Premium on Alibaba’s Hong Kong stock over US shares widens to seven times historical average after primary listing application

The spread between Alibaba’s Hong Kong stock and ADSs reached as wide as US$5.51 last week, compared with the historical average of about US$0.80

A primary listing in Hong Kong will reduce the risk for ADS holders in case the company is booted out from the US and allow it to join the Stock Connect programme

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Published: 7:13pm, 3 Aug 2022

The premium Alibaba Group Holding’s Hong Kong-traded shares command to its American depositary shares (ADSs) has widened almost seven times to its historical average, signalling that more investors may have piled into the ordinary shares after the e-commerce stalwart said it plans to switch to a primary listing in the city.

The spread between Alibaba’s Hong Kong stock and ADSs reached US$5.51 on Friday, compared with the average of about US$0.80 since the Chinese e-commerce giant began trading in Hong Kong in November 2019, according to Bloomberg data. The spread has risen to US$1.364 since it applied for a change of listing status on July 26.

Alibaba’s New York-listed shares are fungible with the Hong Kong stock at a ratio of 1:8, and vice versa at the ratio of 8:1. The fungibility ratio of 8:1 is close to the current Hong Kong dollar exchange rate of 7.85 per US dollar. So that ties the stocks in a 8:1 ratio, where one gain will be reflected in the other, and one decline drags the other down.

The switch to Hong Kong, where Alibaba currently trades in the form of a secondary listing, will reduce global investors’ risk in case the company is booted out from the US and also pave the way for the stock to be exposed to mainland buying when it is added to the cross-border Stock Connect programme. An influx of funds from onshore investors, who tend to give local tech companies higher valuation, will give some impetus to Alibaba’s stock facing a renewed regulatory risk.

The company was added to a tentative delisting list by US securities regulators last week for failing to let American auditors access its audit papers, a long-standing issue between China and the US.

“For those investors with US-based exposure and intent on having Alibaba in their portfolio, it makes sense to switch to Hong Kong,” said Stephen Innes, a managing partner with SPI Asset Management. “And yes, the spread will widen due to forced sales by institutional risk management control authorities.”

Alibaba is the owner of the South China Morning Post.

A primary listing in Hong Kong will offer a leeway for Alibaba’s US-based investors, who hold about 40 per cent of its issued securities, and potentially boost liquidity of its shares in the city. The daily turnover in New York averaged US$3.2 billion in the first six months of the year, compared with US$700 million in Hong Kong, according to the company.