A year of hype surrounding what’s likely to become the biggest IPO in history will officially end later this week, when homegrown Chinese e-commerce giant Alibaba formally lists on the New York Stock Exchange. The IPO will give most global investors access to Alibaba’s shares and a chance to profit from one of the world’s largest and fastest-growing e-commerce markets.
But one group that will be largely barred from buying the company’s shares are investors from Alibaba’s home market, since most Chinese lack access to off-shore traded shares. Alibaba decision to list overseas is quite typical among private Chinese tech firms, many of which are forced to take such a route due to a local listing system that favors large, state-run firms.
China’s securities regulator needs to take steps to change the situation and create a listing system that welcomes companies like Alibaba to make IPOs at home. Failure to do so will result in a continuing exodus of some of China’s most promising private firms to overseas markets, creating a lost opportunity for local investors to buy into these homegrown business leaders.
Alibaba has been in the headlines for much of this year in the run-up to its blockbuster IPO, and the volume got even louder last week when it formally launched its investor roadshow. In its latest public filing just before then, the company said it could raise up to $24.3 billion from its offering if its shares price at the top of their range and all overallotment options are exercised. (previous post)
If it reaches that size or comes in slightly lower, it would be the largest IPO of all time, eclipsing the current record held by Agricultural Bank of China (HKEx: 1288; Shanghai: 601288), which raised $22.1 billion when it listed in Hong Kong and Shanghai in 2010. The listing would also eclipse the current record holder for a tech IPO held by social networking giant Facebook (Nasdaq: FB), which raised $16 billion when it listed in 2012.
The latest reports indicate that Alibaba could quite possibly make it into the record books, as its roadshow has meet with a strong reception so far. According to the reports, interest has been so favorable that the company may end its roadshow a day earlier that previously planned, with the stock’s trading debut set for Friday. (Chinese article)
So, why has Alibaba chosen New York over a listing closer to its home, where its various brands, including the Tmall and Taobao shopping platforms and Alipay electronic payments services, are highly respected names? The company initially pursued a listing in Hong Kong, but opted for New York after failing to get an exemption that would have allowed it to use an unusual partnership structure.
But it never seriously considered either of China’s domestic stock markets in Shanghai or Shenzhen. It was barred from considering such a listing for technical reasons, since it is formally incorporated outside of China – a common practice among venture-backed tech firms that allows them to list overseas. Such overseas incorporation has not only barred Internet giants like Tencent (HKEx: 700) and Baidu (Nasdaq: BIDU0 from listing in China, but has also locked out other major names like China Mobile (HKEx: 941; NYSE: CHL) and Lenovo (HKEx: 992), which are also technically incorporated outside China for historical reasons.
Realizing it was losing some of the nation’s best companies to overseas listings, China’s securities regulator began discussing plans more than 5 years ago for an international board in Shanghai where overseas-based firms could list and make their shares available to local investors. But that plan has been repeatedly been put on hold due to anemic performance of China’s domestic stock markets, which also resulted in a freeze on new IPOs last year and for most of the first half of 2014.
China’s securities regulator has many issues on its plate right now, including combating insider trading and making companies report more transparently and honestly. But the regulator also needs to make room on its agenda for reforms that could finally allow companies like Alibaba, Baidu, China Mobile and Lenovo to list at home.
It could do that by either reviving plans for the international board, or by modifying its rules to allow listings on its main boards by companies that do the majority of their business in China, regardless of where they are officially incorporated. Failure to act soon could mean that privately run corporate leaders will continue to follow in the footsteps of Alibaba and list overseas, depriving Chinese of the opportunity to invest in some of the nation’s most promising and well-run companies.
Bottom line: China’s securities regulator needs to implement reform to allow overseas domiciled companies like Alibaba to list at home, or risk depriving local investors of some of the nation’s most promising companies.