Alibaba (NYSE:) decided at its board meeting before the announcement of its first-quarter earnings that it would delay the listing of Alibaba stock in Hong Kong. The company cited the ongoing political unrest on the island as the reason for its decision.
“It would be very unwise to launch the deal now or anytime soon. It would certainly annoy Beijing by offering Hong Kong such a big gift given what’s going on in the city,” Reuters a source saying in an article published on Aug. 21.
While Alibaba is looking to raise up to $15 billion by listing BABA stock on the Hong Kong Exchange, it understands the politics of China; it wouldn’t want to offend anyone in the Chinese government.
So, the listing of Alibaba stock will have to wait until the situation in Hong Kong simmers down.
By no means does the company consider the delay a major concern. However, the Hong Kong Stock Exchange must be freaking out. First, Anheuser-Busch InBev (NYSE:) canceled the $9.8-billion listing of its stock on the exchange, and now Alibaba has delayed its listing, resulting in a double blow to the exchange’s reputation.
As long as Alibaba eventually lists its shares on the Hong Kong exchange, Alibaba stock will do just fine. If, however, the listing is canceled entirely, Alibaba Group stock could suffer some damage.
However, it can’t hurt to consider what the ramifications of not listing Alibaba stock in Hong Kong would be for the e-commerce giant.
Not Listing Would Be Costly
By canceling the Hong Kong listing, BABA would the Chinese government and Chinese investors, who’ve been able to buy Hong Kong stocks for the past five years.
Additionally, listing BABA stock would enable Chinese investors to buy the large number of shares of Alibaba stock that look poised to flood the markets over the next few years. If the listing is canceled, the impending sale of those shares could meaningfully weigh on Alibaba Group stock.
Two major firms look poised to sell large amounts of BABA stock. Not only is Softbank (OTCMKTS:) open to the idea of lowering its stake in Alibaba, but Altaba (NASDAQ:AABA), the company set up to hold Yahoo’s 11% stake in BABA, in April that it was planning to liquidate those shares and dissolve itself
Finally, some U.S.-listed companies have de-listed from American exchanges in the past, opting to re-list in China where their stocks tend to get higher valuations. Alibaba Group stock continues to be significantly undervalued relative to Amazon (NASDAQ:). By listing in Hong Kong, BABA would give itself a better shot at a higher valuation. Of course, if the Hong Kong listing is canceled, BABA won’t get the opportunity to raise the valuation of BABA stock.
Alibaba’s Business Will Be Strong Either Way
One need only look at BABA’s Q1 results to know Alibaba’s business is doing just fine.
Its revenue grew year-over-year and its operating income increased 27% excluding share-based compensation, while its free cash flow was a robust $3.8 billion. The revenue of its cloud-computing business, which is considered an up-and-coming part of the company, grew 66% YoY to $1.1 billion. It now accounts for 7% of Alibaba’s overall revenue.
And the top line of its e-commerce business, which accounts for 66% of its overall revenue, increased 40% YoY in Q1. That jump demonstrates that its legacy business is alive and doing very well.
BABA finished Q1 with $30.7 billion of cash and cash equivalents.
At the moment, it has plenty of momentum in all of its businesses and the cash necessary to keep those plans moving ahead.
With or without a Hong Kong listing, BABA stock will be a long-term winner.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
The post appeared first on InvestorPlace.