Alibaba and JD.com Face US Threat. Should Brands Be Concerned? | BoF Professional, China Decoded

SHANGHAI, China — Even as America appears more politically divided than it has been in recent history, the anti-China drum beat emanating from the White House, Senate and House of Representatives sees politicians of all stripes marching in unison.

In recent weeks, the US Senate has passed a bill that would require the delisting of any company on a US stock exchange that goes three consecutive years without being inspected by the Public Company Accounting Oversight Board (PCAOB). The bill has bipartisan support in the US House of Representatives and is likely to be made law in record time.

Chinese companies listed in the US have until now resisted these inspections because the Chinese Government believes PCAOB inspection of Chinese audit records would violate state secrecy laws. In short, the US-government is about to pass a law asking Chinese companies to comply with inspections their own government won’t allow.

This leaves US-listed Chinese firms — disproportionately tech-related companies and major e-commerce players like Alibaba, JD.com and Secoo, alongside social media darlings, like Bilibili — stuck between a rock and a hard place.

The fact that the delisting threat comes at a time when US fashion and beauty companies are more intertwined than ever with Chinese tech giants — reliant on the likes of Alibaba and JD.com to sell to Chinese consumers, who are spending an increasing percentage of their yuan online in the wake of the coronavirus outbreak — may be cause for concern.

How Worried Should Brands Be?

One potential next step in the current stand-off is a wave of Chinese firms delisting from US exchanges, with approximately 150 companies set to reassess their positions. BoF reached out to Alibaba, JD.com and Secoo for comment, but they all declined, with a spokesperson for JD.com responding: “We don’t comment on market rumours.”

If… in Chinese media they’re telling people ‘do not buy iPhones,’ you know this has taken on some serious implications.

According to Peter Boockvar, chief investment strategist at Bleakley Advisory Group, the core issue is about the potential for a delisting to aggravate US-China relations which are at the lowest point in recent history — and for strained relations to foment anti-American sentiment among Chinese consumers faced with buying American brands.

“If all of a sudden in Chinese media, they’re telling people ‘do not buy iPhones,’ you know this has taken on some serious implications,” he said.

The deepening animosity between China and the US exemplified by the delisting threat encompasses several years of a trade war and tit-for-tat tariffs. Yet so far it has not dented demand among Chinese consumers for American products, and according to Humphrey Ho, managing director of Hylink Digital, an agency that helps US brands market to customers in China, it is unlikely to any time soon.

“We can be patriotic, so long as the iPhones keep coming, and I can access the best vaccines for my child, and I can get that wine from Napa Valley,” he said of the Chinese consumer attitude to US products.

In the fashion sector, US companies lead the way in terms of sportswear and streetwear, with both categories seeing impressive growth in the China market. According to Ho, there is no reason US companies in these or other fashion and beauty sectors are likely to suffer as a result of geopolitical tensions or economic decoupling between China and the US.

“Consumers are very universal; they want to buy the best products for their families, for themselves, for their babies, and they will gravitate to the best product they can afford in that category,” he said.

Even in categories in which US companies have seen increased competition from domestic players, including sportswear and cosmetics, the rise of Chinese companies has been more about local companies improving their performance and catering better to their home market, rather than consumers moving away from US or international brands.

“I think US companies, like Nike, are doing really well in China. They have localised their management, staff, product offering and marketing very well,” explains Walter Woo, vice president of research at CMB International Capital Corporation.

“[But generally] the domestic players are doing better in knowing what consumers really want and they’re more aggressive on e-commerce, working better with Alibaba, JD and Pinduoduo. So, they are [doing] better with the product portfolio, as well as the channel management,” he added.

There should always be a sceptical eye in terms of the source, integrity, cleanliness of the data.

Luckin Coffee, a self-styled Chinese “Starbucks killer” — which saw dramatic growth in recent years, precipitating an even more dramatic fall as news of inflated sales figures wiped out 80 percent of the company’s share value overnight —has become an unfortunate poster child for the fast and loose accounting practices of some Chinese companies. This incident was nominally the reason for the US Senate to introduce its new legislation in the first place.

Questions raised about the veracity of the data emanating from Chinese companies were addressed by Alibaba’s Chief Financial Officer, Maggie Wu, on a recent earnings call. She sought to reassure Alibaba investors by pointing to Alibaba’s auditing by PwC Hong Kong which follows “auditing standards [that] are overseen by the PwC national office in the United States.”

“The integrity of Alibaba’s financial statements speaks for itself. We have been an SEC [US Securities and Exchange Commission] filer since 2014 and hold ourselves to the high standards of transparency,” Wu added.

