The announcement of big revamping plans by Alibaba Group has been interpreted as a hint that Beijing’s regulatory crackdown on corporations is coming to an end, driving its shares higher and bolstering investor confidence in the future of Chinese digital giants.

The conglomerate, which was founded by Jack Ma, announced on Tuesday that it would split into six companies and consider raising money or going public for the majority of them, marking the greatest restructuring in its 24-year existence.

After a surge in its American-listed shares overnight, its Hong Kong-listed shares closed up 12%, giving the group a market worth of roughly $255 billion. Their profits drove up the Hang Seng Index and other local markets.

Many investors have seen a significant cloud looming over China’s private sector as a result of a wave of regulatory blitzes that have hit its internet, private education, and property sectors hard over the last couple of years.

“We think this is likely a sign that we are moving closer to the end of the regulatory scrutiny…and we would expect that the company moves back into the good graces of the regulators and policy makers after this,” said Jon Withaar, head of Asia special situations at Pictet Asset Management.

Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics Group, Global Digital Commerce Group, and Digital Media and Entertainment Group are the six divisions that Alibaba announced it would divide into.

Two sources acquainted with the company’s thinking claim that the group has long been considering the separation of specific business groups.

“There was a consensus within and outside Alibaba that the stock was trading at a major discount to the inherent value of the businesses,” said one of the people, adding that the company had become “too bloated”.

The individual claimed that Taobao and Tmall, Alibaba’s primary revenue generators, will stay with the current listed organization while there would be five initial public offerings from the units.

According to the person and a different source acquainted with the capital market activities of Chinese IT businesses, Hong Kong is the most likely location for these IPOs.

Due to the fact that the material was confidential, the sources declined to be named. Alibaba did not offer any commentary.

In order to become a holding company, Alibaba would reorganize. In addition to continuing to serve as group CEO, Daniel Zhang will also serve as the unit’s leader. The boards and CEOs for the other divisions will be independent.

That wouldn’t be the first time that Alibaba had its business divisions spun out. The company split out its rapidly expanding payments division Alipay in 2011, and Ant Group, a key player in fintech, later developed from it.

Alibaba’s restructuring was referred to by Bank of America analysts as “an important experiment” that would determine whether or not China’s largest corporations could comply with Beijing’s desire to “give to society.”

According to Morgan Stanley, the announcement will increase support for platform businesses and the private sector.

“We believe such efforts will help stimulate efficiency and creativity by restoring/improving the business environment,” analyst Laura Wang said in a research note.

She went on to say that a recent statement made by China’s internet regulator about the protection of business owners from libel also hinted at a potential end to regulatory pressure on the industry.

Based on their valuation model for each business unit, Morgan Stanley values the entire firm at up to $530 billion, or $200 per share.

Alibaba came under criticism during the regulatory crackdown for its monopolistic activities in e-commerce, as well as for its cloud business’s data security procedures and its delivery units’ labor policies.

Ma departed China in late 2021 and was spotted traveling to a number of foreign nations, which many observers saw as a symbol of the regulatory cold.

Only one day before to Alibaba’s announcement of the restructuring, he was sighted on Monday in Hangzhou, the city where the firm is based.

In addition to permitting greater values, the restructuring, according to Brian Tycangco, who monitors China’s tech industry for Stansberry Research, better safeguards individual divisions from any future government intervention.

“Any new regulations will likely not affect the whole company now – just the particular division that that regulation covers,” he said.

According to CMC Markets analyst Tina Teng, the separation may open the way for similar reorganization at other Chinese tech behemoths.

Tencent Holdings (0700.HK), in addition to its primary gaming and social media operations, also has finance and cloud divisions. Alibaba’s longtime e-commerce rival JD.com (9618.HK) has created a number of spin-offs in recent years, including JD Logistics (2618.HK) and its cloud and AI-focused subsidiary JD Digits.

Tencent and JD.com shares initially rose, but eventually cut gains to end slightly higher by less than 2%. Alibaba’s 13.7% owner SoftBank Group Corp (9984.T) saw a 6.2% increase in Japan.

(Adapted from Reuters.com)

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