Alibaba Stock Rises Even as China Imposes $1 Billion Fine on Ant Financial

Alibaba stock (NYSE: BABA) is trading higher in early US price action today even as China imposed a nearly $1 billion fine on its affiliate Ant Financial.

The People’s Bank of China imposed a fine of 7.12 billion yuan which is around $985 million on Ant Financial for multiple regulatory violations including those related to consumer protection, corporate governance, and anti-money laundering requirements.

Alibaba holds a third of the stake in Ant Financial and Jack Ma is the co-founder of both companies.

Ant was set to IPO in 2020

Ant was looking to go public in 2020 and raise $37 billion from the mammoth IPO which would have made it the biggest listing ever – surpassing the record set by Alibaba. The IPO received bids worth $3 trillion and Ant was set to have a market cap in excess of JPMorgan Chase, the largest US bank.

However, Chinese regulators blocked the IPO at the last moment. Ma made comments critical of Chinese regulators ahead of the IPO which apparently did not go well with the powers that be in China.

Not only did China block the IPO of Ant but Ma wasn’t seen in public for months. Chinese regulators also intensified the scrutiny of Alibaba and the company eventually paid a record fine of $2.8 billion in 2021 to settle the antitrust case.

Alibaba stock too had risen after it agreed to pay a record fine as markets saw it as a sign that the tech giant has finally bought peace with the powerful regulators.

Alibaba stock rises even as China imposes a massive fine on Ant

The rise in Alibaba stock today can also be attributed to a sense of relief among investors as the fine signals that Ant has now finally gotten over the regulatory probe.

There were signs previously also that Chinese regulators and Ant are moving towards reconciliation. In January, The China Banking and Insurance Regulatory Commission allowed Ant Financial to expand its consumer finance business and more than double its registered capital of that business unit.

As part of the agreement, while Ant still held the majority stake in the unit, an entity backed by the Hangzhou government and Sunny Optical Technology also took a stake in the business.

Ant has been making all the right noises and has amicably agreed to all the diktats of regulators.

After the nearly $1 billion fine, Ant said, that it would “comply with the terms of the penalty in all earnestness and sincerity and continue to further enhance our compliance governance.”

Ant might not IPO anytime soon

Meanwhile, while the fine helps clear the path to an eventual IPO of Ant Financial – the fintech giant might not list anytime soon.

Chinese rules mandate that if there is a change in management control companies have to wait for at least three years to list on the country’s domestic A-share market.

The wait time stands at two years for Shanghai’s STAR market while it is only one year for listing in Hong Kong.

Since the management changes at Ant took place earlier this year, the earliest it can list is in 2024 in Hong Kong.

Alibaba has also reorganized its business

Notably, in March Alibaba reorganized its business into six business units which would eventually pave the path for their individual listings.

The stock soared after the announcement but has since pared gains amid concerns over slowing growth in China.

Notably, when Alibaba announced the business reorganization in March, Zhang also took over as the CEO of Cloud Intelligence Group along with his position as the CEO and chairman of Alibaba Holdings.

The move highlighted the importance of the Cloud segment for BABA – which also happens to house its AI business.

Alibaba is progressing with its AI efforts and recently unveiled its ChatGPT-like generative AI service for public testing.

Zhang to step down as BABA CEO

Last month, Alibaba said that Daniel Zhang, who is the current CEO and chairman of Alibaba Holdings – the parent company of the conglomerate – would step down in September.

The company has bifurcated the roles and Joseph C. Tsai, who’s currently Executive Vice Chairman of Alibaba Holdings would become the chairman while Eddie Yongming Wu who’s currently the Chairman of Taobao and Tmall Group would become the CEO.

Meanwhile, Zhang would remain the CEO of the cloud business. In his prepared remarks, Zhang said, “Looking ahead, I am committed to strengthening Alibaba Cloud Intelligence Group’s market leadership by making cloud computing and artificial intelligence more accessible for businesses of all sizes and industries as they continue their digital transformation.”

Alibaba is looking to unlock shareholder value

Last year, BABA stock hit its all-time low amid China’s controversial zero-COVID policy and the rising US-China tensions.

Notably, Alibaba’s growth has stalled and in the March quarter, its revenues rose only 2% YoY. The company has also been losing market share in China.

Many US fund managers now find Chinese stocks “uninvestable” after the tech crackdown. Cathie Wood of ARK Invest is among those who sold off Chinese stocks in 2021 amid the tech crackdown.

When Alibaba announced the business reorganization, it said that the move would help “unlock value” for stockholders.

An eventual IPO of Ant would also help Alibaba unlock value even as the current valuation of the fintech company is nowhere near its 2020 highs.