Alibaba Group Holding Ltd.’s potentially record-breaking initial public offering risks handing losses to investors in the rest of the Chinese Internet stocks listed in the U.S.
The operator of China’s largest online marketplace filed this month for what could be the largest ever U.S. IPO, creating competition for investor cash going into new technology stocks. Analysts surveyed by Bloomberg estimate the company’s total value at $168 billion, only about 15 percent less than the combined market capitalization of 35 Chinese information technology firms listed in the U.S.
Investors are poised to sell other Chinese dot-com stocks to free up cash for the IPO, which is projected to raise about $20 billion, according to Blackfriars Asset Management Ltd. Alibaba is preparing to debut in the market after an index of Chinese dot-com companies plunged 15 percent in the past two months amid concern earnings growth will slow as the government cracks down on online pornography and tightens censorship.
“Dedicated portfolio managers may have to sell some holdings to buy Alibaba if they think the IPO price is attractive,” Tony Hann, the head of emerging-market equities who helps manage $300 million at the London-based firm, said by phone on May 19. “It adds a bit more selling pressure and people are paring back their enthusiasm.”
Alibaba, which sells everything from Alaska salmon to Boeing 747 jet parts, hasn’t specified how much it expects to raise in the IPO. People familiar with the matter have said the company plans to sell a 12 percent stake. The people asked not to be identified because the plans haven’t been made public.
Ashley Zandy, a spokeswoman for Alibaba, declined to comment on the IPO and its market impact.
A $20 billion IPO would exceed Visa Inc.’s record $19.65 billion offering in 2008. The aggregated market value of the biggest Chinese information technology companies listed in the U.S., including Baidu Inc., the nation’s largest search engine, is $197 billion, data compiled by Bloomberg show.
“The Alibaba IPO will impact the sector negatively, especially in e-commerce,” Henry Guo, a senior analyst at ABR Investment Strategy LLC, said by phone from San Francisco on May 16. “Funds tend to limit their exposure to individual countries, and they may have to sell some companies to make room for Alibaba.”
Founded in 1999 with an initial $60,000 investment by Jack Ma, a former English teacher, Alibaba is tapping U.S. investors’ interest in China’s burgeoning technology industry.
Chinese Internet users have grown to 618 million and could exceed 850 million by 2015, according to government data. McKinsey & Co. predicts online retailing in the world’s second-largest economy will reach $395 billion next year, triple its 2011 level.
JD.com Inc., a Beijing-based online retailer, raised $1.78 billion in an initial share sale on May 22, the largest ever of a Chinese Internet company in New York. It was the eighth Chinese firm to do an IPO in the U.S. this year. Others included Weibo Corp. and Cheetah Mobile Inc.
No Chinese companies did IPOs in the U.S. during the first five months of 2013. The attention Alibaba is getting as it prepares what could potentially be a record offering will probably help rather than hurt its competitors, said Brendan Ahern, managing director at New York-based Krane Fund Advisors LLC, which oversees two Chinese exchange-traded funds.
“If anything, it raises the awareness of the great growth these companies are experiencing,” Ahern said in a phone interview on May 15. “The market cannibalization is going to be outweighed by the numerous new potential investors learning about e-commence in China.”
The CSI China Internet Index of U.S. and Hong Kong-listed companies has dropped to 3722.12 yesterday from a record high of 4364.07 on March 6. The selloff came after a 12-month surge of 121 percent that pushed the median price-to-earnings ratio of the gauge’s 29 member stocks including E-Commerce Dangdang Inc. and Sina Corp. to 36, up from 16 a year earlier, according to data compiled by Bloomberg.
Youku Tudou Inc., China’s largest online video operator, led the decline, falling 46 percent since March 6, followed by Dangdang, which dropped 42 percent.
Chinese Internet stocks have also declined as the government escalated a crackdown on content deemed offensive. Sina, owner of a Twitter-like social messaging service, has dropped 36 percent since March 6 after it apologized for posting lewd and pornographic material. Sohu.com Inc. lost 29 percent as it removed four U.S. television shows including “The Big Bang Theory.”
The benchmark gauge of mainland technology companies has retreated 9.8 percent this year. It has pared losses since May 19 when a U.S. indictment of five Chinese officials for cyber crimes raised speculation that Beijing may retaliate by giving local technology firms preferential treatment over their foreign competitors.
“The Internet names have been so beaten up already,” Eric Jackson, president of Ironfire Capital LLC, said by phone on May 19. “But there are still a lot of risks out there.”
The mainland tech benchmark added 0.4 percent today, while the Shanghai Composite Index slid 0.1 percent to 2,039.21. The Bloomberg index of the most-traded Chinese stocks in the U.S. retreated 0.1 percent to 102.78 at 10:07 a.m. in New York.
Alibaba, which owns stakes in messaging application TangoMe and ride-sharing program Lyft, has already shown it is willing to spend to gain market share from competitors including Tencent Holdings Ltd, Baidu and Dangdang in areas from online shopping to social networking.
It bought a 10 percent stake in Singapore Post Ltd. earlier this week to develop its logistics in Southeast Asia. In April, Alibaba agreed to acquire AutoNavi Holdings Ltd., China’s most popular mobile mapping service, one month after it invested almost $700 million in Intime Retail Group Co., a Beijing-based owner of department stores and supermarkets. It also owns parts of Sina, Weibo and Youku.
The money Alibaba gets from the IPO will provide the company with the means to further squeeze competitors’ profits, Guo of ABR said.
“Alibaba will get more cash, invest more aggressively and start a price war,” he said. “The biggest impact will be felt in e-commerce.”