Shares of Alibaba surge 16% as investors cheer breakup plan

Chinese tech company will split its $220bn empire into six business units, a major overhaul that promises to yield several initial public offerings

Trader at the post where Alibaba is traded on the floor of the New York Stock Exchange. Reuters

Chinese tech shares jumped on optimism that Alibaba Group’s plan to split up its business will mean the further easing of regulatory constraints for the sector.

Shares of Alibaba surged as much as 16 per cent in Hong Kong on Wednesday, the most since November and tracking gains in its American Depositary Receipts.

Tencent and Meituan were up at least 5 per cent. Their gains boosted the benchmark Hang Seng index, which advanced more than 3 per cent.

Alibaba announced late Tuesday that it would split its $220 billion empire into six business units, a major overhaul that promises to yield several initial public offerings.

The plan comes as Chinese regulators vow to boost support for private enterprises after years-long crackdown, which has burnt investors and hurt market sentiment.

“Investors could get hyped on the positive side in the short term,” said Willer Chen, senior research analyst at Forsyth Barr Asia.

“Alibaba’s shake-up plan may also lead investors to think of the potential for other tech firms like Tencent to follow suit.”

The potential is huge for Alibaba to unlock its value through the historical reorganisation, given its cheap valuation that currently prices the Chinese e-commerce leader below peers.

With its Hong Kong shares trading below 10 times of its estimated earnings for the next 12 months, Alibaba’s valuation trails that of major rivals JD.com and PDD Holdings, which have double-digit multiples. The stock is even cheaper than utility firm CLP Holdings and is valued on par with China Telecom.

Investors say the move will spur a revaluation of the tech empire by allowing individual units to raise funds separately and make swift business decisions amid intensifying competition in China.

“We believe it will lead investors to reassess the valuation methodology of Alibaba,” Citigroup analysts including Alicia Yap wrote in a note, adding that the move to unlock the underlying value of each business came as an earlier-than-expected surprise.

Investors have been giving utility-like valuations to Alibaba shares, reflecting concerns that the company’s high-growth era is over.

The reorganisation could be deemed as a way to change such perception.

Daiwa Capital Markets analysts including John Choi expects the revamp to enable quicker response to market changes, allow greater external fund raising, while also helping to improve employee morale via individual stock option plans.

The valuation of Alibaba has more than halved since November 2020, when China scrapped Ant Group’s initial public offering, marking the beginning of a years-long crackdown on the sector. Although earnings-per-share have been revised up since mid-2022 as investors factored in benefits from China’s reopening, the company’s valuation multiple has received limited boost.

Investors have been betting on a revival of Alibaba’s rivals such as PDD amid fierce competition in China’s e-commerce space. PDD’s US-listed shares have gained 64 per cent over the past year even after a recent pullback, while Alibaba is down more than 25 per cent.