Alibaba’s much-anticipated China stock link may provide a timely boost

(Bloomberg) — Chinese investors finally snapping up shares of Alibaba Group Holding Ltd. could provide a much-needed boost to the e-commerce company’s stock, with an inflow of up to about $20 billion next year.

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The company first mooted the plan to go for a main listing in Hong Kong two years ago amid heightened tensions with the US. It may finally come to fruition by the end of the month, paving the way for it to join a program linking the Shanghai and Shenzhen bourses to the Hong Kong bourse.

This new source of funds through the so-called “southern link” could support shares, which have outperformed arch-rival Tencent Holdings Ltd., amid concerns about the impact of competition and sluggish Chinese consumption.

“We believe the addition of Alibaba to Stock Connect would have a positive impact on the stock and may help stabilize sentiment, given that it is a household name among mainland investors,” said Bloomberg Intelligence analyst Marvin Chen. The mainland’s share holdings could reach double-digit percentages, similar to other tech giants, Chen added.

Alibaba shares are up just 2 percent so far this year in Hong Kong, while peers Tencent and Meituan are up 25 percent each. China’s weak retail sales have hurt Alibaba’s key businesses, and price wars in cloud services are limiting the growth of a potential new engine.

On Thursday, Alibaba reported an anemic 4 percent rise in first-quarter revenue after its China e-commerce business shrank for the first time in at least a year. Profit fell 27%, dashing hopes of a quick recovery.

In addition to China’s struggling economy, Alibaba shares have struggled in recent years with Beijing’s regulatory crackdown and geopolitical tensions with Washington. The company initially envisioned the dual main listing in 2022 amid fears of a potential delisting for its US depositary receipts, a threat it later dropped.

The next step for the plan is a shareholder vote at the annual general meeting on August 22. If the move to primary listing in Hong Kong is completed by the end of the month, the stock could join Stock Connect on September 9 at the earliest, according to Morgan Stanley.

“We expect some inflows, but not major ones,” at about $12 billion in the first six months after listing, or about 7 percent of Alibaba’s total outstanding shares, analyst Laura Wang wrote in a June note. Bloomberg Intelligence’s Chen sees inflows of up to about $19.5 billion, although “this will take time to build up and the initial impact will not be as large.”

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Share price performance for other Stock Connect members was mixed. XPeng Inc. and Kuaishou Technology fell in the month following the move. Xipu Han, quants strategist at JPMorgan Chase & Co. Alibaba is expected to look more like Meituan, whose shares topped the benchmark in the month after the listing, with trading volume up 20% in six months.

Of course, how the stock plays out may depend more on the company’s fundamentals and the environment in which it operates. But the access of Chinese investors may add to the momentum, especially amid the recent influx of foreign funds.

“Over the past two years, even Chinese investors have been underwhelmed by big Chinese internet stocks, so it’s hard to say whether Alibaba could follow the trading patterns of its predecessors,” said Kenny Wen, head of investment strategy at KGI Asia Ltd. If the stock rises on positive news, “then buying will be amplified as there will be additional supply.”

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