market is most concerned about.

In the latest fiscal quarter, Alibaba's cloud intelligence group revenue was 26.549 billion yuan, a year-on-year increase of 6%; adjusted EBITA increased by 155% year-on-year, mainly due to double-digit growth in public cloud business and AI-related product revenue continued to record triple-digit year-on-year growth.

Although relatively speaking, the scale of this business is still relatively small. However, we should not ignore the new background of the current era - AI is becoming the hottest global technology trend.

Although in the current AI field, the market recognizes that a few major US technology giants such as NVIDIA, Microsoft, Apple, and Google dominate, in fact, many Chinese technology giants also have significant advantages.

Alibaba is the only company in China that has leading AI cloud services and the largest open-source AI model company. Alibaba's new open-source model Tongyi Qwen2-72B has leading performance and tops the list of the world's strongest open-source models.Alibaba's AI technology has long been deeply integrated into its core businesses such as e-commerce, logistics, and cloud computing, creating an extremely rich AI ecosystem. Recent financial report data shows that thanks to the continuous construction and improvement of Alibaba's AI ecosystem, its AI business is showing a high-speed growth trend.

In the era when the entire market is striving to develop AI, the future growth space of Alibaba's AI ecosystem is undoubtedly very much worth looking forward to. However, due to the market's focus in recent years on concerns about the competitive landscape of Alibaba's e-commerce business, Alibaba AI has not been given a full and reasonable value premium.

But now, with Alibaba's strategic adjustments and reforms, the e-commerce business has regained vitality, and it is about to be included in the Hong Kong Stock Connect. This part of the business is also about to follow the entire Alibaba system to usher in a major opportunity for value reassessment.

03 Hong Kong Stock Connect and Alibaba's New Starting Point

As we all know, the competition among countries in the future is a competition of scientific and technological strength. Among them, the Internet can be said to be the core field that integrates the most advanced technologies.

For investors, Internet technology giants represent not only the future technological competitiveness of the country but also an immeasurably huge and indispensable investment value.

At present, China's core Internet technology companies are largely concentrated in the Hong Kong stock market, especially the most core giants in various fields such as Tencent, Alibaba, Meituan, Xiaomi, and only those that can be bought in Hong Kong or US stocks. The only way for mainland investors to participate in the investment of these companies, in addition to a small number of cross-border funds, is through the Hong Kong Stock Connect channel.

We hope that there will be more such Internet technology companies in the Hong Kong Stock Connect, just like the giants that have already been included, such as Tencent, Meituan, Xiaomi, etc., to share the value growth returns with investors across the country.

At the same time, we are even more eager for these listed companies that represent the most powerful strength of China's Internet technology to truly become the backbone of the Hong Kong or Chinese-funded market, just like the "mag7" seven sisters in the US stock market, continuously leading the development of China's technology and the trend of the times.

We also look forward to the moment when Alibaba is included in the Hong Kong Stock Connect, which will be the beginning of the "Chinese-funded seven sisters" leading the Hong Kong stock market out of the downturn.