Chinese e-commerce giant Alibaba (
HKSE:09988, Financial) has been a rollercoaster investment for many investors. It’s been through a lot the last few years with the pandemic and China’s tech sector crackdown, but these days, the main thing plaguing it is the risk of being delisted from U.S. exchanges.
For those not familiar with the situation, the U.S. government has decided to crack down on its accounting demands for Chinese companies listed on its exchanges. Chinese regulators have complied in some aspects but have pushed back against allowing U.S. officials access to company materials that they deem a risk to national security.
The delisting risk has been a veritable see-saw, with regulators sometimes optimistic and sometimes claiming there is no chance of reconciliation. The Wall Street Journal has recently reported a switch to optimism, as U.S. and Chinese officials have supposedly made “substantial progress” on a deal.
Real progress or just speculation?
Just last month, talks were at a standstill and Alibaba was even added to a list of companies which would likely be delisted from U.S. exchanges in 2024. However, this new information states that Chinese companies and their accounting firms are transferring their audit papers and data to Hong Kong from mainland China. Hong Kong is a former British colony and is known for its more Western approach to doing business.
Regulators from the U.S. Public Company Accounting Oversight Board are expected to travel to Hong Kong next month to conduct site inspections of the firms there which audit Alibaba. However, the outcome of this is still uncertain. U.S. officials have demanded full access to the audit working papers in order to finalize a deal, which really brings us back to square one on the whole national security debate.
We are also missing a key perspective. The China Securities Regulatory Commission was asked to comment but didn’t provide any disclosure confirming or denying the process.
No matter what happens with the U.S., it looks as though many Chinese companies such as Alibaba are still seeking a primary listing on the Hong Kong stock exchange. This would actually be a major positive for Alibaba as stocks listed in Hong Kong are eligible for inclusion into “Stock Connect." The Stock Connect service links Chinese exchanges together and would give Alibaba easy access to a new pool of Chinese mainland investors. Goldman Sachs (
GS, Financial) estimates this could result in an extra $30 billion in inflows for Chinese stocks on the Hong Kong exchange. Chinese tech juggernaut Tencent (
HKSE:00700, Financial) already is part of Stock Connect and has approximately 7% of its shares, or $29 billion worth of stock, held by mainland Chinese investors.
Asian hedge funds are buying
According to data from 13F filings for Asian hedge funds such as Oasis Management and Aspex Management, a selection of 15 Asian hedge funds that I follow have recently increased their holdings in Alibaba. Other popular buys among these 15 Asian hedge funds include Sea Ltd (
SE, Financial). Based on 13F data, this selection of 15 Asian asset management firms collectively increased their positions in Alibaba stock by over 311% and Sea by 110%.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
This buying activity is in stark contrast to U.S.-based asset management firms, which have been selling U.S.-listed Chinese stocks. Even long-term bull
Ray Dalio (Trades, Portfolio) of the world’s largest hedge fund Bridgewater Associates sold his entire Alibaba position (over 7 million shares) in the second quarter of 2022.
In addition,
Charlie Munger (Trades, Portfolio), who runs the Daily Journal (
DJCO, Financial) investment fund, purchased Alibaba stock in 2021 before slashing his positive by over 50% in the second quarter.
Chinese economic stimulus
Alibaba’s shares popped 8% around the same time as the latest positive regulatory news was annoucned, but this may have been skewed by another piece of positive news for Chinese stocks that has recently been annoucned by China’s State Council.
Reportedly, China’s State Council will increase its stimulus package by $146 billion. This stimulus aims to help reignite the Chinese economy after slumped growth driven by a hard lockdown policy for Covid-19 which is still ongoing across the country.
Alibaba earnings rebound
Alibaba also reported solid financial results for its fiscal quarter ended June 2022. Revenue was $30.7 billion, which beat analyst expectations by $530 million, despite being flat year over year. Earnings per share also increased to $1.75, which surpassed analyst estimates by $0.19.
The company also has a bulletproof balance sheet with a substantial $69.1 billion in cash and short term investments. It has just $700 million in current debt due within the next two years.
Management has also shown bullish confidence by buying back $3.5 billion worth of shares in the prior quarter. The company also authorized a whopping $25 billion buyback program which will be accessible up until 2025.
Valuation
Alibaba is trading at a forward price-earnings ratio of 12.7, which is approximately 50% cheaper than its five-year average. The GF Value chart also indicates a fair value of $347 per share, making the stock significantly undervalued at the time of writing.
Final thoughts
Alibaba still dominates the e-commerce, fintech and cloud markets in China. The company is facing a potential risk with delisting, and this stock definitely requires a strong stomach for investors, because there’s no way to know if the delisting will really happen or not. The recent good news regarding SEC talks, Asian hedge fund buys and Chinese economic stimulus are positive catalysts.