Alibaba: How High Is The Risk Of Delisting In Reality

Summary

• If the risk of delisting Chinese companies were really high, the behavior of their shares would be more homogeneous. But this is obviously not the case.
• DIDI's case is different from Alibaba.
• Neither the United States nor China is interested in the massive delisting of Chinese companies.

Andrew Burton/Getty Images News

Events of the last days...

Over the past seven days, two events have happened that, at first glance, contradict each other.

On November 25, Reuters reported that the Chinese and US authorities are working together to prevent delisting of Chinese companies from US stock markets. Here is the official statement from the Chinese representative:

We don't think that delisting of Chinese firms from the US market is a good thing either for the companies, for global investors or Chinese-US relations...

We are working very hard to resolve the auditing issue with U.S. counterparts, the communication is currently smooth and open...

Source: Reuters

Then, on November 1, Bloomberg announced that China plans to ban tech companies using the VIE (Variable Interest Entity) structure from raising capital in foreign markets. And those companies that have already been listed using this scheme will need to make changes to their ownership structure.

If some of the readers are still not aware of what the VIE structure is, here is a good explanation:

Source: Bloomberg

At the moment, the Chinese government has not provided official comments on this news (well, at least I have not seen them). But if we assume that there are such plans, then many additional questions arise to which we will not have answers in the near future. This creates additional uncertainty around the Chinese market and Alibaba (NYSE:BABA) (OTCPK:BABAF) in particular. But, still, I propose to try to assess the likelihood that Alibaba will be delisted in the future.

Strange market reaction

First, it's worth remembering that Alibaba isn't the only Chinese company to use the VIE structure. In this case, if the risk of delisting is really high, it is logical to assume that the prices of such companies should demonstrate approximately the same dynamics.

But this is obviously not the case. And for example, the price of JD.com (JD) has practically not changed in the current year, while Alibaba has lost almost 50% of its price this year.

Data by YCharts

How can you explain such a selective market attitude towards Chinese companies?

If the risk of delisting were really high, in my opinion, the behavior of such stocks would be more homogeneous.

DIDI's case is different from Alibaba

Literally, at the end of November, information appeared about the requirement of the Chinese regulator to delist DiDi (DIDI) from the United States. China took this step out of fear of confidential data leakage.

This is also not official information yet. It is also not clear at what price DIDI can redeem its shares. It is also possible that the regulator will change its mind. But nevertheless, the following formula has formed in the minds of investors: since this happened to DIDI, it will happen to Alibaba.

But do not forget that DiDi has displeased the Chinese regulator on the eve of the IPO in the United States, ignoring the requirements to ensure data security. And literally, a day after the IPO, the Cyberspace Administration of China found serious violations in how Didi collected and used personal information.

Regarding Alibaba, as far as can be judged from official information, the company is not in confrontation with the regulator. The antitrust investigation of the Chinese authorities against Alibaba ended with a fine of $2.78 billion. Especially noteworthy is the tone of the company's comment on the fine, full of sincere remorse. The company intends to invest $ 15.5 billion over the next four years in support of President Xi Jinping's "common prosperity" initiative. Another loyal step.

In short, in this context, Alibaba and DIDI are two different cases. Don't mix them up.

Who needs all this?

Asia Financial estimates that the massive delisting of Chinese stocks on US exchanges threatened more than $ 1.1 trillion of US investors' investments. In my opinion, this clearly indicates that the United States clearly does not need it.

Does China need it?

This year's events have proven that the Chinese government is willing to sacrifice economic growth and foreign investment for domestic stability and more sustainable growth in the future. But nothing indicates that China is ready to shoot itself in the leg (or even both legs). Forced, massive delisting causes a domino effect, and the US stock market will be lost to China. This will be reflected in the debt market as well. And let me remind you that the United States is China's largest trading partner.

Source: Global Politics

Bottom line

I constantly try to remind myself that I don't know the future. But I can judge the probabilities.

I understand how scary it is to invest in Chinese companies when such a term as delisting constantly appears in the news. It's much easier to sell and not think about it. But if you look at things calmly and objectively, then this risk is greatly overestimated at the moment.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[EliasMouawad]

Nice article. If BABA is not delisted, it would be a great opportunity to buy at these depressed prices.

[ABC2030]

The CCP wants the GDP per capita to dubble from 10 K now to 20 K within 15 years. They want the middle class to prosper and grow, this means a plan to generate 5 % annual growth. Focus areas are high tech, greener economy, security and agriculture. Baba is now 40 % of the ecommerce markets, and yes they will need to share and donate and thank the CCP to help them become a major ecommerce giant. And yes they have competition.

