The breakup of Alibaba raises hopes of a thaw in China’s regulatory winter

March 29 (Reuters) – Investors welcomed a major revamp of Alibaba Group (9988.HK) in a sign that Beijing’s crackdown on the corporate sector is drawing to a close, sending shares of the Jack Ma-founded company and its peers surging on Wednesday.

Alibaba said on Tuesday it plans to split into six units and explore fundraising or most listings, in the tech conglomerate’s biggest restructuring in its 24-year history.

The group’s Hong Kong-listed shares jumped as much as 16.3%, tracking a 14.3% rise in its US-listed shares overnight, which lifted the benchmark Hang Seng Index (.HSI) and broader markets in the region.

The move represented a light at the end of the tunnel for many investors who saw a wave of regulatory blitz as a major cloud hanging over China’s private sector.

“We think this is likely a signal that we are nearing the end of regulatory scrutiny on BABA and we expect the company to be back in the good graces of regulators and policymakers after that,” said John Withar, the firm’s president. Special Cases in Asia at Pictet Asset Management.

Alibaba said it would hold a conference call on Thursday to discuss its split plan. CEO and group president Daniel Chang may join the call, according to people familiar with the matter.

China’s wide-ranging regulatory crackdown over the past two years on its prominent domestic companies, mainly from the internet, private education and real estate sectors, has wiped billions off market values ​​and weighed on investor sentiment.

Alibaba said on Tuesday it will 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 group had been planning to separate the individual business units for a long time, according to two other sources familiar with the company’s thinking.

“There was a consensus inside and outside Alibaba that the stock is trading at a significant discount to the companies’ underlying value,” said one person, adding that the company had become “too inflated.”

There will be five initial public offerings of units, the person said, while Taobao and Tamul, Alibaba’s two primary revenue drivers, will remain with the existing listed entity.

Hong Kong is the most likely location for these IPOs, the person said, and a separate source familiar with the capital markets transactions of Chinese tech companies.

Alibaba did not immediately respond to a request for comment.

In Japan, SoftBank Group Corp (9984.T), which owns 13.7% of Alibaba shares, rose 6.2%. SoftBank did not respond to a request for comment.

Alibaba itself would be reorganized into a holding company structure, with Zhang retaining his position as Group Chief Executive Officer, and the six subdivisions each having their own CEOs and boards of directors. Zhang will also lead the cloud-focused unit.

This wouldn’t be the first time that Alibaba has spun off its business units. In 2011, the company spun off fast-growing payments arm Alipay, which later evolved into fintech flagship Ant Group.

The end of pain?

Analysts at Bank of America on Tuesday described Alibaba’s restructuring as an “important experiment,” which will test whether or not China’s largest companies can meet Beijing’s demand to “contribute to society.”

Ali Baba was a popular target during the period of repression. It has faced scrutiny for engaging in monopolistic behavior in the e-commerce space, as well as the data security practices of its cloud business and the business practices of its delivery units.

In what many observers saw as a symbol of organizational coolness, its founder, Ma, left China in late 2021 and has been seen traveling to a number of different countries.

It was seen Monday in Hangzhou, the home of Alibaba, just a day before the company announced a restructuring.

Zhang Zhihua, chief investment officer of Beijing Yunyi Asset Management, said that in addition to Ma’s return and restructuring, the new leadership and local governments have recently softened their attitude towards China’s private sector, which has given investors confidence.

Shares in JD.com Inc (9618.HK), longtime Alibaba e-commerce rival, jumped as much as 7.8% on Wednesday.

Tencent Holdings Ltd (0700.HK), China’s largest gaming company, saw its shares rise 5.1%.

CMC Markets analyst Tina Teng said the Alibaba split could pave the way for other Chinese tech giants to undergo a similar restructuring.

“This helps break the monopoly power of these conglomerates, which is consistent with the Chinese government’s regulatory reform on antitrust issues,” she said.

In addition to its core gaming and social media businesses, Tencent also has cloud technology and financial technology arms. JD.com has in recent years had a number of spin-offs, including JD Logistics (2618.HK) and its cloud and AI arm JD Digits.

In addition to enabling higher valuations, restructuring better protects individual divisions from future government regulation, said Brian Tycangco, who tracks China’s tech sector at Stansberry Research.

“Any new regulations probably won’t affect the whole company now – just the specific section that is covered by that law,” Ticangku told Reuters.

Additional reporting by Josh Hurwitz in Shanghai, Ken Wu, Selina Lee, Donnie Cook and Julie Zhou in Hong Kong; Anirban Sen and Ken Lee in New York and Ankur Banerjee in Singapore; Editing by Muralikumar Anantharaman and Sam Holmes

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