Alibaba’s breach raises hopes that China’s regulatory winter is thawing

March 29 (Reuters) – Investors cheered a major overhaul of Alibaba Group ( 9988.HK ) as a sign that Beijing’s crackdown on the corporate sector was coming to an end, sending shares of the Jack Ma-founded company and its peers soaring on Wednesday.

Alibaba said Tuesday it plans to split into six units and explore fundraising or listings for most of them, in the biggest restructuring of the tech conglomerate in its 24-year history.

The group’s Hong Kong-listed shares jumped as much as 16.3%, trailing a 14.3% rally in U.S.-listed stocks overnight, leading the benchmark Hang Seng Index (.HSI) and broader markets in the region higher.

The move represented a light at the end of the tunnel for many investors who had seen a wave of regulatory blitzes as a big cloud hanging over China’s private sector.

“We believe this is likely a sign that we are nearing the end of the regulatory scrutiny of BABA, and we expect the company to move back into the good graces of regulators and policymakers after this,” said Jon Withaar, chairman. of Asia special situations at Pictet Asset Management.

Alibaba said it will hold a conference call on Thursday to discuss the plan to split. CEO and chairman Daniel Zhang may join the conversation, according to people familiar with the matter.

China’s sweeping regulatory crackdown over the past couple of years against its domestic companies, mainly from the internet, private education and real estate sectors, had wiped away billions in market capitalization and weighed on investor sentiment.

Alibaba said on Tuesday it would split into six units – Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics Group, Global Digital Commerce Group and Digital Media and Entertainment Group.

The group had long planned to spin off individual business units, according to two additional sources familiar with the company’s thinking.

“There was consensus inside and outside Alibaba that the stock was trading at a large discount to the intrinsic value of the businesses,” one of the people said, adding that the company had become “overinflated”.

The person said there would be five public offerings from the units, while Taobao and Tmall, Alibaba’s core revenue drivers, would remain with the current listed unit.

Hong Kong is the most likely location for those IPOs, said the person, and a separate source familiar with Chinese tech companies’ capital market transactions said.

Alibaba did not immediately respond to a request for comment.

In Japan, SoftBank Group Corp ( 9984.T ), which has a 13.7% stake in Alibaba, rose 6.2%. SoftBank did not respond to a request for comment.

Alibaba itself would reorganize into a holding company structure, with Zhang retaining his position as CEO, and the six subdivisions each with their own CEOs and boards. Zhang will also lead the cloud-focused unit.

It wouldn’t be the first time Alibaba has spun off its business units. In 2011, the company spun off its fast-growing payments arm Alipay, which later evolved into fintech major Ant Group.

DID THE PAIN END?

Analysts at Bank of America on Tuesday described Alibaba’s restructuring as “an important experiment”, which would test whether China’s biggest companies could meet Beijing’s demands to “contribute to society”.

Alibaba was a common target during the downturn. It was investigated for engaging in monopolistic behavior in the e-commerce space, as well as the data security practices of its cloud business and the labor practices of its delivery units.

In what many observers saw as a symbol of regulatory chill, Ma, the founder, left China at the end of 2021 and was seen traveling to a number of different countries.

He was spotted on Monday in Hangzhou, the home of Alibaba, just one day before the company announced the restructuring.

Zhang Zhihua, chief investment officer at Beijing Yunyi Asset Management, said that on top of Ma’s returns and the restructuring, new leaders and local governments have recently softened their stance on China’s private sector, giving investors confidence.

Shares in JD.com Inc ( 9618.HK ), Alibaba’s longtime e-commerce rival, rose as much as 7.8% on Wednesday.

Tencent Holdings Ltd ( 0700.HK ), China’s biggest gaming company, saw shares rise as much as 5.1%.

Alibaba’s split could pave the way for other Chinese tech giants to undergo similar restructuring, CMC Markets analyst Tina Teng said.

“This helps break down the monopolistic power of these conglomerates, which is consistent with the Chinese government’s regulatory overhaul of antitrust issues,” she said.

In addition to its core gaming and social media businesses, Tencent also has cloud and fintech arms. JD.com has spawned a number of spin-offs in recent years, including JD Logistics ( 2618.HK ) and its cloud- and AI-focused arm JD Digits.

Brian Tycangco, who tracks China’s technology sector at Stansberry Research, said that in addition to enabling higher valuations, the restructuring better protects individual divisions from future government regulation.

“Any new regulation probably won’t affect the whole company now – just the particular division that that regulation covers,” Tycangco told Reuters.

Reporting by Josh Horwitz in Shanghai, Kane Wu, Selena Li, Donny Kwok and Julie Zhu in Hong Kong; Anirban Sen and Ken Li in New York and Ankur Banerjee in Singapore; Editing by Muralikumar Anantharaman and Sam Holmes

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