Alibaba faces renewed delisting risk in the US and they might continue to fall further.
Its shares aren’t all that undervalued, contrary to many bulls believe.
Also, its Hong Kong-listed shares aren’t as safe as they’re touted to be.
maybefalse/iStock Unreleased via Getty Images Alibaba’s ( BABA ) shares are down 50% in the last 6 months and contrarian bulls are now wondering if this is a good time to buy. Bulls argue that the stock is grossly undervalued, its delisting risk is exaggerated and that the company’s Hong Kong-listed shares will shield them from the delisting risk in the US. While I appreciate the zeal behind the contrarian investment thesis, I’ll argue again that the stock is likely to fall further and that investors should avoid the name for the time being at least. Let’s take a closer look at it all. Its Auditor’s Role
Let me start by saying that the SEC has been making steady progress since 2020 towards requiring foreign companies to open up to audit inspections, or get delisted from US bourses. The general rationale for such a stance is that if foreign companies are tapping US capital markets, they should also be audited and inspected like all the other domestic companies listed in the US. This would reassure US investors that their foreign investment is less likely to be an accounting scandal.
I’ve actually been warning investors about the severity of this delisting threat for the past 9 months and suggesting investors to exit their long positions in Alibaba. Interestingly, the stock has collapsed 50% since then but I’ve been constantly chided for issuing the warning. One of the recurring arguments has been that Alibaba has tapped a renowned auditing firm – PricewaterhouseCoopers – which implies that its books ought to be in order, the company will gladly comply with US regulators and that its shares won’t be delisted in the US.
Fast forward to last week and the SEC took a step further. It provisionally named 5 Chinese companies – BeiGene (NASDAQ: BGNE ), Yum China (NYSE: YUMC ), Zai Lab (NASDAQ: ZLAB ), ACM Research (NASDAQ: ACMR ), Hutchmed (NASDAQ: HCM )- that don’t meet the audit requirements and could be delisted. This makes Alibaba’s prospects even murkier for a number of two reasons.
First, it signals that US regulators aren’t playing power games with China and that they’re actually serious about delisting non-compliant foreign companies such as Alibaba. There’s another factor that nobody, at least to the best of my knowledge, seems to be discussing. It’s that having a renowned auditor isn’t necessarily enough to shield Alibaba and its investors from the delisting risk.
I say this because most of these 5 companies that the SEC has named in its provisional list, have globally reputed firms as their auditors. This begs the question — if these firms can face a potential delisting in spite of having globally reputed auditors, why can’t Alibaba get delisted as well? This goes straight up against the commonly held belief, that Alibaba is safe from a potential delisting in the US because it has PricewaterhouseCoopers as its auditor. Business Quant Also, it’s not necessarily up to Alibaba or its auditor to comply with US regulators. The company disclosed in its latest 20-F filing that it’s the Chinese government that has to permit such audit inspections. From their filing: PricewaterhouseCoopers, our auditor, is required under U.S. law to undergo regular inspections by the PCAOB. However, without approval from the Chinese government authorities, the PCAOB is currently unable to conduct inspections of the audit work and practices of PCAOB-registered audit firms within the PRC on a basis comparable to other non-U.S. jurisdictions. Since we have substantial operations in the PRC, our auditor and its audit work are currently not fully inspected by the PCAOB, and as such, investors of our ADSs, Shares and/or other securities do not have the benefit of such inspections. All of this essentially suggests that investors shouldn’t underestimate Alibaba’s delisting risk just because its audited by one of the Big Four firms. The Hong Kong Connection
Many investors are now considering investing in, or converting their existing US-listed Alibaba’s shares to, Alibaba’s Hong Kong-listed shares. The rationale is that Alibaba’s Hong Kong-listed shares won’t have the overhang caused by US-regulators and they offer all the goodness involved with the company’s growth story. The general belief is that Alibaba’s Hong Kong-listed shares offer superior returns and/or offer a safer way to invest in the company.