My Hold investment rating for Alibaba Group Holding Limited’s (NYSE:BABA) [9988:HK] shares remains unchanged. I evaluated BABA’s intermediate-term outlook till 2025 in an earlier update for the company published on March 3, 2022.
Concerns regarding a potential delisting of Alibaba’s shares traded in the US have resurfaced after I wrote my previous article. As such, I focus on analyzing the delisting issue for Alibaba in this latest article.
Delisting is an issue investors should be concerned about. It is true that investors can convert their ADRs into Hong Kong-listed shares in the event of a delisting. But if Chinese companies as a group do get delisted eventually, it will likely mean that the geopolitical conflicts between the US and China have reached a whole new level, and a worst-case scenario of barring US investors from investing in Alibaba and other Chinese companies (notwithstanding listing venue) can’t be ruled out.
Considering BABA’s undemanding low-teens forward P/E multiple, the stock is not a Sell. But Alibaba is not a Buy either, as the stock’s long-term growth outlook is unexciting and there are geopolitical risks relating to the stock as evidenced by recent delisting concerns.
Why Are There Delisting Concerns?
Delisting from the US stock market has always been a risk for foreign companies especially those from China, and this includes Alibaba.
The Public Company Accounting Oversight Board or PCAOB “has the responsibility for determining that it is unable to inspect or investigate completely a registered public accounting firm or a branch or office of such a firm because of a position taken by an authority in a foreign jurisdiction” as per the Holding Foreign Companies Accountable Act or HFCAA which came into effect on December 18, 2020.
On March 10, 2022, five Chinese companies listed in the US were named “for not adhering to” the HFCAA according to a Seeking Alpha News article published on the same day. According to the HFCAA, there will be “an initial trading prohibition on a registrant as soon as practicable after it is conclusively identified as a Commission-Identified Issuer for three consecutive years.”
Alibaba’s shares fell by -8% from $100.93 as of March 9, 2022 to $92.92 as of March 10, 2022. BABA’s stock price eventually dropped by an additional -21% to register a new 52-week low of $73.28 during intra-day trading on March 15, 2022. This is a reflection of investors’ concerns that Alibaba could be forced to delist from the US in a few years’ time just like other US-listed Chinese firms.
On its website, PCAOB has highlighted that “positions taken by Chinese authorities impede our ability to oversee PCAOB-registered audit firms in mainland China and Hong Kong.” In the company’s 2021 20-F filing, Alibaba also acknowledged that “our auditor (PricewaterhouseCoopers Hong Kong) and its audit work are currently not fully inspected by the PCAOB” as there is no “approval from the Chinese government authorities” granted.
Is Alibaba Stock Likely To Be Delisted?
I have a mixed view of whether Alibaba stock will be eventually delisted in the US.
On one hand, China appears to be willing to change its stance on allowing access to its companies’ audit work.
On March 22, 2022, Seeking Alpha News cited a report from Reuters which noted that BABA was one of the US-listed Chinese technology companies “told by Chinese regulators to prepare for more audit disclosures.” A subsequent April 2, 2022 Seeking Alpha News article mentioned that The China Securities Regulatory Commission or CSRC “confirmed plans to revise confidentiality rules in regards to overseas listings” for Chinese companies.
In other words, it seems like the Chinese government is taking steps to enable greater disclosure of audit information for its companies so as to satisfy US regulations. This reduces the probability of a US delisting for BABA.
On the other hand, the US authorities have expressed caution about a quick resolution of the auditing issue involving US-listed Chinese companies, and new names continue to be added to the list of companies which are in violation of the HFCAA.
SEC Chairman Gary Gensler “appeared to tone down speculation of a potential imminent deal for Chinese companies to avoid delistings” and emphasized that “only full compliance with U.S. audit inspections would suffice” based on a March 30, 2022 Seeking Alpha News article that made reference to a Bloomberg interview published on the same day. This implies that there is significant uncertainty with regards to the extent of audit disclosures and access for US-listed Chinese companies and whether this is perceived to be acceptable by the US authorities.
