alibaba

Alibaba and other US-listed Chinese stocks are trading lower today after PetroChina Co., China Life Insurance Co., and China Petroleum & Chemical Corp announced that they would delist from the US markets.

US regulators recently added Alibaba to the list of Chinese companies that face delisting in the country. The Holding Foreign Companies Accountable Act mandates that foreign companies listed would risk delisting if does not comply with the US PCAOB’s (Public Company Accounting Oversight Board) audits for three years in a row.

The Act was passed after the Luckin Coffee accounting scandal where US regulators found themselves handicapped amid the alleged lack of cooperation from Chinese regulators. US investors lost billions of dollars amid the accounting scandal.

Also, Alibaba is among the companies that trade on the US markets as VIEs (variable interest entities). Both Chinese regulators and the US SEC have been looking to clamp down on the practice.

While Alibaba has said that it intends to keep its listing on the NYSE, it has gone for a dual primary listing in Hong Kong. The company already has a secondary listing in Hong Kong. Here it is worth noting that while The Holding Foreign Companies Accountable Act is not solely targeted against China, mostly Chinese companies might be targeted amid the escalating US-China tensions.

Earlier this year, Didi delisted from the US markets in a span of months. While US investors suffered billions of dollars in losses from the forced delisting, Uber also took a hit. Uber has suffered losses on its other equity investments also. SoftBank has also suffered massive losses on its investments including Didi. The private equity giant has also offloaded 242 million Alibaba shares.

Alibaba Posted Better Than Expected Earnings

Alibaba reported revenues of $30.7 billion in the June quarter. While the metric was ahead of what analysts were expecting, it was slightly below the last year. This is the first time since Alibaba went public that it has posted a YoY fall in revenues.

But then, even Amazon’s revenues rose by only 7.2% in the second quarter of 2022 which is its slowest pace of growth in over two decades.  Alibaba’s earnings in the June quarter were also negatively impacted due to the lockdowns in the country.

China had imposed strict lockdowns in April and May which took a toll on its industrial activity as well as consumer spending. Unlike the rest of the world, which is learning to live with the coronavirus, China has a strict zero-COVID policy and shuts downs large parts of the country to control the outbreak. The policy has helped the country keep its death toll low even as it is now impacting economic activity.

Meanwhile, Alibaba sees a rebound in its business. In his prepared remarks, Alibaba’s CEO Daniel Zhang said, “Following a relatively slow April and May, we saw signs of recovery across our businesses in June. We are confident in our growth opportunities in the long term given our high-quality consumer base and the resilience of our diversified business model catering to different demands of our customers.”

Low Valuations Make BABA Stock a Buy

Last month, Bernstein advised investors to buy Alibaba stock and said that $85-$90 price levels as a floor for the stock. The brokerage also raised its target price to $130. Meanwhile, amid China’s tech crackdown and uncertain policies, valuations of Chinese stocks have taken a hit.

While Alibaba and Chinese stocks are trading lower today, Rivian is trading higher. While the company posted a wider than expected loss in the second quarter of 2022, it maintained its 2022 production guidance of 25,000 vehicles. Many other startup EV (electric vehicle) companies have lowered their production guidance amid the supply chain issues.

NIO’s production also took a hit in April and May due to the lockdowns. However, it delivered a record 12,961 cars in June. NIO is ramping up its production capacity and last year entered into an agreement with its production partner JAC Motors to double the annual production capacity to 240,000 cars. However, the ramp-up has been held back by supply chain issues. Like Alibaba, NIO is also trading lower today.

As for delisting, while the state-owned companies are delisting as China might not want them to share data with US regulators, it remains to be seen if non-state-owned Chinese companies also take the same route. However, with the Hong Kong listing, Chinese companies are offsetting the risk of a possible US delisting.

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