Perhaps western giants like amazon and facebook apple should also start paying fair level of taxes instead of keeping billions of cash overseas. What good is it for the SME of the US and EU that these companies dive in paying the normal tariffs. Talking about corruption! There is so much negativity in the western media, who of you took the effort here to check the press release of 5/12/21 from the china securities regulations? It does not make sense for the CCP to destroy Baba. China is in the business of doing business. Didi went for an IPO (backed by wallstreet who took the fees.....)without the clearance from CCP, that does not work. By the way, it is not true that institutiuonals are not buying right now. Ofcourse it can drop again lower, for a long term investor only the better.

[Shaduc]

@ABC2030 middle class doesn't grow much, wrong word. Middle class according to the WorldBank is 0.75-2x median income.
correct term: global consumer class

[ABC2030]

@Shaduc if a cat is black or white, do not care about it as long as it catches the mice. I think you will get my point as being one of the reasons why I think long term Baba will grow grow grow, getting from 10 K to 20 K is acceptional achievement if it works for China. This money will be spent on products via paretly baba platforms. I noticed you are from China, how is the press reporting in China on recent developments with Baba? Thanks for sharing, sure more folks from the west here at SA will appreciate it.

[Shaduc]

@ABC2030 as Westerners, we care of accuracy of information.
Apparently,73million Americans don't care of a united nation.
That is why the USA has been going to hell for the past 20years!
I'm not in China, Xi shoved my Banana ass out with his Pandemic!

[its_a_dog_pal]

The delisting isn't what's scary, it's the CCP and the fact that institutional investors don't want to touch Chinese names with a 10 ft pole

[mpresnick]

@its_a_dog_pal and yet they all do, all the time and in increasing AUM. Perhaps what you mean is that they are souring on US listed Chinese MNCs, which is fair enough, considering how the investor markets here are populated by investors who do not possess adequate market understanding and objectivity about the Middle Kingdom.

[Drea]

On November 1 or December 1 was the Bloomberg news?

[ValueTrapHouse]

neutral in this discussion, but can we point out the irony of the US govt criticizing Chinese companies for donating funds to the CCP to curry regulatory favor when corporate PACs do the same exact thing in US politics?

[MmoneyFHitches]

I am long and will keep buying but I do ask myself does China want to make its own stock market a serious competitor to the NYSE in the future? China could make more money if it takes its big companies and keeps them in its own exchange?

[winning life]

udn.com/...

[avivalasvegas]

I'm convinced that Chinese companies will never comply with US regulations, and, in so, will be forced to delist. There is simply no way the Chinese Communist Party will comply with any American regulation. They specialize in IP theft, espionage and infiltration. Nothing transparent exists there.

This is only the beginning. As operations continue to exit China into neighboring countries, the next natural step is to bar and force the sale of Chinese investment in Western assets, followed by the removal of all known Chinese Communist party members from democratic soil. This decoupling will be painful but ultimately good for the free world. No place for Xi's China in it.

[Shaduc]

@avivalasvegas "t Chinese companies will never comply with US regulations, "

then they should have never listed.
Bush 2 sold out our competitive advantage from his lack of diligence & his war on terror.
so that is the source.
i recall 2000-2005 China govt were shaking in terror over their forced opening their markets do to entrAnce into WTO.
Since the govt just laughs at us.

[bengalesq]

Hoping u r right. I've taken quite a hit.

[Retire2020]

What good does delisting BABA or any other stocks do for the Chinese Govt?

[Shaduc]

@Retire2020 LOTS of wealthy Chinese lose some money, a they are invested in their shares through their kids or other woman living in the USA

[shauny2010]

This is going to go from $111 to $11 upon delisting
What a rubbish investment this has turned out to be

[sharpsicle]

@shauny2010 you should sell it. "always sell after a big downdraft when everyone is hysterical" - Warben Bruffet

[treespace]

@sharpsicle I'm not sure the sarcasm is justified in this case because you could have made the same point about DiDi when it dropped from $18 to $12. Now it has a $6 handle. General rules don't always apply to specific situations.

[sharpsicle]

@treespace Yeah the sarcasm is probably not called for. However we could argue that Didi is a crap money losing company and Baba is a growing cash flow fortress. I would not apply the same rules to Didi and Baba, but I would not buy Didi in the first place because there is no value proposition. Guess it depends why you buy. If Baba was a great deal at $200 based on fundamental analysis a month ago, it is a super duper deal at $110. But if you're buying to try to make a quick buck on market gyrations maybe it would be better to just run quickly. Trader or investor?

[fox1996]

“Neither the United States nor China is interested in the massive delisting of Chinese companies.”
There are massive amount of companies listing in the States. The Chinese government just needs to order delist of two or three and the rest will "voluntarily leave" on their own.

