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Alibaba IPO: Your questions answered

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17/09/2014
When will shares go on sale? Can UK investors get involved? What's this you keep hearing about the Cayman Islands? Laith Khalaf of Hargreaves Lansdown answers these questions and more.

The market has been buzzing with speculation about Alibaba, the Chinese ecommerce website, and owner Jack Ma as the company’s initial public offering (IPO) nears.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “Big IPOs like this tend to capture the public imagination, from Facebook to the Royal Mail group. Alibaba is not prompting the same level of interest as those floats, but for a Chinese company that is far from a household name over here, it is punching above its weight with UK investors.”

Here Khalaf answers your questions about the IPO.

What’s going on?

Alibaba has finally set the date and price range of its stock market debut. Shares will go on sale on 19 September at 2:30pm, with prices in the range of $66 to $68. This is up from previous guidelines of $60 to $66 and would value the company at $163bn, making it the 26th largest company on the US market.

But don’t look for Alibaba on the S&P 500. Khalaf says. As a Chinese company it’s more likely to appear on the S&P China BMI index.

Is it worth the price?

Valuing technology giants is incredibly difficult, according to Khalaf.

He says: “Alibaba recently released phenomenal second quarter results. Quarterly revenues increased 46 per cent year on year to $2.54bn – more than eBay and Amazon combined – with profits tripling to £1.99bn. In addition, a staggering 279 million ‘active buyers’ used Alibaba’s platform to shop, up 50 per cent last year.”

That being said, IPOs are notoriously volatile in the first few days. Khalaf explains: “Even a relatively traditional UK listing like Royal Mail can move dramatically. Investors need to be mindful.”

How do I invest?

UK investors will have to wait until shares have been authorised by CREST, the UK’s clearing house, meaning that they’re shut out of the IPO. According to Khalaf shares may become available Friday afternoon, but there’s a chance UK investors will have to wait until next week.

If you’re looking to get exposure to Alibaba before the float, Khalaf has some suggestions.

He says: “Investors could consider Softbank Corp and Yahoo Inc. Both have stakes in Alibaba – 34.1 per cent and 22.4 per cent respectively – although these are likely to be reduced following the IPO. Both Fidelity China Special Situations and Scottish Mortgage Investment trust also have a stake in the company.

Can I put Alibaba shares in a SIPP or an ISA?

No. Khalaf says that the shares themselves will be registered in the Cayman Islands, making them ineligible for a SIPP or an ISA.

Wait, what? Isn’t Alibaba a Chinese company?

Yes, but Chinese law forbids the ownership of strategic Chinese assets by overseas investors so Alibaba has registered a speperate company in the Cayman Islands. It’s this company – which by contract takes profit from Alibaba’s Chinese assets without actually owning any – that investors buy.

Isn’t that risky?

It’s a tactic used by other Chinese internet companies, Khalaf says, but there is a measure of risk involved.

He says: “The risk for investors is a legal one. If shareholders want to enforce their rights, they will have to do so based on contracts between a Cayman Islands entity and one based in mainland China. Furthermore, Alibaba admits that while its Chinese lawyers believe this structure conforms to Chinese laws, this could change and it is uncertain what action Chinese regulatory authorities would take.”

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