China ETFs Surge on Alibaba Breakup Plan

The company hopes to unlock value by breaking itself up into six smaller parts.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

China exchange-traded funds surged on Tuesday as one of the country’s largest conglomerates announced plans to split itself up into six different business groups. 

The $8.5 billion iShares MSCI China ETF (MCHI), the biggest U.S.-listed China ETF, jumped 3.3%, while the $5.9 billion KraneShares CSI China Internet ETF (KWEB), the second-biggest China ETF, gained 4.3%. 


 
 

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Shares of Alibaba, the company best known for being an online retail giant in China, surged more than 14% on Tuesday after it announced it would begin operating six business groups, each of which that will be independently managed by its own chief executive officer and board of directors. 

The six groups include: 

  1. Cloud Intelligence Group (including cloud, artificial intelligence, DingTalk and other businesses)
  2. Taobao Tmall Business Group (including Taobao, Tmall, Taobao Deals, Taocaicai, 1688.com and other businesses
  3. Local Services Group (including Amap, Ele.me and other businesses)
  4. Global Digital Business Group (including Lazada, AliExpress, Trendyol, Daraz, Alibaba.com and other businesses)
  5. Cainiao Smart Logistics
  6. Digital Media and Entertainment Group (including Youku, Alibaba Pictures and other businesses)

Future IPOs 

What got investors especially excited about the announcement was Alibaba’s openness to allowing each of the business groups to do an IPO in the future. 

The hope is that the separate companies will be able to command a higher collective market value than the one conglomerate that exists today.  

Shares of Alibaba were ravaged during the government crackdown on Chinese tech companies that began in late 2020. The stock fell as much as 80% from peak to trough between November 2020 and October 2022. 

The price of the stock has since rebounded 57%, helping ETFs like the aforementioned MCHI and KWEB rebound as well. 

MCHI, which offers broad exposure to both mainland- and offshore-listed Chinese companies, currently has almost 8% of its portfolio invested in Alibaba. KWEB, which holds internet-related Chinese companies, also has an 8% weighting in the stock. 

Presumably, if Alibaba breaks up into several smaller publicly traded companies in the future, all—or most—of those stocks will be included in these ETFs. 

What the Future Holds  

Alibaba’s breakup plan was widely praised by analysts.  

“We believe investors’ valuation framework will shift from a blended forward P/E to SOTP [some of the parts] as news flow on initial public offerings hits the market, leading to as much as 100% potential share price upside,” analysts at J.P. Morgan said. 

Meanwhile, analysts at Mizuho Securities used a similar some-of-the-parts valuation framework to come up with a $155 price target on the stock, which currently trades around $100. 

“We believe that only core commerce and cloud are priced into the stock, and that operations like Food Delivery, Online Video, and Payments are free call options,” they said. 

While it has the potential to unlock value for shareholders, Alibaba’s decision to split itself up raises questions about what role the Chinese government had in the move and what it means for the broader government crackdown on tech companies in the country. 

Bloomberg Intelligence analyst Marvin Chen noted that Alibaba’s decision to split itself up was “one step in the direction with China’s policy to reduce the monopolistic nature of the tech giants.” But does that mean that, going forward, tech companies in China will be limited in how large they can grow? 

If so, that could be bearish for the prospects of Alibaba’s spinoffs.  

On the other hand, if Alibaba’s ploy to unlock value via a breakup works, then it might open the door for similar moves by other Chinese tech giants. 

Tencent, the largest holding in many China ETFs, is a prime candidate for a similar move. Its vast operations—spanning gaming, cloud computing, e-commerce, fintech and more—could conceivably be broken up into multiple public companies. 

The company will likely be watching closely to see how the breakup gambit plays out for its fellow tech giant Alibaba. 

 

Email Sumit Roy at [email protected] or follow him on Twitter @ sumitroy2      

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.