If Xi believes the rich are funding his political enemies with money from the US. What would he do? Politics always has priority over money. It's not money first. Stability and control first.
This could also be a bargaining chip with the US trade war. If baba gets delisted. Xi's political enemies as well as US investors will lose money.
Think of the mega tech companies in China are threatening the stability. Then you will have a better understanding or why they are doing this.
If you are OK with all the risks, that's fine. You may get a huge return or loss. But don't recommend the stock if you don't really know what's going on behind the scenes. This is beyond economics or business.

[luckylalo]

Current (bag) holder of BABA.

Another speculaton for a great "value" stock turns out badly.

I remember when everyone had GILD pegged as a great "value."

It's gotten to the point that I'll just be a long term (bag) holder so I don't feel like an idiot if this thing ever goes back up.

The problem with BABA, is that people are realizing you don't have real ownership interests with a VIE structure for a Cayman Islands shell company.

[Wall-Invest]

@luckylalo Hilarious post! Unfortunately I find myself in exactly your position on both of the stocks you mentioned. I'm out of GILD for the second time with a second loss. (I thought Remdesivir was going to be the magic COVID bullet) Thankfully I'm a 10 year holder of BX which makes up for a multitude of sins.

[scottiebumich]

This is one thing that I find utterly ridiculous- the more the price drops people sell and think it becomes more risky. The reality is the more the price drops the less risky and safer the investment gets.

People use recency bias and saying wow the stock is this low it has so far to go but in the long-term the price will move to the intrinsic value despite its current trading price

[ValueBet]

@scottiebumich You're my kinda guy.

[shauny2010]

@scottiebumich great speech in theory but what is the intrinsic value of a company that Xi Jinping and his CCP cronies are meddling in.
Investing $1000 when the price was $250 has the exact same risk as investing $1000 when the price is $110. If it goes to $0 you will loose the same amount. This is the risk and it's no safer now then it was 6 months ago.

[jrpspamm]

a followup: It seems moving shares to HK might not be a bad idea. I could maybe take a tax 'loss' and the wash rule would not apply going from NYSE to HK ? No clue about that though

[jrpspamm]

thanks for the article. I have a large underwater BABA investment and delisting was a worry. I do note that on the HK exchange BABA 9988 is down pretty much exactly the same as on the NYSE over the last 2 years, and I was thinking of moving my investment there, but the fact that the stock price is just as poor on HK I think that adds to your point that delisting is not likely the biggest concern

[Zylia]

@jrpspamm BABA and 9988 are two sides of the same coin, delisting BABA would largely take US influence out of the equation, and gone with it geopolitical risks, result of delisting would be overall beneficial to the stock price of 9988.

[mpresnick]

@jrpspamm that is because both the stock (1 US BABA ADR = 8 HK 9988.hk shares) and HKD (1USD = 7.78HKD) are pegged.

[jrpspamm]

@mpresnick @Zylia so as I understand your comments together I was wrong to assume the price in HK reflected a different outlook vs US but overall moving to the HK shares would offer more upside if there was a delisting, and no worse long term outcome if no delisting. I think I will do that then

[Valueish_Investor]

Dear Oleh, The Chinese govt clearly lays out sectors which are illegal for foreigners to invest in such as Tech. The Chinese govt also welcomes foreign investors in sectors such as banking. Why would one want to own a security where the law of the land is clear that foreigners are not welcome? Ask Yahoo or the other FANG companies.

[songf1turtles]

Trump started the trade n tariff wars against China n later on announced the US govt will delist Chinese companies citing national security concerns for whatever it means. Biden had the opportunity to undo the damage of Trump's policy but unfortunately Biden continued with Trump's policy against China n Chinese companies listed in US, exchanges.

Ray Dalio opined in his latest book that "NO EMPIRE LASTS FOREVER". Unfortunately due to its behavioral arrogance of being an empire since WW2 it will be very difficult for USA to do a self appraisal to undergo a transformative paradigm shift in its mindset towards mutual respect, working amicably with others in a multi polar world instead of imposing one's will on others.

If USA persists in its arrogant behaviour of US exceptionalism in hyping its geopolitical ambitions, imposing its will on others, the unintended consequence arising thereof is the US will have less friends, its economy will not be optimal, its financial centre will decline in importance

If Baba announced its decision to delist from NYSE, there is very high chance that Baba share price will surge higher.

[mbpgui]

@songf1turtles 100% agree the US should tone down the arrogance.

...hope I'm misreading the inference that the emerging super power(s) are not equally arrogant and have primarily honorable intentions. 🤔

[ColdwaterRod]

Agree. Don’t throw out the baby with the bath water. Just be more selective with the Chinese companies you buy. And buy more when everyone says to sell.

[elba]

This whole conversation smells of CN government influence. And Kombaiev's argument is based on the (dubious) premise that free market action proves anything about Chinese government actions past, present and future.

[Shaduc]

@elba doesn't smell.
This is the CCP's action!