Conditions for Chinese Stocks Leaving the U.S. Strengthen
At the very least, dual-listing in Hong Kong grows more viable for Chinese megastocks
In the recent and mostly-concluded earnings season, I dug deep into Alibaba’s earnings release on the Leverage Shares website (see article here), SeekingAlpha (see here) as well as the Tiger Brokers Community platform (here). This led to a discussion with Alex Frew McMillan of TheStreet, a leading U.S.-based digital financial media company, a couple of weeks later. TheStreet article featuring my comments can be found here. For the fullness of my commentary, read on!
At first blush, Alibaba’s performance trends over the nine months of its Financial Year 2025 (FY 2025) indicate that the company is well on its way to beating the previous FY’s revenues in practically every one of its major segments:
Taobao and Tmall Group, the company’s China-centered commerce business remains the biggest earner with a 46% share of total revenue. Trends indicate however, that the segment will close out FY 2025 with about 4% increase in both revenue and EBITA (“Earnings Before Interest, Taxes, and Amortization”) respectively relative to the previous FY.
The company’s internationally-focused commerce business, meanwhile, has shown ferocious outperformance. If trends continue, revenues and EBITA for FY 2025 will close 26% and 89% higher than previous FY’s respectively. Its total revenue share also increases by 2%.
Current trends in the company’s AI and cloud business indicate that FY 2025’s revenue and EBITA will close 9% and 75% higher than previous FY’s. Its total revenue also increases by 1% and is presently deemed the most-vaunted growth driver by the company.
The company’s logistics division will close out FY 2025 with a 6% increase and a 15% decrease in revenue and EBITA respectively than previous FY’s. The local services (food/grocery delivery, map data, etc.) segment will close FY 2025 with a 12% increase and a massive 81% decrease in revenue and EBITA over previous FY’s.
The logistics and local services divisions highlight the challenging environment within the Chinese economy. With goods movement volumes in disarray as global economies veer away from China and declining economic fortunes in the mainland affecting consumption, these segments’ networks cost burdens have increased. Nonetheless, the projected rise in revenues indicates that the company is busy at work in both these sectors, potentially at a cost to its rivals.
Led by strong performance in the China business, AI & cloud business and international commerce, overall revenue and cost of revenue are projected to close FY 2025 a modest 6% and 1% higher than previous FY’s respectively.
Overall, Net Income is poised to close out FY 2025 a full 88% higher than last FY’s while Earnings Per Share (EPS) is set to close with a solid 105% higher than previous FY. Both these line items have steadily increased over the past two full FYs as well.
Now, despite its AI and cloud businesses delivering such massive earnings in the year so far, it's unlikely that this will remain as free cash for all of Alibaba's endeavours. The company has committed to spending $53 billion on its AI infrastructure and data centers over the next three years — thus effectively cycling back these earnings back into this segment. However, to build this infrastructure, it will likely need U.S. tech, which it might have hurdles accessing.
On the 21st of February, the White House unveiled the “America First Investment Policy” wherein the need to contain the risk of certain adversaries that “systematically direct and facilitate investment in United States companies and assets to obtain cutting-edge technologies, intellectual property, and leverage in strategic industries” was highlighted. Effectively, this means that the sale of technology to the likes of Alibaba will be heavily scrutinized.
Another pressure point on the company is the directive made to government officials to “determine if adequate financial auditing standards are upheld for companies covered by the Holding Foreign Companies Accountable Act.” Alibaba, along with over 100 other companies, was listed by the U.S. Securities and Exchange Commission (SEC) in 2022 as being "non-compliant". The new policy demands a time-bound mitigation protocol over "perpetual and expensive compliance obligations". It is quite unlikely that Alibaba would be able to comply, since the Chinese government bars examination of its companies' books by foreign regulators on national security grounds.
In a bid to remain available to investors, Alibaba effectively became among the first major Chinese companies that were U.S.-listed to seek a primary listing in the Hong Kong Stock Exchange (HKEX). When considering the movement of the company’s two tickers in their respective exchanges, a distinct sharpening of conviction is discernible:
A year ago, traded volumes in its Hong Kong-listed shares had averaged at 3.5 times that of its U.S.-listed American Depositary Shares (one of which equals eight shares) over the past year. Now, this ratio has increased to 4.1 times. In terms of price performance, the U.S. ticker’s valuation shows a startling 10% underperformance over the past year relative to the “9M” earnings release, with the bulk of this attributable to the period immediately after the release.
