Equity Analysis / Global

Is Alibaba's Hong Kong listing a judicious move?

  • The Chinese e-commerce giant Alibaba (BABA US) is seeking a secondary listing in Hong Kong.
  • The Chinese e-commerce giant Alibaba (BABA US) is seeking a secondary listing in Hong Kong.
  • The timing and venue of this listing raises profound questions for the company and e-commerce.
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Why is Alibaba listing in Hong Kong now? 

The reasons for Alibaba's Hong Kong listing are complex. There are macro reasons and company-specifics. 

The HK listing is a function of the trade war. The US may close the door on Chinese companies. There could be restrictions on Chinese companies operating in the US, as well as accessing the capital markets. In September, Bloomberg reported that Larry Kudlow, the Head of President Donald Trump's National Economic Council (NEC), was considering restrictions on Chinese companies that used US financial markets. By listing in Hong Kong, Alibaba insulates itself from the risk of those extreme measures. 

The listing is also an act of solidarity with Beijing. The Chinese authorities are facing defiant protests in Hong Kong. One of China's largest companies listing in Hong Kong would cement its status as a leading financial centre. 

What are the chances of a successful issue?

Despite the trade war and the crisis in Hong Kong, the issue has a high chance of success, in our view. Alibaba broke records during Singles Day – the world's largest 24-hour shopping event. The annual event takes place on 11 November and celebrates the virtues of singlehood in a culture where youth face parental pressure to marry. Gross merchandise value (GMV) on Singles Day easily exceeded last year's record of US$30.5bn.

Operationally, BABA US in the pink of health. In Q2 20 (the quarter ending 30 September 2019), revenue was up 40% yoy. GMV soared 18% yoy in FY19. Net earnings more than tripled.

BABA US is up 34% ytd. This suggests that demand for the issue should be robust.

What is the state of Alibaba's business?

Alibaba has been resilient in the face of intense competition from Tencent, Meituan Dianping and Baidu. The proceeds from this issue would be used to consolidate Alibaba's expansion in cloud computing, entertainment, as well as investment in startups. 

Our Cash Sustainability Index (CSI) is a metric to assess the viability of e-commerce companies. The CSI rates the historical EBITDA margin, CFO margin and FCF margin. The higher the CSI, the more sustainable the business.

Alibaba tops our CSI. If anything, the Hong Kong listing should consolidate its position and insulate it from a downturn.

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Macro Analysis / Lebanon

Lebanon restructuring plan: A long and winding road

  • The government’s plan imposes US$83bn losses on the banking system, wiping out shareholders and bailing-in depositors
  • An alternative plan from the ABL could propose lower bond haircuts and more emphasis on structural reform, asset sales
  • Support from external creditors such as IMF/CEDRE donors will be key, but they may demand greater cross-party support
Rahul Shah @ Tellimer Research
14 May 2020
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BLOM Bank hosted an update call last week with investors. We address below some of the topics touched upon during this discussion. Note that unless specifically identified as such, this report does not reflect BLOM Bank’s views.

The main economic issue Lebanon is grappling with is the country’s high debt burden. The main political issue is that the cross-party consensus needed to push through required extensive structural reform is non-existent, leading to years of paralysis. The banking system has historically helped fund large twin budget and current account deficits, sucking in deposits from the diaspora (and elsewhere) attracted by high returns in a dollar-pegged currency. However, this balancing act has spectacularly unraveled: the Lebanese pound has devalued by close to two-thirds on the black market; the government has suspended payments on its debt; deposit withdrawals are heavily restricted; and the economy is in freefall.

Given this environment, a significant reboot is required, with all sectors of the economy, plus creditors and deposit holders, sharing the pain. Discussions on how best to put the economy back on track are likely to be intense and protracted.

The government’s debt restructuring proposal weighs heavily on the banks

As my colleague, Stuart Culverhouse, has previously commented, the government’s restructuring plan rests on four pillars: fiscal reform; structural reform; banking system reform; public debt restructuring.

