Alibaba Group announced on March 26 that the group will no longer pursue an initial public offering (IPO) of Cainiao, its logistics arm, on the Hong Kong Stock Exchange (HKEX), said Alibaba's chairman Joe Tsai.
The group now holds approximately 64% of stake in Cainiao, and is planning to spend up to $3.75 billion to purchase remaining outstanding shares held by minor investors and employees, taking the firm into 100% ownership of Alibaba.
Previously, the group had completed a massive restructuring, splitting its business segments into six associated units, and Cainiao was one of them. The logistics arm filed for listing on HKEX last September and has been pending regulatory approval ever since, until the whole plan was scrapped.
Tsai explained in a conference call that Alibaba wanted to "double down on its investment in Cainiao", as opportunities brought by a global logistics network hold "strategic importance" for the whole group.
The share acquisition offer valued Cainiao at $10.3 billion, one which might not be realised on the public market, said Tsai, and he now believes that a public listing is not in the best interests of Alibaba.
Late last year, FinanceAsia spoke to experts and market participants on Alibaba's bumpy business split journey. A version of this piece was first published in FA's first issue of 2024's print magazine, which came out in January. This piece has since been updated.
Alibaba's break-up is hard to do
From their golden era which started around 15 years ago, China’s internet giants have accumulated huge revenues and profits, thanks to the exponential growth of e-commerce, amid other businesses, in the world’s second-largest economy.
Among them, Alibaba Group Holding (Alibaba) has long remained a proxy for the sector’s ups and downs. Founded by entrepreneur Jack Ma in 1999, the firm established its leading e-commerce position in the 2000s, known for its platform, Taobao.com.
In 2014, Alibaba went public on the New York Stock Exchange (NYSE), raising $21.8 billion from what came to be recognised as the world’s second-largest IPO. By then, its empire had evolved beyond its initial e-commerce business to encompass digital payments, technology, logistics and entertainment.
While many rivals entered the fray, Alibaba’s dominance reigned until the firm hit a significant roadblock six years after its NYSE debut, this time through another IPO attempt.
A brief recap – in October 2020, China’s watchdogs suspended what could have been the world’s largest IPO by Alipay's owner Ant Group. The following probe did not conclude until July 2021, when a Rmb7.12 billion ($1 billion) fine was levied.
Not long after the shunned IPO, another Rmb18.2 billion ($2.5 billion) fine was imposed on Alibaba by the State Administration for Market Regulation (SAMR) in April 2023, taking away an equivalent of 4% of the firm’s sales in China, citing antitrust concerns.
Since March 2023, Alibaba’s business break-up has been in the spotlight – the firm announced plans to spin-off its cloud intelligence, international commerce, logistics, local consumer services and digital media and entertainment segments.
The tough process overhauling the group’s business structure remains ongoing, with its logistics arm, Cainiao's filing for IPO in Hong Kong pending regulatory approval; and a late-2023 announcement to cancel a proposed cloud unit spin-off.
In the announcement, the firm attributed the decision to tensions between China and the US, and export curbs. It said: “We believe that a full spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement.”
In early December 2023, ratings agency Moody’s cut its China credit outlook from stable to negative, with a similar adjustment to Alibaba’s credit ratings.
A Chinese saying suggests: a falling leaf heralds the advent of autumn, but it’s hard to attribute the ups and downs of both Alibaba and other Chinese internet giants, to any one factor.
Navigating regulation
Alibaba’s business split was considered by some market watchers, as a signal of the suspension of a wider crackdown on the sector, and also a potential outcome that Beijing is happy about.
“Foreign investors typically watch for the Cyberspace Administration of China (CAC), which regulates cybersecurity, data privacy, and online content. Another key agency would be the State Administration for Market Regulation (SAMR), which oversees market competition, anti-monopoly measures, and even consumer pricing practices,” said Shaun Wu, partner at law firm Paul Hastings.
The Ministry of Industry and Information Technology (MIIT), the People’s Bank of China (PBOC), and the China Securities Regulatory Commission (CSRC) are some other watchdogs that could also play a role, he told FA.
“While each agency possesses its own distinct regulatory focus, they collaborate collectively in regulating the sector as a whole,” Shaun Wu added.
Lorraine Tan, director of Asia equity research at Morningstar, said that while regulations covering antitrust or data security issues in China don’t differ much from those in other markets, “it is the way in which these rules are implemented that adds to uncertainties, as there’s not as much dialogue”.
She cited as an example the crackdown on the private tutoring sector in 2021, which wiped out a once booming market in a matter of days. As a consequence, New Oriental, one of the largest tutoring businesses in China, laid off 60,000 staff and saw revenue plunge by 80%.
“The education crackdown might be less of a norm, but it did make some of the investors anxious,” she added. “Regulations on the tech sector could be different.”