In addition to investors’ concerns, brands partnering with Chinese technology firms also have legitimate questions about the veracity of their data. With international brands now largely dependent on firms such as Alibaba, Tencent, JD.com and Baidu for information about Chinese consumers, the famed big data operations of Chinese tech giants are naturally attractive, but how much should these numbers be relied upon?

“There should always be a sceptical eye in terms of the source, integrity, cleanliness of the data,” Ho warns, though he adds that that same lens should be applied to data from any source, not just those coming from China.

“There should be [the same lens applied] in the West with Google or Facebook,” he says.

International firms, including L’Oréal and P&G, which currently work closely with Alibaba on big data for innovation, marketing and retail strategies gain a competitive advantage in the China market because of what they can do with that data. In other words, from a data perspective, there is far more to be gained than lost from working with Chinese tech giants.

Who Might Benefit from a Delisting?

According to Harvard Law Professor, Jesse Fried, writing in a The Financial Times op-ed, the move plays directly into the hands of China’s Central Government.

At present, the threat of the US to delist Chinese tech giants remains just that, a threat.

“Beijing is unhappy that its biggest and most famous tech giants — such as Alibaba and Baidu — trade in the US and not at home. It wants its crown jewels back,” he wrote. “[B]y not allowing inspections, China can then trigger a ban and force its companies to leave the US. Some may then return home… [and] exits would be arranged by Chinese controllers to enrich themselves at public investors’ expense.”

As much as delisting from US exchanges might, on the surface, seem like a punishment for companies, or at least a move that might have a destabilising effect on these firms, Fried points to the case of Qihoo 360, an internet securities firm, as a model for the way in which delisting from US markets can actually improve the financial strength of Chinese companies.

In 2016, Qihoo’s founders squeezed out US shareholders at a valuation of $9.3 billion. In February 2018, Qihoo relisted on the Shanghai Stock Exchange at a valuation of more than $60 billion. Qihoo’s chairman made $12 billion — more than the whole company claimed to be worth 18 months before.

If US investors become wary and back away from Chinese companies ahead of potential delistings, it will make such manoeuvres a more attractive option for the controllers of those businesses.

Even more so than mainland Chinese exchanges or controllers, however, the major beneficiary of secondary or other listings looks to be Hong Kong. The Hong Kong Stock Exchange is already home to Alibaba’s secondary listing, which raised over $13 billion last November in one of 2019’s biggest offerings.

JD.com confirmed rumours of its secondary listing in Hong Kong just last week. If all goes to plan, it hopes to raise as much as $4.1 billion when it starts trading on June 18th, which is both the anniversary of the company’s founding and also a major e-commerce shopping festival in China.

These secondary listings — as well as the imminent Hong Kong listing of gaming company NetEase, which also initially listed on the Nasdaq, and potentially Pinduoduo, in an unconfirmed rumour — would be a major boost for Hong Kong’s reputation as a financial hub at a time when it faces multiple political and economic crises of its own.

“I’m not surprised to see companies looking for secondary or other listings in other places, especially in Hong Kong,” says Woo of CMB International Capital Corporation.

According to Brendan Ahern, chief investment officer at KraneShares, however, these relistings have little to do with the recent passage of legislation in the US Senate, or the broader deepening of competition and animosity among the world’s two largest economies. Rather, it’s about companies appeasing their most important master — the bottom line.

“Asian investors give their Hong Kong-listed peers a higher valuation than US investors. They also don’t trade them based on trade tweets or political rhetoric… capital flows to where it is treated best,” he wrote in a note.

It is this principle — companies being more sensitive to monetary value than geopolitics — that is likely to hinder London as a serious competitor to Hong Kong for more listings of China-based companies. Although Chinese authorities have reportedly encouraged listings in London, due to the London-Shanghai Stock Connect, the fact that it remains one of the most undersubscribed stock exchange connections utilised on a daily basis casts doubt on its value.

At present, the threat of the US to delist Chinese tech giants remains just that, a threat. As much as the ostensive aim of this new legislation is to protect US-based investors from investing in companies with dodgy accounting practices — a la Luckin Coffee — it is more likely to impact existing investment trends by accelerating them, including secondary listings in Hong Kong.

As much as the broader tensions between the US and China present a real threat to both countries and their respective economies, the threat to delist Chinese companies from US exchanges is unlikely to impact the day-to-day running of these companies and — thankfully for the international brands who have become increasingly reliant on Chinese consumers for sales in a post-pandemic world — little impact on their appetite for American brands.

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