The Big-News-That-Isn't for Alibaba

"Big" news came out for Chinese e-commerce giant Alibaba (BABA) last month.

It caught a lot of investors by surprise, and even made many of them worry... But it shouldn't have.

The reality is that this "big news" wasn't news at all. And while it seems to be a major problem for Alibaba – and companies like it – the truth is quite different.

Let me explain...

The report from Bloomberg started with this headline: "Alibaba Blocked From Hong Kong Stock Link to China."

The article went on to say, "China's largest e-commerce company... can't be included in the stock connect program linking the Asian financial hub with Chinese investors at present."

Why is this "big" news? Well, it goes against a major theme I've been writing about in our China letter in recent months.

I've told readers how Alibaba's secondary listing in Hong Kong – which happened last November – paves the way for its eventual inclusion in China's Stock Connect program.

The Stock Connect program is simply a way for investors to trade shares across China's different stock exchanges. It links the markets in Shanghai and Shenzhen with Hong Kong and the outside world.

Before the new listing, Alibaba only traded in the U.S. Now, it trades in Hong Kong as well. And if Alibaba is added to the Stock Connect program, it will allow mainland Chinese investors to buy shares of this popular company for the first time.

We could see hundreds of thousands of Chinese investors rushing to buy shares. That's one of the reasons folks are excited about owning Alibaba. The stock is up roughly 18% since its Hong Kong listing.

So any news saying that we won't see a trading link with China is going to be met with disappointment... and a sell-off. Indeed, the stock fell as much as 2% immediately after this news came out.

But here's the thing... This "big" news isn't really new news.

No company like Alibaba has been included in the Stock Connect program to date. (That is, a company with a secondary listing in Hong Kong that also has dual-class shares.)

Alibaba is the first of its kind to try. So rules haven't yet been established to cover cross-border trading of such listed stocks.

But this won't last forever. In August 2019, China and Hong Kong securities regulators already agreed similar companies could be included in the Stock Connect program – companies with dual-class shares trading only in Hong Kong.

These include consumer-electronics giant Xiaomi and food-delivery company Meituan-Dianping... And their shares have done spectacularly well.

So there's only a half-step separating Alibaba's Hong Kong-listed shares from millions of eager mainland Chinese investors.

Importantly, there's a six-month cooling-off period before a newly listed Hong Kong stock can even be considered for the Stock Connect program. So Alibaba won't get a real decision until the end of May (at the earliest) or potentially even June. And I expect it to be a green light.

But even if it doesn't happen by this summer, it will happen eventually.

As China's largest company by market capitalization, Alibaba is a must-own for Chinese investors. That includes the country's pension funds, which are now allowed to invest in the stock market.

They simply can't afford to miss out on a big-name tech giant that's already returned an average of 20.2% per year over the last five years. It would be like being unable to invest your 401(k) in shares of Apple.

The Bloomberg article got it right when it said that "Alibaba is not among the current batch of companies to be included in the stock connect." But that doesn't mean it won't be included in the future.

All this means is that we have even more time to cash in on Alibaba's eventual inclusion.

Good investing,

Brian Tycangco

Further Reading

In a rational market, a situation like this would never exist... But thanks to one of the craziest anomalies in finance, we have a rare opportunity to buy the top Chinese companies at a massive discount. Learn more here: The Craziest Anomaly in Finance.

Things have been changing in China's markets for years. Thanks to a huge decision from Beijing, billions of dollars have started flowing into Chinese stocks. And investors all over the world are starting to pay attention... Get the full story here: This Changes Everything.

Market Notes
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