Alibaba Group Holding Ltd.’s potential plan to raise $20 billion in Hong Kong is huge.

That’s not just because $20 billion is a lot of money. After going public in New York, the Chinese e-commerce giant is considering a secondary listing in Hong Kong, Bloomberg News reported on Monday – a coup for the city that’s still sore from missing out on the biggest IPO in history.   

It’s also a major boost to Beijing amid the trade spat. Having its pride and joy trade on a foreign bourse isn’t a good look these days.

Investors will rightly start asking why China’s most-valuable company would want to do this. After all, it has plenty of money. 

Politics may be the most obvious consideration. By coming closer to home, Alibaba shows Beijing where its loyalties lie; and authorities can revel in what they see as an example of China’s growing power. You can just imagine the state-media editorials crowing about this evidence of the U.S.’s decline.

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Beijing isn’t the only consideration. Trading in Hong Kong would provide a buffer if its New York-listed shares fell victim to global anxiety about U.S.-China tensions. Hong Kong investors – and by virtue of Stock Connect, those on the mainland – are likely to remain more positive toward Alibaba, whose products they use every day. That could put a floor under the company’s American depositary receipts: Given the Hong Kong dollar’s peg with the greenback, any major deviation in share price would present arbitrage opportunities that hedge funds and day traders would quickly shut down.

All this begs the question why Alibaba wouldn’t list directly on the mainland, given China is setting up a technology board aimed squarely at attracting tech stars. Quite simply, the A-share market wouldn’t be able to digest it. An IPO this size would be almost double the largest-ever domestic listing: the $10 billion Shanghai leg of Agricultural Bank of China Ltd.’s 2010 listing. 

And the listing is more than just hanging out a shingle. While it wouldn’t match the scale of shares trading in New York, a Hong Kong IPO would mean the amount of Alibaba ownership circulating in the city would be significant.(1)  

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Even on the corporate-finance front, there’s a lot Alibaba could do with an extra $20 billion. At $28 billion, it currently has the sixth-largest holdings of cash and equivalents in the world, if you exclude financial companies. That figure is a little misleading, though. If you account for current liabilities, then factor back in its free cash flow, Alibaba isn’t quite as rich as it seems:

This is more cash than Alibaba is likely to self-generate in a year – even though it appears to be sitting on a lot of money – and would allow it to make some important purchases.

Among the most obvious would be to start buying back SoftBank Group Corp.’s stake in Alibaba, which is valued at around $120 billion. This would be a favor to Masayoshi Son, since SoftBank is trading at a massive discount to book value and has a ton of debt to service. Such a deal might include Alibaba becoming a cornerstone investor in Son’s forthcoming Softbank Vision Fund II.

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Earlier this month Son confirmed reports that he’s considering starting a sequel to his $100 billion Vision Fund, which would be founded by SoftBank and likely invite external investors to join later. Such a project would need more capital at Son’s disposal, and Alibaba would make a handy partner.  

And there are plenty of unicorns to chase, notably in Southeast Asia. Rival Tencent Holdings Ltd. is never far away from the hunt. Back home, food-delivery provider Meituan Dianping is giving Alibaba’s ele.me a run for its money – the war for takeout customers is one neither company would willingly surrender.

So with plenty of good reasons for a Hong Kong IPO, it would be almost ridiculous for Alibaba not to do it.

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(Corrects the valuation of SoftBank’s stake in Alibaba in the eleventh paragraph. Updates with details about SoftBank’s Vision Fund II. )

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(1) Assuming we ignore the fact that even with U.S. ADRs, it’s already Chinese owned via a Variable Interest Entity structure

To contact the authors of this story: Tim Culpan at tculpan1@bloomberg.netNisha Gopalan at ngopalan3@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

©2019 Bloomberg L.P.

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