Although the Alibaba share price is up 6.5% year-to-date to $128.30 at the close on 10 January, there's a worry that investors may continue to convert their ADR holdings. Hong Kong shares [HKG:9988] are up 8.6% year-to-date.
According to stock exchange data holdings under registration with Hong Kong's Central Clearing and Settlement System increased by about 724 million shares in the last trading week of 2021, reported Bloomberg.
Steven Leung, executive director at brokerage firm UOB Kay Hian, told Bloomberg that the recent dip in the Alibaba share price could be a sign that more investors will follow suit in the near future and sell their ADR holdings. The publication highlights the 14% decline in the Alibaba share price during last September after around 670 million ADR shares were converted. It also fell in June and March following the conversion of 1.2 billion and 2 billion shares respectively.
Further conversions later this month could depress the ADR Alibaba share price, which came under pressure in 2021 and is down 43% in the last 52 weeks. As liquidity moves away from the US, the ADR share price could fall while the Hong Kong share price would rise. Converting shares isn't a straight-forward process, though, and not all trading platforms and brokers offer the service. Investors have to instruct theirs to carry out the process but need to be mindful of the conversion ratio - the number of HK-listed shares they will receive per one ADR share.
The negative sentiment around Alibaba is due to concerns that the company could follow Didi [DIDI] in delisting from the NYSE. China's big tech companies have been dealing with increased scrutiny from Beijing and were hit with yet more fines at the start of the year for failing to disclose. Alibaba will have to pay RMB500,000 (PS57,600) for a deal that saw it take a 25% stake in a Guizhou telecoms company back in 2015.
Back in July, DZ Bank analyst Manuel Muhl downgraded Alibaba to a 'sell'. Benzinga quoted him as saying: "The fear that the ADRs will be delisted, the worry that more regulatory pressure is on the way, have led to those massive sell-offs, and right now it is not possible to find an adequate risk premium for the sector."
As it stands, Alibaba poses a valuation trap. One of two scenarios would need to play out in order for Muhl to consider revising his rating upwards. The first is that Beijing is satisfied and no longer imposes new fines or sanctions. The second is that "the sell-off continues to a point where the mismatch between the intrinsic valuation and the stock price becomes so dramatic that the stock can withstand any more negative news flow".
According to a report in Barron's, analysts are divided over whether Alibaba would actually be delisted. Bernstein analyst Robin Zhu told the publication that "the risk of eventual delisting is real". However, Needham analyst Vincent Yu takes a slightly more positive stance and says "on the Chinese regulator's side, there's no intention to delist them".
While the possibility of Alibaba delisting from the US looms over the company, investors are increasingly likely to sell their ADR shares for a Hong Kong stake.
According to Samuel Le Cornu, CEO and co-founder of Stonehorn Global Partners, there are still reasons to be bullish on the stock. In an interview with CNBC's Street Signs Asia on 6 January, Cornu said: "Based on valuations and the earnings outlook, we see that [Alibaba] is a buying opportunity."
With cities in China being forced back into lockdown, Alibaba should benefit from the demand for goods and shoppers being unable to buy from brick-and-mortar, said Cornu. He was also "pretty impressed" by how the company has navigated the headwinds it's faced over the past year or so.
As for Beijing's crackdown on big tech, Cornu said the situation was a bit of a "black box", but believes the broader market across Asia has been "relatively undervalued" while the Nasdaq and NYSE continue to record new highs. He wouldn't be surprised if there was a rotation away from developed markets to emerging markets.
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