What happened?
It seems like China’s tech stocks are finally earning a reprieve from regulators. Online games are being approved and Alibaba Group Holdings Ltd (SEHK: 9988) (NYSE: BABA) founder Jack Ma was even spotted in Hanzghou on Monday (27 March).
That was the first time in over a year that the Alibaba founder and former CEO was publicly spotted.
Perhaps it was no coincidence that just a day later (28 March), the e-commerce giant announced a major restructuring of its business.
This saw its New York-listed shares soar around 14% while its Hong Kong-listed equivalent closed today (29 March) up 12.2%.
Effectively, the large e-commerce, cloud and logistics giant is going to split into six separate business units:
- Cloud Intelligence
- Taobao Tmall Business
- Local Services
- Global Digital Business
- Cainiao Smart Logistics
- Digital Media and Entertainment
According to Alibaba, each of these new business divisions will have their own chief executive officer (CEO) and board of directors.
So what?
A lot of investors have been trying to second-guess when China’s tech giants – and their share prices – would make a comeback.
Previously the darlings of China-focused investors, their share prices have taken a battering over the past few years as China’s government has cracked down on their monopolistic and outspoken tendencies.
This announcement from Alibaba, along with the news that these business divisions would be free to raise outside capital and pursue an IPO, seems to be a marked response to this scrutiny.
The only exception to this would be its Taobao and Tmall division, which will remain wholly-owned by Alibaba Group.
For Alibaba, the company can pitch its proposed restructuring as “unlocking value” for shareholders. However, it also meets a key concern of regulators – that these tech conglomerates were amassing too much market power.
This move has also sparked a rally in other China tech giants – like Tencent Holdings Ltd (SEHK: 700) – which many investors speculate could pursue a similar move.
Now what for investors?
For those of us invested in Alibaba, a conference call scheduled for 8am HK time on Thursday (30 March) will shed more light on exactly what the company has in mind and how it plans to go about restructuring.
We also shouldn’t forget that even with the pop in Alibaba’s shares, the company’s stock price is still down nearly 70% from its all-time high in late 2020.
Understanding where the competitive environment lies is also crucial.
News last month that JD.com Inc (NASDAQ: JD) (SEHK: 9618) was launching a US$1.5 billion subsidy campaign for its customers caused brief panic in the China e-commerce space.
It’s clear that competition is heating up – which is what regulators want – but does that mean a high likelihood of lower margins for the dominant players in the years ahead? Only time will tell.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.