The Prime Minister indicated that the 5-year plan aims to restore positive GDP growth in 2022 (from a 12% contraction this year) and promises financial support for those most in need. It aims to restore an initial budget surplus by 2024, to lower the public debt/GDP ratio to below 100% from the current 170%, and to reduce the current account deficit to 5.6% of GDP (from over 25% now). However, the details as to how these worthy goals will be achieved are currently not well defined, in our view. 

We further note that the government’s proposal does not enjoy widespread support across the political spectrum. Although dominated by technocrats, the Cabinet is relatively one-sided, backed by Hezbollah and its allies. The Prime Minister, Hassan Diab, lacks political support from much of his own Sunni community; press reports indicate that the blocs of former Prime Minister Saad Hariri, former Prime Minister Najib Mikati, the Kataeb Party and the Marada Movement all boycotted the meeting where he presented his government’s restructuring plan to President Michel Aoun. The lack of consensus suggests finalising the restructuring plan will likely take time.

Regarding debt restructuring, the Lebanese government has proposed a plan that would see the banking system shoulder US$83bn losses, comprising US$54bn of losses on the central bank’s government securities holdings, US$17bn losses of commercial banks’ government securities holdings and US$12bn losses on the bank’s loan books. This proposal would effectively wipe out the value of all bank-issued securities (equity and debt) as well as bailing-in some deposits.

As currently structured, smaller depositors would be protected from the bail-in; the Prime Minister has indicated that the plan would not affect 98% of the 3mn Lebanese depositors. A report by the Carnegie Middle East Centre, indicated that the bail-in could amount to one-third of all deposits, or 55% of deposits over US$500k (representing 2% of all accounts), or 70% of deposits over US$1mn (representing 1% of all accounts).

The plan also requires the assistance of international donors: around US$10bn external support on top of the US$11bn that was pledged in the 2018 CEDRE conference. “International financial assistance at favourable terms to close the large external financing gap and finance the development of the infrastructures … are necessary to support the growth of the economy”.

We think that any IMF programme is likely to come with strings attached (such as pre-conditions), as is also the case with the CEDRE package. Given its narrow support base, it is not clear if the current government can push through the necessary reforms; this has been an ongoing issue for many years, irrespective of who has been leading the government. 

Hezbollah, the key party within the current government, has now softened its resistance to IMF assistance, although concerns clearly remain. “One thing would be unacceptable, which is to blindly surrender, to go wearing handcuffs and give ourselves to the IMF,” Hezbollah leader Hassan Nasrallah has said. “We must see what the conditions are. Can the country handle them?”

In our view, the make-up of this government has also likely impacted where the proposed restructuring burden will be felt most sharply. In recent years, most Lebanese banks have cleansed their books of Hezbollah exposures to avoid US sanctions. 

Thanks to my colleagues Tolu Alamutu, Stuart Culverhouse and Hasnain Malik for their input 

To access the full report, subscribe to Tellimer Insights.

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Fixed Income Analysis / India

Yes Bank: Interesting test case for bond investors

  • A moratorium restricting withdrawals is in place at Yes Bank; SBI has approved the purchase of Yes Bank shares
  • Comments from India’s authorities suggest that senior liabilities are to be honoured
  • A draft scheme stated that AT1 instruments would be written down in full; this has been opposed by bondholders
Tolu Alamutu @ Tellimer Research
12 March 2020

Yes Bank (YESIN) has been in the news. Following a series of events, the LSE suspended trading in the YESIN 3.75% 2023 bond on 6 March and Moody’s has downgraded its rating on this security to Caa3. Comments from India’s authorities suggest that senior liabilities are to be honoured but a 30-day moratorium imposed on the bank has caused more than a little concern, even though the next coupon on the bond is not due until 6 August. Basel 3 Additional Tier 1 (AT1) instruments were to be written down permanently, and in full. However, reports suggest opposition from holders of these instruments may mean that AT1s are converted into equity instead (in part). This will likely prove to be another important test case for the potential implications of government-backed intervention on bondholders.

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