Alibaba’s Hong Kong shares fall 10% after calling off cloud spinoff citing US chip sanctions

shares of alibaba It fell nearly 10% in early Hong Kong trading on Friday, a day after the Chinese e-commerce giant said it would not proceed with a full spinoff of its cloud group due to US chip export restrictions.

Alibaba’s US-listed shares closed more than 9% lower on Thursday after falling more than 10% since the beginning of the year.

Alibaba’s Hong Kong-listed shares have fallen about 15% year-to-date, underperforming the broader performance. Hang Seng Index A decline of 11.2% in the same period.

In its earnings release Thursday, Alibaba said it would no longer proceed with the spinoff of its Cloud Intelligence Group — Alibaba’s cloud computing arm that competes Amazon Web Services and Microsoft Blue. Alibaba had planned to list the division publicly.

Alibaba said U.S. chip export restrictions have made it harder for Chinese companies to get critical chip supplies from U.S. companies. America banned its sale NVIDIAAdvanced artificial intelligence-focused H800 and A800 chips in October.

On Thursday, Alibaba said the sanctions “have created uncertainties for Cloud Intelligence Group’s prospects.”

“We believe that a full spin-off of Cloud Intelligence Group may not achieve the desired impact of shareholder value enhancement,” the company said, adding that instead it would seek a permanent deal for the entity “in volatile circumstances.” Will focus on developing development models.

Ahead of Thursday’s earnings announcement, Alibaba announced in a regulatory filing that founder Jack Ma’s family trust plans to sell its stake in the business, with 10 million shares to be sold for $870.7 million in cash.

The decision to scale back its cloud unit spinout marks a hitch in Alibaba’s plan to reorganize into six individual business units — one of the most radical changes in the company’s history.

Alibaba previously announced it would put plans to list its Freshippo retail chain for groceries “as we evaluate market conditions and other factors.”

The company still intends to list its Cainiao Smart Logistics division in Hong Kong.

Thursday’s results are Alibaba’s first set of earnings since veteran executive Eddie Wu replaced former boss Daniel Zhang as CEO. Alibaba said in June that as part of a broader management shuffle, the company’s co-founder, Joe Tsai, would also take over as chairman.

Alibaba reported net income attributable to shareholders of 27.7 billion yuan ($3.8 billion) for the September quarter, less than the 29.7 billion yuan expected by analysts.

However, revenue met expectations and stood at 224.79 billion yuan, up 9% year on year.

Chairman Tsai tried to allay investor concerns about obstacles to Alibaba’s restructuring on an earnings call Thursday, saying the company has enough cash on its balance sheet to support its operating business. .

“We ended the quarter with $63 billion of net cash and over the last 12 months we generated $27 billion of free cash flow,” Tsai said. “Alibaba has never been in a better financial position to invest in the growth of our businesses.”

He said Alibaba wants to prove to investors that it can grow its cloud business as part of Alibaba Group rather than focusing on “financial engineering.”

“In an AI-driven world, developing a full-fledged business based on a highly networked and high-end infrastructure requires investment,” Tsai said. “We would like to show investors through our operation of the cloud business rather than shut it down.”

Alibaba CEO Wu said the company would begin a strategic review of its existing businesses, distinguishing between “core” and “non-core” businesses.

The company will give different levels of priority to different businesses “depending on their market size, business model and product competitiveness.”

Core businesses are where Alibaba will place a long-term focus, conducting research and development and developing its products and services. Noncore businesses are ones where Alibaba wants to realize value by making them profitable, “or through other means of capitalization,” Wu said.

The company also announced that it will issue its first annual cash dividend in 2023. Companies use dividends to share a portion of their profits with shareholders.

In the release, Alibaba said its board of directors had approved an annual $0.125 per ordinary share or $1 per American depositary share cash dividend for the fiscal year.

The total amount of the dividend will be approximately $2.5 billion. Alibaba will pay the amount to investors at the close of business on December 21, 2023, Hong Kong time and New York time, respectively.

“Going forward, we will continue to review and determine the dividend amount on an annual basis based on factors such as business fundamentals, capital requirements,” Alibaba said in its earnings release.

On an earnings call Thursday, Wu said that Cainiao, one of the remaining divisions still trying to land an IPO, has seen “relatively rapid growth this quarter” and that the business is working on building out its global smart logistics network. Concentrating.

He outlined a three-year plan for the entity, which includes increasing investment in technology, increasing cross-border e-commerce and growing its international business.

Alibaba’s results are often seen as a sign of the health of the Chinese consumer.

Economists were expecting China’s economy to bounce back after emerging from COVID-19 lockdowns last year, but the rebound has proven more fragile as an asset crisis and other structural challenges pose risks to the country’s recovery.

On China, Tsai said that, despite volatility in global markets, “we are entering a phase of a more stable operating environment in China.”

However, Alibaba said it recorded good year-on-year growth in users of its Taobao and Tmall domestic online shopping sites. Both sites saw positive order growth year-on-year during the annual 11:11 Chinese shopping holiday, the company said.

Returning to the future direction of Alibaba’s strategy, the Chinese tech giant also said on Thursday that it plans to invest in and develop several strategic-level innovative businesses.

These include 1688, Alibaba’s online purchasing service for Chinese manufacturers, Jianyu, its second-hand goods site, DingTalk, a workplace messaging app, and Quark, a search product for young people.

Alibaba said AI will be central to its strategic direction going forward, with plans to invest in more customized product experiences for its users on these platforms.

The company is competing with big competitors like China in that region Tencent And BaiduAlso like American technology giant metaMicrosoft, Google and OpenAI.

Correction: This story has been updated to accurately reflect that Alibaba’s US-listed stock has fallen 10% year-to-date. An earlier version had misstated that figure.