SINGAPORE, Nov 17 (Reuters Breakingviews) – Restructuring a restructuring is not good news. Alibaba ( 9988.HK ) scrapped the spin-off of its prized cloud computing business, blaming U.S. limits on advanced chips. That sent shares in the Chinese giant more than 10% lower in Hong Kong. The U-turn shatters market expectations of stability among tech companies after the end of Beijing’s years-long regulatory crackdown. The country’s weak economy and bad geopolitics mean that the sector has not yet hit rock bottom.
The flip-flop adds to a string of disappointments for Alibaba’s long-suffering shareholders. In June, just months after revealing plans to split into six independently run companies, the $200 billion giant shocked markets with news that its CEO and chairman Daniel Zhang would step down to focus on its cloud division. Later, Zhang also left that business. Cainiao, the e-commerce group’s logistics arm and the first subsidiary to be spun off, still has its Hong Kong listing application pending with the securities watchdog. On Wednesday, Alibaba also put its IPO on hold for its smaller supermarket chain Freshippo.
Alibaba’s US-listed shares have bounced back from multi-year lows hit in October 2022, but have lost about three-quarters of their market value since peaking in late 2020, wiping out about half a trillion dollars in value.
When the split was announced in March, analysts valued Alibaba at about $130 a share. stock. At the current price of $79, the markets seem to have given up on any value creation that the breakout triggered. The stock currently trades at 8 times forward earnings, well below its five-year average of 18 times, per LSEG data. The dividend announcement was not enough to cheer up shareholders.
Alibaba’s misfortune will cast a pall over the rest of the beleaguered sector. Chinese tech majors, hampered by the government’s massive sector crackdown since Alibaba’s fintech arm Ant’s initial public offering was derailed three years ago, need to rebuild their businesses. At the same time, they are dealing with an anemic post-pandemic recovery. The collapse of the country’s housing market, a deepening youth unemployment crisis and subdued consumption weaken the growth prospects for the world’s second largest economy. The hectic state of relations between the US and China is adding to investor concerns.
Add in so-so results from Alibaba’s main businesses, also reported on Thursday, and it’s hard to see a silver lining in the dark clouds gathering over China’s technology sector.
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Alibaba Group announced on November 16 that it would not proceed with a full spinoff of its cloud computing unit due to “uncertainties” created by US control rules for advanced chips to China. It had announced the spinoff plan in March as part of a six-way carving of its empire.
The tech giant reported revenue of 224.8 billion yuan ($31 billion) in the three months to September, up 9% year-on-year and in line with market estimates. Alibaba had a net profit attributable to shareholders of 27.7 billion yuan against a net loss of 20.6 billion yuan due to an increase in the value of its equity investments.
Alibaba’s US-listed shares fell 9% to $79 on November 16. Its Hong Kong-listed shares fell 8% to HK$75 in morning trading on November 17.
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
Editing by Francesco Guerrera and Thomas Shum
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