Investors have reacted positively to the announcement of a major restructuring of Alibaba Group, with shares in the company and other leading Chinese tech firms rising. The move has been seen as a sign that Beijing’s crackdown on the sector may be coming to an end. Alibaba said it plans to split into six units and explore fundraisings or listings for most of them, in the biggest restructuring of the technology conglomerate in its 24-year history. The group’s Hong Kong-listed shares jumped as much as 16.3%, tracking a 14.3% rally in its US-listed shares overnight. Its e-commerce rival JD.com Inc rose 7% and gaming giant Tencent Holdings Ltd gained 5%.
The restructuring is the most significant in the company’s history and comes after Beijing launched a years-long regulatory crackdown on the tech sector, in which Alibaba was a common target. The group had been planning to spin off individual business units for a long time, according to two sources familiar with the company’s thinking. “There was a consensus within and outside Alibaba that the stock was trading at a major discount to the inherent value of the businesses,” said one of the people, adding that the company had become “too bloated”.
Alibaba said it would split into six units – Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics Group, Global Digital Commerce Group and Digital Media and Entertainment Group. The person said there would be five initial public offerings from the units, while Taobao and Tmall, Alibaba’s core revenue drivers, will remain with the currently listed entity. Hong Kong is the most likely venue for these IPOs, said the person, and a separate source familiar with Chinese tech companies’ capital markets transactions.
Alibaba itself would re-organise into a holding company structure, with Daniel Zhang retaining his position as group CEO and the six sub-divisions each with their own CEOs and boards. Brian Tycango, who tracks China’s tech sector at Stansberry Research, says that in addition to enabling higher valuations, the restructuring better protects individual divisions from future government regulation. “Any new regulations will likely not affect the whole company now – just the particular division that that regulation covers,” Tycango said.
The revamp is seen as a continuation of the government restructure of the tech companies and dismantling of the large monopoly businesses in China. Jon Withaar, head of Asia special situations at Pictet Asset Management, said: “We think this is likely a sign that we are moving closer to the end of the regulatory scrutiny on BABA and we would expect that the company moves back into the good graces of the regulators and policymakers after this.”
China’s unprecedented regulatory crackdown in the last couple of years on its marquee domestic companies, mainly from the internet, private education and property sectors, had wiped off billions in market values and weighed on investor sentiment. In Japan, Softbank Group Corp, which has a 13.7% stake in Alibaba, shot up 6%.
The restructuring is expected to enable higher valuations for Alibaba and better protect individual divisions from future government regulation. It is also seen as a sign that Beijing’s crackdown on the tech sector may be coming to an end.