Market concern over ADS registration
• Questions over whether the moves paves the way for sale of shares by SoftBank or management
• Softbank has entered into prepaid forward contracts previously; reserve increase could be helpful in settlement
• Unlikely to be a precursor to upcoming equity fund raising in our view
1B ADSs being registered – On 4 Feb 2022, Alibaba filed an F-6EF, registering 1b American Depositary Shares (ADS). Per the filing, these 1b ADSs are being registered to accommodate the issuance of additional ADSs upon the deposit of ordinary shares including deposits by current holders of ordinary shares who have indicated to the Company and the depositary their intent to do so in the future. By extension, and in our view, this event has no dilutive impact and is a procedural process to increase reserves for future ADS issuance. For perspective, Alibaba would theoretically have ~2.7b ADSs in total if all basic outstanding shares are converted to ADSs, as of Sep 2021.
Motivation behind this still speculative – In our view, a number of market participants believe that this could pave the way for management or SoftBank to conduct a sale of shares, though we would stress that this is merely speculation at this juncture. To share some historical perspective, Alibaba’s ADSs were last registered back in 2019 (500m ADSs), subsequent to Altaba’s announcement of its share sale plan. This could thus contribute to the above narrative in the market. Separately, we highlight that Softbank has entered into several prepaid forward contracts using Alibaba shares with financial institutions, procuring an aggregate amount of USD15.4b previously (Softbank’s FY21 annual report). Hence, one possibility could be that this reserve increase would potentially be helpful in contract settlements, with those yet to be delivered having settlement periods ranging from 2022-2024 (Softbank’s FY21 annual report).
FV of USD201/HKD194 – In our view, while the registration (a) is not a dilutive event, (b) does not have a fundamental impact on the operations of the company, (c) is unlikely to be a precursor to an upcoming equity fund raising, and (d) might not lead to any significant share sale by management/SoftBank in the immediate future, the market might not be comfortable with the uncertainty on this front at least in the near term. We remain constructive on the name over the longer-term, but our preferred sector picks are still JD.com (JD US/9618 HK), Meituan (3690 HK) and NetEase (NTES US), as outlined in our previous sector report. We will be looking out for management’s comments on the online consumption outlook in
China and regulatory related developments at the upcoming earnings season; our estimates and fair value are unchanged for now.
ESG updates
Alibaba has been upgraded in Dec’21. As one of the largest Chinese online retailers, Alibaba is exposed to risks related to data privacy. Following the enforcement of China’s Personal Information Protection Law (effective November 01, 2021), the company has bolstered its data protection initiatives. Research indicates its cybersecurity systems adopt encryption techniques and proactive measures such as a back-end security system to mitigate potential risks. BUY. (Research Team)