Shaun Wu said that investors should pay attention to the most recent policies rolled out in the past year and consider how they can support China’s growth. The country is now bullish, at least from the side of policymakers, on reviving its private sector.
These policies had sent out positive signals to the private economy, but it does not equal greater freedom for tech companies, analysts pointed out.
“The internet giants have become systematically important for China’s economy. There is no going back to the pre-2021 era in terms of regulation,” said Winnie Wu, chief China equity strategist and co-head of China equity research at Bank of America (BofA). “They will continue to be kept under strict scrutiny, no matter on data security or antitrust issues.”
Beijing wants its internet companies to help drive technological innovation, to grow the private sector, to provide more job opportunities, to expand into overseas markets, and to compete on a global stage, according to an opinion piece posted on the National Development and Reform Commission’s (NDRC) website in October 2023.
What it does not want to see, Winnie Wu said, is these firms using their monopolistic products taking market share away from small and medium-sized enterprises (SMEs) and driving up the unemployment rate as a consequence.
As suggested from one of her recent sector reports titled: “With great power, comes great responsibility”.
Economic challenges
The difficulties come on top of a weak domestic consumer economy. Alibaba’s businesses span across a host of sectors domestically, including its core e-commerce capacity, meaning it needs a recovery in consumer sentiment to help its plans.
A monthly consumer confidence index gathered by McKinsey stood at 87 in September 2023 in the pessimism territory, which is below 100. Showing the changes, previous gauges in 2022 could be as high as 125 even during the Covid-19 pandemic.
The pessimism started not long after the authorities lifted stringent Covid-19 containing measures in early 2023, when the economy was expected to walk out of the shadow of city lockdowns.
However, the purchasing managers’ index (PMI), an economic indicator reflecting outlooks in the private sector, recorded 49.4 in contractionary territory in November 2023, according to the National Bureau of Statistics (NBS). The reading has been below a tipping point of 50 since April, despite a minor spike to 50.2 in September.
The consumer price index (CPI) of China in November marked a 0.5% drop both year-on-year and compared to that in October, said the NBS. The decrease was one of the fastest in the past three years, amid a deflationary trend.
In July 2023, the National Development and Reform Commission (NDRC) unveiled 28 measures, one of which expressed the authority’s support for private participation in technological developments including cloud computing, artificial intelligence (AI) and the industrial internet.
Several months later in September, the NDRC announced the establishment of a private economy development bureau, with a view to facilitate regular communication between regulators and private sector players and tackle critical issues to their development. A late November note jointly issued by eight departments looked at the financial sector’s potential to support private players, vowing help.
BofA’s Wu said that China is pivoting, from an economy model heavily reliant on domestic consumption, towards an advanced manufacturing and homegrown technology innovation-driven economy.
Chinese internet firms also shoulder great responsibilities as China tries to develop its own version of advanced tech, in order not to miss out in the AI age.
“The economic shift will not happen overnight. The next 12 months will be the most challenging time for Chinese internet giants,” she noted.
AI and cloud capabilities stand at the centre of the opportunity for internet companies, she said. “In fact, internet giants are in the best position to leverage AI technologies to drive growth, with their database, infrastructure and market penetration.”
Investor confidence
Gary Ng, senior economist at Natixis, cited the IPO of Alibaba’s logistics arm Cainiao (as mentioned above), as a tester of both Chinese regulatory stance and investor appetite.
Cainiao filed form A1 as required by the HKEX, and had been under review (as of the end of 2023) from the CSRC under a set of new listing rules targeting Chinese companies listing overseas. With the latest announcement for Cainiao to remain private, regulatory approval won't be needed.
To add to the challenges is a Hong Kong and mainland Chinese IPO market trying to recover from a low-performance year, with a record outflow of foreign funds and a group of global investors cautious about exposure to Chinese assets.
The country’s foreign direct investment (FDI) recorded a $11.8 billion deficit from July to September 2023, according to statistics from CEIC Data. This marks a further plunge since April 2022, when global investors sought diversification and de-risking strategies from China.
“Investors are looking at better options to invest in other markets including Japan and Vietnam, where geopolitical volatility remains minor,” said Ng.
For the tech sector, “raising international capital in this current environment is more challenging than in the past,” said Kyle Rodda, senior financial market analyst at Capital.com.
The ongoing geopolitical tensions between China and the US, in addition to other western countries, have contributed to gloomy investor sentiment.
“[The tension] is now considered as a fairly significant country risk for investors to put capital in Chinese tech, both because of less appealing growth aspects and a lack of confidence that the capital will be protected,” he said.
For internet companies and the tech sector in general, the key lies in reestablishing investor confidence in cashflow and profitability, Tan from Morningstar said.
