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The Alibaba Arbitrage that Hedge Funds Pray For

Dual listings by tech giants present a windfall opportunity for certain stock exchanges and international hedge funds.

  • By Allen Cheng

Chinese technology companies traded in the U.S. could have secondary listings on the Hong Kong stock exchange as early as the second half of this year, according to trading experts.

Dual listings by the Alibaba Group, Baidu, and others present a windfall opportunity for the Hong Kong Exchange and Clearing Co. (HKEX) as well as hedge funds, which could arbitrage valuation differences between the U.S. and Hong Kong markets. 

That’s according to Tobias Bland, the chief executive of Hong Kong-based Enhanced Investment Products, which manages several exchange-traded funds. 

Chinese technology companies listed in the US through American deposit receipts, or ADRs, trade at an average valuation of 29 times earnings, he said, far lower than the 36 times earnings average of many of their U.S. peers. Firms listed on the Shanghai and Shenzhen exchanges have in recent years traded in the range of 23 to 80 times earnings, Bland added during his interview with Institutional Investor. By listing in Hong Kong as well as in the U.S., Chinese companies like Alibaba would become available to Chinese investors via the Stock Connect program, which unites regional exchanges and investors.

“Americans who are major investors in these Chinese ADRs discount them because they are headquartered in China,” said Bland. “The Chinese investor feels more comfortable with owning a Chinese stock. The Chinese investors see the growth of China’s economy and these companies more than their U.S. investor peers do.”

HKEX announced in December that it was working with the market regulator to allow companies with dual- or variable-weighted equity structures to list, as well as those trading in offshore markets to launch secondary offerings in Hong Kong. Variable equity structures are common when company leaders have minority ownership stakes but maintain majority voting rights. 

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Alibaba has such a structure, and chose the New York Stock Exchange over Hong Kong’s for its 2014 IPO. HKEX chief executive Charles Li has been pressing to reform listings rules since then, and the December announcement was in effect a culmination of his efforts.

Li pushed for reform, Bland said, in part to help HKEX diversify away from banking and real estate companies. Tencent Holdings, the Shenzhen-based Internet service provider, is one of the few major technology stocks trading in Hong Kong. 

“Tencent is a lonely beast sitting on the Hong Kong exchange,” Bland said. “It’s because we haven’t got this critical mass of technology stocks, which are the stocks of the future. If you get Alibaba, Tencent, Baidu all listed in Hong Kong, you will get $1 trillion of market cap just among them, and you will all of a sudden have an extremely powerful and attractive technology offering in Hong Kong.”


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