Morgan Stanley Projects Up to $37 Billion Inflows for This Dormant Tech Giant

I’m confident that we’ve seen the bottom for the shares of Alibaba Group Holding BABA HK:9988, and that they have a solid base from which to move higher into next year and beyond.

Why? Well, Wall Street investors are beneficiaries of Chinese yuan flowing into the stock.

Alibaba this week succeeded in joining the Shanghai and Shenzhen “stock connect” schemes, which allow mainland investors in those cities to buy into stocks in Hong Kong, a market that is otherwise off-limits to mainland investors.

It’s a quirk of the “bamboo curtain” that creates a barrier, largely for currency-control purposes, between the markets in free-wheeling Hong Kong and the command-economy, highly-controlled mainland exchanges.

Alibaba shares are up 5.7% in Hong Kong since Monday’s close on the back of the inclusion. The addition to the stock connect went into effect as of Tuesday.

It’s the prime impetus behind Alibaba’s move to upgrade its Hong Kong listing to “dual primary” status, equal alongside its Wall Street shares. And it offers a high-quality, highly profitable company to the slim pickings that mainland investors face in terms of local “A share” listings.

Companies don’t get higher profile in China than Alibaba. It is the leading e-commerce platform, started the omnipresent digital payments super app Alipay (now run by affiliate Ant Group), and made a household name of figurehead and co-founder Jack Ma.

The Hong Kong shares finished Tuesday up 4.2%, and have continued to move slightly higher from there, despite mixed prospects for Hong Kong stocks in general.

This has been a dire time for Hong Kong markets as well as Alibaba itself. The Hong Kong benchmark, the Hang Seng, stands at similar levels to where it began this century. And Alibaba shares, having peaked at $310 in October 2020, now bounce around at barely one-quarter of that value, last changing hands in New York at $84. The figures differ slightly but the chart looks very much the same in Hong Kong, with a current value of HK$83 down from almost HK$300 in 2020.

Morgan Stanley believes the stock connect addition an “imminent share price catalyst,” and estimates that the stock connect inclusion may result in inflows of between $17 billion and $37 billion into Alibaba’s Hong Kong shares in the first year after they are available to mainland investors.

No surprise then that Alibaba has been working on the Hong Kong upgrade since July 2022. But the company faced a wait until March 2025 if it was not included in this round of the stock connect. In the end, the Shanghai and Shenzhen exchanges both approved the addition in time for inclusion now.

The “dual primary” change went into effect on August 28, 2024, after shareholders approved the move. It also made good on the company’s pledge to complete such a change by the end of August, and involves a few technical tweaks, as I explained in a column just ahead of the change.

Although companies like Alibaba are “coming home” with Hong Kong listings, globally-minded companies are likeliest to list in that city rather than Shanghai or Shenzhen. There are strict quotas on the amount of stock that international investment banks can buy in Shanghai or Shenzhen, meaning the biggest and best companies looking to attract a global investor audience will pick Hong Kong over the mainland markets, which also tend to be very volatile.

Alibaba’s Hong Kong stock was originally a secondary offering. The company raised $13 billion in Hong Kong with that listing in 2019, building on what was the world’s largest-ever initial public offering when BABA listed in New York in 2014, to the tune of $25 billion.

Alibaba was the first of China’s Big Tech companies to be taken to task by Chinese President Xi Jinping and the Chinese Communist Party. Xi was concerned that figurehead Ma had been meeting with foreign dignitaries on his travels abroad, with the tech sector able to rival the CCP for power and influence.

Its shares began their descent as the crackdown on Chinese Big Tech began, Ma moving to Tokyo and keeping a very low profile, as he continues to do. But Alibaba shares actually got a boost in August 2021, as I outlined at the time, after the company was hit with a record $2.8 billion fine for anticompetitive behavior, the largest ever levied against a Chinese company. A “significant overhang” had been removed from the company and its operations. It can move on.

This is a trying time to operate in or invest into China. This week alone, Chinese authorities have levied a record C¥441 million ($62 million) fine on the accountants PwC, the largest against a multinational accounting firm, suspending its operations in the mainland for six months for good measure. That means it cannot sign new clients for the next half-year.

The penalty stems from its auditing work on the collapsed property developer China Evergrande Group, and its mainland subsidiary Hengda Real Estate. China’s securities watchdog, the China Securities and Regulatory Commission, confiscated “illegal gains” and a fine of C¥325 million for the audits in 2019 and 2020, while the Chinese Ministry of Finance levied another C¥116 million fine for the audit in 2018.

The ministry also revoked the license of the PwC branch in Guangzhou. PwC has responded by terminating six partners and five staff directly involved in the Hengda audits, with the territory senior partner for China agreeing to step down from that post, although he will remain chief accountant at the China subsidiary PwC Zhong Tian.

Last week, meanwhile, the Chinese police reportedly detained five current and former employees of the drugmaker AstraZeneca AZN, the largest overseas drugmaker operating in China, as well as the largest British listing by market capitalization. Led by the police in the southern city of Shenzhen, next to Hong Kong, the investigation is examining whether AstraZeneca’s staff marketing cancer drugs violated privacy rules and imported medications that weren’t licensed for use in China.

The five staffers involved are a tiny fraction of the 16,000 employees for AstraZeneca in China, where it gets around 13% of global sales. But the incident may add impetus to the company’s mooted move to spin off its China business and list it in Shanghai or Hong Kong. AstraZeneca would retain control of the new legal entity, but would then have an arm’s length relationship with what would become a domestic drug company in China.

Alibaba has taken its licks, and can continue to build. China’s monopolies authority, the State Administration for Market Regulation, said at the end of August that the company has completed the three-year “rectification” process following its antitrust penalty. In particular, the company says it has ceased the “pick one from two” system in which a retailer would be forced to select either Alibaba or its rivals such as JD.com JD (HK:9618) and the Temu app operator PDD Holdings PDD.

This is a low point for consumer confidence in China, but a high point in terms of an entry point into Alibaba stock. Look back in one year's, three years' or five years’ time and I believe investors into BABA and HK:9988 will be very happy indeed.

At the time of publication, McMillan had no positions in any securities mentioned.