Why SoftBank Is Selling Its Shares of Alibaba, and What This Means for China’s Tech Giant

Alibaba Stock

Alibaba Group Holding Ltd – ADR (NYSE:BABA)

The stock of Alibaba (NYSE:BABA) increased after a report stated that the technology investment organization SoftBank has decided to sell down the majority of its remaining stake in the company. SoftBank had been an early investor in Alibaba. This is another indication that the status quo in Chinese technology is shifting.

According to the Financial Times, which based its findings on a review of regulatory records, SoftBank 9984 –0.97% (9984.Japan) has reportedly sold approximately $7.2 billion worth of Alibaba (NYSE:BABA) shares this year through prepaid forward contracts. According to the article, the sales will eventually lower SoftBank’s shareholding in Alibaba, which stood at almost 25% at the beginning of the previous year, to less than 4%. This comes after a record-breaking $29 billion share sale was completed in the previous year.

At lunchtime on Thursday, the stock of Alibaba had gained 2.3%. 

The expansive technology conglomerate, which has interests spanning cloud computing, artificial intelligence, and digital media, has revealed plans to break itself into six entities, which will open the way for spinoffs. The conglomerate’s core business is in e-commerce, and its interests also include cloud computing. The move, which was a drive to unlock shareholder wealth and promote competition, was a crucial hint that the Chinese technology sector is undergoing a sea change. The decision was an apparent bow to tough-on-tech authorities who were responsible for two years of huge stock-price drops. 

One further example would be SoftBank going one step further in expanding its operations.

SoftBank, which is currently headed by Masayoshi Son and was one of the company’s initial investors in Alibaba, made one of the most rewarding bets in the history of technology as the company grew to become worth multiple hundreds of billions of dollars. However, the announced transactions are by no means the first time that SoftBank has reduced its interest. In fact, a significant portion of this reduction occurred in 2018, when falling tech valuations caused Son’s investment house to significantly lower its stake in 2022.

SoftBank’s Decision

The decision by SoftBank to sell off a significant portion of the remainder of its holdings in Alibaba comes at a crucial juncture for the company as it prepares to undertake the most extensive restructuring it has ever undertaken. As a result, Alibaba is left without the backing of a significant investment at a time when the company may want to spin off or list businesses, such as its high-growth cloud division, which is highly sought after by investors.

Perhaps they had something like that in mind all along. 

According to market observers, officials in Beijing are likely to approve of Alibaba’s decision to split up, and may even promote the move. This comes at a time when President Xi Jinping is exerting a greater level of control over the Chinese economy, which has led to a significant decline in valuations. In anticipation of Alibaba founder Jack Ma’s return after a year spent away from the company, the split-up plan has already made investors aware of the possibility of a change in control of certain aspects of the company. The decrease in SoftBank’s ownership position represents yet another round of consolidation in this new era for Chinese technology.

Alibaba did not comment. Beyond the assertions that were included in regulatory filings, SoftBank declined to comment. The investment group adheres to a policy that mandates the continuation of conservative financial management in the face of uncertain market circumstances. This policy includes asset-backed financing of holdings such as Alibaba stock.

Naturally, there’s also the possibility that SoftBank is merely trying to cash in on the surge. Although Alibaba is currently trading at levels not seen in the last six years, the company’s stock has increased by 49% from its lows in October. This is in line with the performance of much of the rest of the Chinese technology industry.

Following a report from Bloomberg that Prosus PRX +3.67% (PRX.Netherlands) had placed 96 million shares in the business into Hong Kong’s stock clearing system—a usual precursor to a share sale—the stock of Chinese tech peer Tencent 700 +1.68% (0700.H.K.) decreased by 5% during trading on Wednesday. This news caused the stock of Tencent 700 +1.68% (0700.H.K.). to fall.

“Without taking any single name views, it isn’t necessarily surprising to see [a] large stakeholder use a rally in a particular sector to lock in profits, especially when other holdings may be in negative territory,” Mark Haefele, the chief investment officer at UBS Global Wealth Management, wrote in a note on Thursday. Haefele is the author of the note.

UBS is optimistic about Chinese stocks in general and companies such as Alibaba in particular. “When viewed at the level of the industry as a whole, most of China’s internet companies reported higher-than-expected profitability in their most recent round, and a number of CEOs detailed a revival in activity. As more reduced cost structures come into view, we foresee a further expansion of our profit margins. “Within our Asia strategy, we continue to maintain our most preferred stance on China equities, and we continue to maintain a positive stance on China’s internet space in particular,” added Haefele.

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