Separately, Chinese search portal operator Sohu.com (SOHU) was among the new names included on the HFCAA list in April 2022. This suggests that there is no indication that the US authorities are willingly to compromise on the auditing access requirements for foreign companies, even though China has seemed to be prepared to make certain concessions on the audit issue.
In a nutshell, it is very hard to make a prediction about BABA’s future listing status in the US, as this will be heavily dependent on the future actions taken by the Chinese government, and the outcome of negotiations between the US and China. This uncertainty is reflected in Alibaba’s share price trajectory. BABA’s shares recovered from its 52-week trough of $73.28 on March 15, 2022 to close at $117.50 on April 4, 2022, but Alibaba’s stock price subsequently pulled back to $101.21 as of May 2, 2022 which is only marginally higher than its share price of $100.93 as of March 9, 2022 (prior to the listing of names on the HFCAA list).
What Happens To BABA Stock If It Is Delisted?
The negative impact on BABA stock if it is delisted in the US should be mitigated by the fact that Alibaba already has a secondary listing in Hong Kong which accounts for the bulk of its trading volumes.
Alibaba’s shares have been listed and traded on the Hong Kong Stock Exchange since November 25, 2019. As per a January 15, 2022 South China Morning Post news article, “ADR holders (for dual-listed Chinese companies like Alibaba) can hand their US shares back to the depository bank to register a conversion, which then swaps them into Hong Kong-listed shares at a set ratio.”
For some of the Chinese firms, there are worries that if they are delisted from the US, they will see a valuation derating due to relatively lower trading liquidity in Hong Kong vis-a-vis the US. This is not an issue for Alibaba. According to a March 17, 2022 China internet research report (not publicly available) titled “A Temporary Cardio Booster Shot” published by brokerage firm UOB Kay Hian (Hong Kong), approximately 94% of the trading volume for Alibaba’s shares in the past five trading days occurred in the Hong Kong market as compared to the US. This sends a strong signal that most institutional investors are prepared for a potential US delisting of Alibaba, and they are already holding the Hong Kong-listed shares of Alibaba rather than the ADRs.
In summary, Alibaba will be solely listed in Hong Kong if its ADRs are delisted. For those investors who are still holding ADRs, they should have few issues converting them to Hong Kong-listed shares.
However, one should not eliminate the possibility of US investors being barred from investing in Alibaba and its Chinese peers in the future, irrespective of where they are listed (or if they are non-listed companies). In June last year, Seeking Alpha News reported that “the Biden administration plans to expand Trump-era bans on Chinese defense and tech companies.” In a scenario where Alibaba and other Chinese firms are delisted from the US, US-China ties would have gotten sufficiently worse that a broader ban on US investments in Chinese companies is very likely.
What Is Alibaba’s Long-Term Forecast?
Alibaba is expected to see its top line and normalized earnings per share grow by +11.9% and +11.6%, respectively, for the FY 2023-2026 (YE March) period as per sell-side’s consensus financial projections obtained from S&P Capital IQ. In contrast, BABA’s historical revenue CAGR for the FY 2018-2021 (the company has yet to report full-year FY 2022 results) was +45.9%, while its bottom line CAGR over the same period was +29.1%.
In other words, the long-term consensus forecasts for Alibaba implies that the company will experience much slower growth going forward.
I agree with the sell-side’s expectations of BABA’s long-term growth outlook. Alibaba’s core China e-commerce business has been ceding ground to rivals like Pinduoduo (PDD), and there is no certainty that its new growth engines like Alibaba Cloud and international e-commerce businesses can fill in the gap fast enough.
Is Alibaba A Buy, Sell, or Hold?
Alibaba stays a Hold based on my analysis. BABA’s current 13.1 times consensus forward next twelve months’ P/E (source: S&P Capital IQ) is not very demanding, but this seems fair taking into account its expected low-teens forward top line and bottom line annualized growth rates as highlighted in the preceding section. Furthermore, geopolitical risks remain an issue that all US investors vested in Chinese companies need to watch, and Alibaba is no exception.