In a Thursday call, Alibaba Group attempted to reassure its investors that its decision to overhaul its organization and split into six units was aimed at making the company more “nimble” with market changes.
“We believe this will allow all of our businesses to become more agile, enhance their business decision-making, and respond faster to market changes,” CEO Daniel Zhang told investors.
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China’s regulatory crackdown on its technology firms, which has been taking place since 2020, resulted in a roughly $1 trillion wipeout of stocks of the country’s biggest companies, but Alibaba’s reorganization is seen as a sign of Beijing softening that stance, analysts told CNBC.
Zhang told investors on the Thursday call, “We’ve been stressing the idea of agility and being a more nimble and agile organization for several years now,” adding that Alibaba’s board will continue to have control over its entities.
“Alibaba Group will be in the nature of a holding company that is the controlling shareholder of the business group companies,” Zhang said. “As the controlling shareholder, the Alibaba board will continue to have control over the boards of these new companies.”
Shares of Alibaba listed in Hong Kong rose nearly 3% at the market open on Thursday roughly an hour after the call concluded. The stock on Wednesday closed over 12% and saw its best day since Nov. 11, 2022.
Chief financial officer Toby Xu added that Alibaba will ultimately determine which entities to maintain control over.
“We will continue to evaluate the strategic importance of these companies to Alibaba and on that basis, we will decide whether or not to continue to retain control,” Xu said. “That will be an important strategic consideration.”
Zhang added that the group has been working on Alibaba’s “transformation” for years, and that the separation of the entities will eventually lead to a shift in the relationship with its businesses.
“One of the largest changes will be that each of the segments within the company today will each become an independently operating company — therefore the relationship between the group and business group company will change,” Zhang said.
When asked about the timeline of Alibaba’s restructuring, Zhang said the “strategy and business planning for the business groups will commence immediately.”
‘Litmus test’
CFO Tony Xu said separating Alibaba’s entities would allow it to determine the performance of each business.
“We believe that the market is the best litmus test so each business group company can pursue independent fundraising and IPOs as and when they are ready after going public,” he said.
CreditSights in a Wednesday note said the Chinese government could implement similar strategies in other large technology companies.
“We think that Alibaba’s new organizational structure could be used by Chinese regulators as a template for other Chinese Big Tech firms,” analysts Zerlina Zeng, Stephanie Sim and Hanna Ang Siew Min wrote.
“We expect the Chinese Big Techs to significantly scale back acquisitions due to ongoing antitrust scrutiny, helping them to preserve cash for debt servicing,” they wrote.
‘Credit positive’
CreditSights maintained its “outperform” recommendation on Alibaba after it announced its overhaul plans, adding that the plans won’t have much of an impact on the company’s credit.
“We see a limited near-term impact of the reorganization on Alibaba’s debt metrics given all six units remain consolidated and controlled by the group,” CreditSights said in a note.
It expects the move will have a net credit-positive effect on the wider group.
“We think that the corporate reorganization reduces the risk of cash burn for Alibaba to fund unprofitable business lines,” the note added.
“We expect the potential separate equity fund-raising (including IPOs) of these business units to help ease the cash burn for Alibaba, a credit positive in our view,” it said.
Source: CNBC