Alex’s questions follow.
Round 1 (March 7, 2025):
Why are the volumes for Alibaba so much higher in Hong Kong than on Wall Street?
As China's market breadth collapsed in the wake of the ongoing downturn in economic sentiment, the broad "China growth" story has been replaced by a "flight of capital" to a select number of stocks that are considered too big to go under. This is the predominant reason why Alibaba enjoys greater favour in Hong Kong. Wall Street investors, meanwhile, read the downturn as a heavy risk factor — resulting in a dip of conviction (as measured in volumes).How much can we attribute most of that to the southbound Stock Connect, and mainland investors buying into Alibaba?
The ongoing downturn in economic sentiment in China has been particularly hard on the mainland's A- and B-Share classes. H-Shares, meanwhile, are eligible for purchase by a broader swathe of Qualified Institutional Investors (QIIs) and this forms a key support for Alibaba's valuation. Well over 50% of the volume is likely attributable to mainland investors whose conviction has steadily increased since the company dual-listed in Hong Kong.Which other dual listings in Hong Kong are seeing similar trends?
China's Internet giant Baidu has been displaying conviction (as measured in volumes) that is even more pronounced than Alibaba's. On the other hand, pure play EV carmaker NIO has seen the exact opposite.Can we see any increased interest from U.S. investors despite regulatory pressures etc.?
The Trump administration's "America First Investment Policy" initiative is likely to ratchet up the pressure on Chinese companies, many of whom will likely be unable to comply with the increased focus on regulatory compliance. U.S. investors will likely intuit that this will not bode well for valuation trends of the U.S.-listed tickers.
On the other hand, U.S. investors with access to Deutsche Börse — which has a "Stock Connect"-like arrangement with the Hong Kong Stock Exchange through its Xetra program — will likely see an increasing number of choices in tickers being made available for trading. Similarly, U.S.-headquartered/U.S.-owned Qualified Institutional Investors (QIIs) in Hong Kong will be incentivized to switch to trading the HK tickers, since the delisting risk is much lower compared to the same company's U.S. ticker.What general pattern can we see this year, as Hong Kong’s market runs up, in terms of dual listed Hong Kong-Wall Street stocks?
Hong Kong's IPO activity is running quite low since investors — be they mainland, Hong Konger or QII — have been relatively cool to growth narratives in light of the downturn in economic sentiment in China. However, long-running Chinese giants hitherto available as American Depositary Shares (ADSs) will be seeking to tap into the "size premium" currently being sought by investors over there while ensuring that they remain tradable in the face of rising regulatory pressures. A surge in dual-listed Hong Kong-Wall Street stocks is, in many ways, both a natural solution and an inevitability.Do you expect companies like PDD Group/Pinduoduo to list in Hong Kong?
Pinduoduo is already facing pressure through its international arm Temu, on account of both Temu and its rival Shein making solid inroads in U.S. e-commerce. It has long been expected that PDD will consider Alibaba's success and seek to replicate it with a dual-listing in Hong Kong.What’s the prospect for Wall Street listings of Chinese stocks, given these volume trends as well as geopolitical pressures?
Going forward, banks and underwriters will likely consider IPOs of Chinese companies to be fraught with marketability and regulatory issues. However, the rising attractiveness of Hong Kong as an alternative for maintaining exposure on major Chinese companies despite these issues will likely lead to a surge in high-conviction Chinese companies to dual-list in Hong Kong while seeking U.S. investor access through ADS's. (Traditionally, these companies had typically tended to list on only one.)
Round 2 (March 19, 2025):
Hong Kong stocks have risen to a three-year high as of today. Sandeep, has anything changed your views given the runup in Hong Kong stocks?
Overall trends show market breadth, i.e. the percentage of stocks attracting high conviction relative to the universe of listed stocks in that exchange, remain largely unchanged: China's “Seven Titans” — Alibaba, Tencent, Xiaomi, BYD, SMIC, JD.com and NetEase — along with sector-adjacent stocks have been leading the rally in the SEHK. Also, a few recent tech names had descended into relatively reasonable valuations over the course of the past year and are now attracting interest from HK/mainland investors (as well as some QIIs) tactically "risking off" from U.S. markets.Can you double check/confirm that the volume changes you cited still hold true?: The 4.1x volume levels still apply?
On average, yes. On certain days, it goes higher. For example, on the 18th, it was over 7.5:1, on the 14th, it was 6.8:1.
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