How Hong Kong Lost the Alibaba IPO

How Hong Kong Lost the Alibaba IPO

Exchange, Chinese E-Commerce Giant Fell Out Over a Rule


Updated March 15, 2014 11:40 a.m. ET

HONG KONG—Alibaba Group Holding Ltd.’s planned listing in New York is a blow to Hong Kong’s stock exchange, which failed in an effort to change its rules so as to accommodate what could be one of the world’s biggest initial public offerings.

The exchange continues to capture the lion’s share of listings by mainland Chinese companies—and has several big IPOs in its pipeline—but as it focuses on its commodities and derivatives business, it has missed out on a wave of Chinese tech companies. Instead, they’ve listed in the U.S. Nine of the 10 biggest IPOs by Chinese Internet-related companies since 2009 have been in the U.S., according to data provider Dealogic.

The potential loss of e-commerce giant Alibaba comes after months of gridlock at the exchange’s owner, Hong Kong Exchanges & Clearing Ltd. 0388.HK -1.28% , and its regulator, the Securities and Futures Commission, over adapting rules to suit Alibaba’s proposal that it continue to nominate the majority of the board even after being listed. Such a structure, giving the founding partners control of the board, would violate Hong Kong’s existing “one shareholder, one vote” rules.

Talks on a Hong Kong listing for Alibaba fell apart last September. Since then, Charles Li, the exchange’s chief executive, has been urging changing the rules, which many read as an appeal to keep Alibaba interested. But the process has failed to get off the ground, and people involved appear divided.

“A one-off waiver just because of Alibaba’s status would send a pretty bad message regarding the rule of law,” said one person familiar with the matter. “A more general regulatory change was never going to happen quickly.”

Others involved in the regulatory process say that even if Alibaba and the stock exchange reached an agreement, they wouldn’t have been able to convince the SFC that listing rules need to be changed. “They have not fallen foul of the stock exchange, they have fallen foul of the SFC,” said another person familiar with the matter.

On the committee charged with reviewing the exchange’s rules, some members favored accommodating Alibaba, but others felt that any changes would be seen as a weakening of the rule of law in the former British territory, which is now part of China but retains its own legal system. The concern is that Hong Kong’s status as a global financial center could be eroded by the perception that rules could be changed to suit a powerful player, in particular the Chinese government.

Alibaba expressed frustration last fall. Vice Chairman Joe Tsai, the company co-founder who has been leading the IPO effort, said in a post on Alibaba’s website that Hong Kong—which he called Alibaba’s “natural” first choice—must address “whether it is ready to look forward as the rest of the world passes it by.”

Alibaba has repeatedly said that it is determined to keep its partnership structure. In October it received written confirmation from the New York Stock Exchange and theNasdaq Stock Market NDAQ +1.31% that this wouldn’t be an obstacle for a U.S. listing. Alibaba has said it hasn’t chosen an exchange or bankers for a possible IPO, but people familiar with the matter said it has begun preparations to list in New York.

A spokeswoman for the HK Ex said it doesn’t comment on individual companies. The SFC wouldn’t comment. At a recent earnings briefing for analysts and reporters, Mr. Li bristled when questioned about the status of talks with the e-commerce company. “Don’t ask me about Alibaba,” he said.

Mr. Li has also taken heat for the bold 2012 takeover of the London Metal Exchange for US$2.16 billion, a price some analysts said was too high. The business has continued to drag on profits as the exchange spends millions on improving its technology. The LME is also fighting class-action lawsuits over the wait times for metals from its warehouse.

Still, targeting commodities trading will ultimately pay off, said Matthew Smith, an analyst at Macquarie Securities.

“Is it strategically wrong to try to embrace commodities when you are sitting on the doorstep of the world’s key growth driver for commodities consumption? I would say no—strategically it makes sense,” he said.

The exchange’s stock-listing business won’t be too hurt by Alibaba’s decision to go to New York. Fees from new listings account for about 15% of revenue, and a rush late last year—the fourth quarter was the busiest on record—helped deliver an 11% profit increase for 2013.

But those listings were weighted toward Chinese banks seeking capital to shore up their balance sheets against expected losses, rather than fast-growing tech companies, which were gravitating toward New York.

Hong Kong was the world’s No. 2 IPO market in 2013 behind the New York Stock Exchange, according to Dealogic, bouncing back after slipping to fourth place in 2012 following three years as No. 1.

It has made a strong start to 2014 by attracting a number of high-profile new-share offerings. Coming up, WH Group, which under its former name Shuanghui International bought U.S. pork producer Smithfield last year, is set to raise US$5 billion in April. And tycoon Li Ka-shing’s A.S. Watson & Co retail operation is expected to raise billions.

“We have so many fish to fry as it is,” said a person familiar with the matter.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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