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What Alibaba’s Hong Kong Listing Means for U.S. Shareholders – Barron’s

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The Hong Kong exchange is linked to those in Shanghai and Shenzhen. Photograph by Nicolas Asfouri/AFP via Getty Images

The Chinese e-commerce giant Alibaba Group Holding (ticker: BABA) has been trading on the New York Stock Exchange since it raised $25 billion in a 2014 initial public offering. The price of the American depositary shares has soared 173% from $68 at the IPO to $185.49 as of Friday’s close.

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Now, the company wants to offer another 500 million new ordinary shares in a listing through the Stock Exchange of Hong Kong. The offering, expected to raise as much as $14 billion, will be the largest so far in 2019.

What does the Hong Kong listing mean for U.S. investors who already own Alibaba’s ADS, or want to buy the stock? Here are a few things to know.

There will be dilution, but it shouldn’t be worrisome.

Each Alibaba ADS represents eight ordinary shares that will be freely interchangeable with the Hong Kong-listed shares. There will likely be a dilution of about 2.8%, according to a person familiar with the matter, which can reduce the value of existing investors’ shares and their proportional ownership of the company.

But with potential high demand from new investors in Asia, the price of the existing shares could also get a lift. The second listing will also allow global investors to trade nearly round-the-clock. Right now, traders have to wait as much as 17 hours for the U.S. market to open.

The Hong Kong listing is not priced yet. We’ll know the price on Tuesday.

Unlike in the U.S., Hong Kong regulations allow retail investors to directly buy shares in a public offering by making a prepayment. If demand exceeds the amount of stock available, part of the money is returned to investors. The whole process can take a few days.

Alibaba said it expects to officially set the Hong Kong offer price on Tuesday, after the U.S. market closes. The closing price of Alibaba ADSs that day, divided by eight, will be the offer price for the new ordinary shares, although the amount retail investors in Hong Kong will pay is capped at 188 Hong Kong dollars, or US$24. There is no price cap for institutional investors, who are expected to take 97.5% of the new shares.

The new shares are expected to start trading on Nov. 26 under the ticker 9988, the company said.

NYSE should remain the main exchange for Alibaba shares even after the Hong Kong listing.

A person familiar with the matter told Barron’s that there likely won’t be a large amount of trading between existing ADSs and the Hong Kong-listed ordinary shares, because the U.S. market still has better liquidity and access to global investors. Making such trades might also cause tax complications.

The listing isn’t a response to concern that the U.S. will restrict capital investment in Chinese companies.

Amid the escalation of the U.S.-China trade war earlier this year, investors have been worrying about the decoupling of the world’s two largest economies—not just for technology, but also in terms of capital. There have been reports about the U.S. potentially restricting government pensions from investing in China and delistings of Chinese companies traded on U.S. exchanges.

Although Alibaba’s Hong Kong listing could in some way mitigate that risk, it was not the main reason why the company went ahead, according to a person familiar with the matter. These events are all relatively recent, said the person, and Alibaba has been contemplating a Hong Kong listing for years.

When the e-commerce giant went public in 2014, it wanted to list in Hong Kong. But the local exchange didn’t allow Alibaba’s dual-class capital structure at that time. The Hong Kong exchange loosened its rules last year, and many Chinese companies have since offered shares on the bourse. Alibaba said in a Thursday statement that the company wants to tap a wider investor base and capital pool across Asia.

A Hong Kong listing will bring Alibaba closer to home, and that’s a good thing.

The Hong Kong-listed shares will not only be available to global institutional investors, but also to the city’s local retail investors. The Stock Connect program, linking the Hong Kong, Shanghai, and Shenzhen stock exchanges, also allows mainland China’s investors to trade securities in Hong Kong, and vice versa.

Alibaba is planning to apply for eligibility in the Stock Connect channel after the Hong Kong listing. This will make it easier for Chinese citizens—who are mostly Alibaba customers and have a better understanding of its business—to invest and participate in the company’s growth.

Alibaba isn’t so concerned about the unrest in Hong Kong.

Hong Kong’s antigovernment protests have lasted for months and descended into widespread violence. The chaos intensified this week, as protesters marched in the city’s business district and set up barricades on university campuses. One man was shot by the police and another was set on fire by protesters. The economy has fallen into its first recession since the global financial crisis in 2009.

Alibaba’s listing amounts to a vote of confidence in the city. “During this time of ongoing change, we continue to believe that the future of Hong Kong remains bright,” CEO and Chairman Daniel Zhang wrote in a letter included in the company’s supplementary prospectus. Zhang called Hong Kong “one of the world’s most important financial centers” and made no mention of the unrest.

Hong Kong’s stock market remains open. As of the close of trading on Friday, the Hang Seng Index was up nearly 2% this year, compared with the nearly 25% gain in the S&P 500 and a 16% increase in China’s Shanghai Composite index. From June to October this year, 66 companies were newly listed on the Hong Kong stock exchange, compared with 92 in that span in 2018.

Write to Evie Liu at [email protected]

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