Alibaba Pays Price for U.S. IPO as China Link Stokes Tencent

Updated on

Alibaba Group Holding Ltd. spurned Hong Kong for an initial public offering after failing to get the management control it wanted. Now the company is missing out on billions of dollars flowing from mainland Chinese investors.

Hong Kong-listed Tencent Holdings Ltd. surged 40 percent this year, adding $55 billion in market value, as an exchange link with Shanghai enables mainland Chinese to invest in the nation’s biggest instant-messaging services. Shares of Alibaba have slumped 18 percent in New York. That allowed Tencent to close the gap in overall market value to its narrowest since Alibaba went public.

Since its record IPO in September, Alibaba has contended with slowing sales growth, criticism from a Chinese regulator about its e-commerce practices and the prospect of investor lawsuits in the U.S. Rival Tencent added content partnerships with the NBA and HBO to boost website traffic, partnered with Inc. on e-commerce and made its WeChat messaging application among the first to be integrated with Apple Inc.’s new smartwatch.

“A lot of investors are concerned about the near-term growth of Alibaba,” said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong. “Tencent has been seriously undervalued compared with the Internet stocks in the mainland, and that’s why investors have been buying.”

Cross-Border Trading

Hong Kong’s Hang Seng Index surged 17 percent this year, with gains accelerating over the past month as Chinese investors poured money into the city’s shares at a record pace via the cross-border exchange link. The increase comes as China’s economic growth slowed to 7 percent in the first quarter.

Tencent was the seventh-most traded stock through the connect in March and has been the second-best performer in the index in 2015, with its market value briefly topping $200 billion for the first time.

Tencent had a market value of about $191 billion through Wednesday, compared with $209.5 billion for Huangzhou-based Alibaba.

Spokesmen for Tencent and Alibaba declined to comment.

The link between equity markets in Hong Kong and Shanghai allows investors in each city to buy shares of companies trading in the other.

Selling Counterfeits

Alibaba considered Hong Kong for its IPO last year, yet the city’s exchange refused to compromise on its rule that each shareholder vote has the same value. New York allows different classes of shareholders that enable founders to have a bigger say in how a company is run.

The IPO was the biggest ever when the stock debuted Sept. 19, surging 38 percent to close at $93.89 on its first day and reaching a record $120 in November.

The stock has been sliding since, closing Tuesday at $85. Alibaba has lost $86 billion of market value since that peak. The Bloomberg China-US Equity Index, which includes Alibaba, has climbed 14 percent in the same period.

Another member, search-engine owner Baidu Inc., has fallen 6.2 percent this year in New York trading.

Alibaba’s decline was fueled by a sequence of bad news, including government criticism and forecasts that missed estimates.

A Chinese agency said in January that Alibaba had lax control over counterfeits, casting concerns about a bigger dispute between the company and the government. Allegations that counterfeits are sold on Alibaba’s e-commerce platforms, including Taobao and Tmall, came even after the Hangzhou-based company removed 90 million fake products before the IPO.

Strategic Sector

To seek growth, billionaire Alibaba founder Jack Ma wants more than 50 percent of revenue to come from outside of China from the current 5 percent. The company is betting on emerging markets including Russia and Brazil to sustain the next wave of exports, and it is trying to help Chinese buyers gain greater access to brands from the U.S. and Europe.

“Even though cross-border and rural e-commerce show potential, it’s hard to help with the earnings in the short term,” Li said. “People are waiting to see how Alibaba performs for its first-quarter results before they invest.”

As the Shanghai link provides new liquidity, Tencent shares also benefit from the strategic importance China places on the Internet sector. Tencent’s gain on the Hang Seng this year trails only that of Hong Kong Exchanges & Clearing Ltd., which operates the city’s equity market.

Messaging, Games

Unlike Alibaba, Tencent keeps all of its business units within the Hong Kong-listed entity, and the company has been buying Hollywood content to expand its online video platform, investing in cloud-computing technology and acquiring stakes in online health-care companies.

Online games and the WeChat and QQ messaging services, which have more than 1 billion users, underpinned a surge in earnings. Tencent posted a 50 percent jump in profit in the quarter ending December as the company, run by billionaire Ma Huateng, boosted revenue through advertising and payment services.

“China has been promoting the Internet sector as a strategic sector, which is good for companies like Tencent,” said Louis Tse, a Hong Kong-based director of VC Brokerage Ltd. “Alibaba doesn’t have powerful platforms like QQ and WeChat.”

Still, it’s not all bad news for Alibaba.

While the parent company’s New York listing means it has missed out on the China-driven rally, some partially owned units traded in Hong Kong have benefited. Shares of Alibaba Pictures Group Ltd., a film and entertainment business, and Alibaba Health Information Technology Ltd. have both more than doubled so far in 2015.