She added that from a FDI perspective, downward risks would be limited in 2024, as foreign investments have already hit a low.
“Investors will still look for alternative ways to keep exposure to China, as it remains a pivotal feature of the global economy,” Rodda noted.
“At the moment, firms like Alibaba will have to trade at cheaper valuations for investors to feel comfortable with the risk-and-reward of investing in Chinese tech assets.”
On profitability, Natixis’ Ng believes that a sizeable domestic market is enough to keep tech firms’ revenues afloat.
“We will likely see more Chinese firms turning to home-made technologies due to geopolitical and national security concerns,” he said.
“Meanwhile, more government subsidies are poured into chips and semiconductor manufacturing to enable development, even if it might be difficult to compete on a global stage.”
Competition rising
While for Duncan Clark, a longtime watcher of Chinese tech and author of Alibaba: A House that Jack Ma Built, the key challenge for Alibaba lies not related to the macro climate, but in its response to growing competition.
Amid the troughs in the domestic economy, PDD Holdings has emerged as one of Alibaba’s competitors, operating online discounters both domestically and overseas. The firm owns Chinese e-commerce platform Pinduoduo and US-based global e-commerce firms Temu.
PDD almost doubled its revenue, as disclosed in a late November earnings report, which in turn boosted its market capitalisation eclipsing Alibaba’s. The results have prompted Jack Ma, who has long remained silent in the public sphere, to issue a note vowing change in the long-standing e-commerce champion.
“We are only at the start of an AI-driven e-commerce era, an opportunity and a challenge for anybody,” Ma said in an internal note to employees.
Clark added that another downside lies in unclear management communications. Daniel Zhang announced his departure from the cloud unit only two months into his new remit, with his position taken over by Eddie Wu, who has also assumed the role of group CEO.
Externally, JD.com and Douyin under Bytedance have both been key rivals in the e-commerce space, while Tencent and Baidu remain key competitors in the advanced technology area.
JD.com announced its plan for an enterprise-facing large language model in July, targeting business sectors including e-commerce, logistics and marketing. At the end of 2023, in early December, Douyin unveiled its AI chatbot Douyin Xinqing, while Baidu launched an AI conversation application named Wanhua.
As AI competition ramps up among Chinese internet giants, Clark pointed out that it’s important for Alibaba to come up with strong responses.
In an internal letter days after he took over the CEO role, Eddie Wu identified its technology-driven internet platform, AI-driven technology and global commerce network businesses to be three main areas that the firm is seeking to develop.
In the same note seen by FA, he pointed out that traditional internet models have become “increasingly homogeneous and face the competitive pressures of saturation”. He continued to highlight AI’s potential to unlock new growth opportunities.
“We must be determined to reignite our startup mindset to redefine the user-centric value proposition, so that we can earn the opportunity to continue serving our customers in the AI era for the coming decades,” Eddie Wu said.
The focus continued in November’s earnings call, where the group announced the cancellation of the cloud business separation.
Eddie Wu noted in the call: “No matter how successful our business models have been in the past, we need to turn over a new page and start afresh.”
Is a spin-off good or bad?
In an article from Alibaba-owned news website, Alizila, the move to reorganise the business to a “1+6+N” mode was designed to “unlock shareholder value and foster market competitiveness”.
“This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes,” Daniel Zhang, then-CEO of Alibaba Group said in an internal letter cited by the website.
Ricky Lee, managing director, valuation advisory services at Kroll, said a business split of a conglomerate can have both up and downsides.
Ideally, a separation of a certain business segment can help drive technology development through more independent management decisions, he said. This contrasts with operating within a large conglomerate which could be “too hard to innovate”.
Spinning-off a non-profit-making segment is indeed helpful for a group’s overall valuation, said Lee. Such a split helps separate spending at the same time, through concentrating high-cost activities such as technology development into an affiliated entity.
But at the same time, departing the umbrella of a parent group could also mean a growing collaboration with ex-competitors, instead of fully serving the group’s own interests, weakening the company’s leading position.
As a spun-off entity starts to look at fundraising through public channels, Lee suggested that decision makers should wait for a better market sentiment, if not in a hurry. Especially in Hong Kong, where the IPO market has experienced troughs and lows in 2023.
“We’re gradually seeing the improvement in companies’ revenue and net income, and at least it’s not worse than the lowest period.”
Kroll valuation services’ clients in Hong Kong include Alibaba and Tencent.
From a business perspective, Rodda at Capital.com said that as the addressable markets of various business units have shrunk, the growth potential of a conglomerate’s spun-off units could be smaller.
“Subsegments of the group will focus on separate sectors in separate economies, which otherwise could have potentially competed as a whole with tech giants across the world,” he explained. “The benefits of a centralised ownership and decision-making process would be diffused.”
