18 August 2019
Investors can't wait to get their hands on Alibaba. Pending its stock market listing
Investors can't wait to get their hands on Alibaba. Pending its stock market listing

Is betting on Alibaba proxy stocks a good idea?

Alibaba’s valuation is rising rapidly and the company is not even listed yet. The Hong Kong Economic Journal’s investor diary examines the idea of investing in the company through proxy stocks.

To begin with, Alibaba’s growth story has a historical context woven around two major foreign shareholders – Yahoo Inc. and SoftBank Corp. These two companies are compelling plays in their own right.

In 2012, chairman Jack Ma asked Yahoo to offload half of its stake in Alibaba on the grounds that the mainland government was concerned about the high level of foreign shareholding in the company.

Alibaba subsequently bought back 20 percent of its own stock from Yahoo for US$7.6 billion in September 2012. Yahoo cashed in billions of US dollars in profit from its initial investment of US$1 billion for 40 percent of Alibaba in 2005.

What about China’s supposed concern over foreign shareholding in Alibaba? 

If you look at China’s internet investment landscape, there’s little evidence of that concern. Tencent, the country’s largest internet company, has significant shares, even majority stakes, in foreign hands. 

Given that 35 percent of Tencent is held by South Africa’s Naspers Ltd. and there has not been a squeak from China’s regulators about the matter, some people are starting to wonder whether Yahoo fell for Ma’s story line.

They may never know but one thing is for sure — the buyback bestowed Alibaba with a market value of US$40 billion. The stock has been growing in the 18 months since the deal.

In January this year, a large institutional investor reportedly bought into Alibaba, pricing the company at US$125 billion.

If Yahoo had been sweet-talked into selling down its Alibaba stake, it certainly would not mind what happened after.

Stagnant since 2005 when it first bought into Alibaba, Yahoo saw its stock stage a sustained rally in the six months following the share disposal.

It might have been pure coincidence but it gave investors an idea about the importance of Yahoo’s remaining Alibaba stake (24 percent) to its US$39 billion market.

And if anyone doubts the “Alibaba premium”, one simply has to look at SoftBank which holds 37 percent of the stock. Since Alibaba’s market value was unleashed in 2012, SoftBank has risen in tandem.

The best way to bet on Alibaba before it floats its shares is through Yahoo and SoftBank.

But there is a catch: proxy shares typically go south after the underlying stock is listed.

The best example is GSV Capital which invests in private internet enterprises backed by venture capital. Its top 10 holdings account for more than 60 percent of its net asset value, with Twitter Inc. and Facebook Inc. first and 10th, respectively.

GSV shares surged before the Facebook listing in the spring of 2012 and that of Twitter at the end of 2013. The trend reversed after the stock market debuts of the two social network giants.

Yahoo has pledged further cuts in its Alibaba holding when the latter goes public, potentially eroding its attractiveness to investors.

They will be increasingly drawn to a direct relationship with Alibaba when its shares finally becomes available on the stock market.

Which is why timing is everything when playing proxy stocks.

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Freelance journalist

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