Alibaba's breakup plan lifts hopes China's tech crackdown is ending

March 29, 2023 4:31 pm

[Source: Reuters]

Shares in Alibaba Group (9988.HK) and other leading Chinese tech firms jumped.

The investors cheered an unprecedented revamp of the Jack Ma-founded company as heralding the beginning of the end to Beijing’s crackdown on the sector.

Alibaba said on Tuesday it was planning to split into six units and explore fundraisings or listings for most of them, in the biggest restructuring of the technology conglomerate in its 24-year history.

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The group’s Hong Kong-listed shares jumped as much as 16.3%, tracking a 14.3% rally in its U.S.-listed shares overnight. Its e-commerce rival Inc (9618.HK) rose 7% and gaming giant Tencent Holdings Ltd (0700.HK) gained 5%.

That compared with a 2.3% jump in the benchmark Hang Seng Index (.HSI) and a 3.2% gain for the Hang Seng Tech Index (.HSTECH).

Alibaba’s revamp “feels like a continuation of the government restructure” of the tech companies and dismantling of the large monopoly businesses in China, said Jon Withaar, head of Asia special situations at Pictet Asset Management.

China’s unprecedented regulatory crackdown in the last couple of years on its marquee domestic companies, mainly from the internet, private education and property sectors, had wiped off billions in market values and weighed on investor sentiment.

Alibaba said on Tuesday it would split into six units – Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics Group, Global Digital Commerce Group and Digital Media and Entertainment Group.

The group had been planning to spin off individual business units for a long time, according to two sources familiar with the company’s thinking.

The person said there would be five initial public offerings from the units, while Taobao and Tmall, Alibaba’s core revenue drivers, will remain with the current listed entity.

Hong Kong is the most likely venue for these IPOs, said the person, and a separate source familiar with Chinese tech companies’ capital markets transactions.

Alibaba did not immediately respond to a request for comment.

In Japan, Softbank Group Corp (9984.T), which has a 13.7% stake in Alibaba, shot up 6%.

Alibaba itself would re-organise into a holding company structure, with Daniel Zhang retaining his position as group CEO, and the six sub-divisions each with their own CEOs and boards.

The revamp is the most significant restructuring in the company’s history and comes after Beijing launched a years-long regulatory crackdown on the tech sector, in which Alibaba was a common target.

A day before the re-organization was announced, Alibaba founder Ma, who had been out of mainland China since late 2021, was spotted visiting a primary school in Hangzhou, the city where Alibaba is headquartered.

Brian Tycango, who tracks China’s tech sector at Stansberry Research, says that in addition to enabling higher valuations, the restructuring better protects individual divisions from future government regulation.