Chinese e-commerce giant Alibaba (NYSE: BABA) delivered a reason for investors to cheer earlier this week, announcing it will split into six separate entities, which some are dubbing “baby babas.”
Breakups of that nature are usually orchestrated to unlock shareholder value, and the immediate reaction to the plan indicates that investors are pleased with the Alibaba news. The reverberations matriculated down to exchange traded funds with significant allocations to the shares, including the KraneShares CSI China Internet ETF (KWEB ) and the KraneShares Emerging Markets Consumer Technology Index ETF (KEMQ ).
KWEB, which is the pioneer among China-focused e-commerce and online retail ETFs, allocates almost 9% of its weight to Alibaba. KEMQ, which follows the Solactive Emerging Markets Consumer Technology Index, features the stock among its top five holdings.
One reason some analysts are bullish on the Alibaba restructuring is that it could reduce regulatory risk — a factor that hindered the stock and ETFs such as KEMQ and KWEB in 2021.
“The restructure could reduce regulatory risks and ease scrutiny after the Chinese government has cracked down on technology companies in the past few years. The looser connections between the business units is in line with the regulatory stance of encouraging competition. Alibaba had previously been fined RMB18.2 billion in April 2021 for antitrust behavior infringing on merchants’ and consumers’ rights. It was also told to rectify its business practices to ensure future compliance with antitrust regulations,” noted Moody’s Investors Service.
Some analysts believe the breakup is essential to unlocking value for Alibaba investors (and those holding KEMQ and KWEB shares) because the stock has long traded at discounts to its sum-of-the-parts valuation. Plus, the benefit for KEMQ and KWEB investors is that Alibaba remains a prime play on China’s reopening and consumer spending.
“With gradual consumption recovery in China … and the potential catalyst of corporate restructuring, we reiterate BABA as our top pick in China Internet,” according to Morgan Stanley. “We view BABA as a key beneficiary of China’s reopening and a proxy for inflows to China from global investors. We estimate that there is about an 80%+ (or ‘highly likely’) probability for the scenario.”
It remains to be seen how Alibaba’s breakup will impact ETFs in terms of exposures to the six upcoming entities, but some see value in corporate independence for those units.
“As the six business units begin to operate more independently over time, there will be more room for them to choose partners that best service their needs. These partners can be internal or external parties with different terms and conditions. The consolidated cost structure could evolve over time, and the ultimate net result of such change is uncertain,” concluded Moody’s.
For more news, information, and analysis, visit the China Insights Channel.
