Key points
- Hong Kong lets Alibaba proceed with T-Head spin-off
- Alibaba shareholders won't get guaranteed access to T-Head shares
- What T-Head's Hong Kong IPO could raise
Alibaba (BABA) has received permission from the Hong Kong Stock Exchange to proceed with a proposed spin-off of T-Head, its data-center chip unit, the company said on November 10. T-Head designs the Zhenwu V900 AI processor. Alibaba's U.S.-listed shares were down about 1.1% at $104.23 as of 10:19 a.m. ET.
The exchange also waived a rule that normally gives a parent company's shareholders an assured entitlement to shares in a spun-off business. Alibaba owns all of T-Head and expects it to remain a subsidiary after the listing.
T-Head submitted a confidential listing application on September 11, which Alibaba disclosed on November 10. The listing still needs approval from the exchange's listing committee and a completed filing with China's securities regulator.
T-Head plans to sell H shares, a class of shares issued by mainland Chinese companies that list in Hong Kong, on the exchange's Main Board. The offering would combine a public offering in Hong Kong with a placement to institutional and professional investors.
Alibaba shareholders aren't guaranteed T-Head shares
Hong Kong's spin-off rules, set out in a section of the listing rules called Practice Note 15, require a parent company to give its existing shareholders an "assured entitlement" to shares in the spun-off business. That takes one of two forms: a distribution of existing shares, or priority in the offering.
Alibaba applied for a waiver from that requirement, and the exchange granted it. Providing either form of entitlement would require T-Head to conduct a public offering in the United States and file a registration statement with the Securities and Exchange Commission, according to the filing. Alibaba called that unduly burdensome.
The company also said Chinese rules that apply to T-Head, including a lock-up on shares issued before the offering, would make a direct distribution of shares impracticable. And it said asking shareholders to vote on the waiver would be unduly burdensome and not practically necessary.
Alibaba described the spin-off as "insignificant to the Company and its Shareholders with reference to the Company's total assets, revenue and net income." It expects the highest of the exchange's size tests, known as percentage ratios, to come in below 5%. At that level, the spin-off wouldn't count as a discloseable transaction under the listing rules.
For Alibaba shareholders, the waiver means no assured entitlement to T-Head shares. They will retain indirect exposure through Alibaba, which expects to keep T-Head as a subsidiary. If the listing goes ahead, shareholders who want to own T-Head directly would have to buy its shares. Not everyone would be eligible to take part in the offering: the public tranche is for the public in Hong Kong, and the placement is for institutional and professional investors.
T-Head's offering size isn't set
Alibaba said it hasn't finalized the size or structure of the offering, or how much its stake in T-Head will fall. The International Financing Review has reported that the share sale could raise $2 billion to $3 billion. Alibaba hasn't confirmed that figure.
Alibaba and T-Head still have to make final decisions. "There is no assurance that the Proposed Spin-off will take place or as to when it may take place," Alibaba said.
Alibaba expects the spin-off to leave its dual primary listing in Hong Kong and New York unchanged.
T-Head joins other Chinese chip units heading to Hong Kong
Alibaba unveiled T-Head's Zhenwu V900 on September 22 and called it the most powerful AI processor designed in China. That was 11 days after T-Head's confidential filing.
Baidu (BIDU) said its chip unit Kunlunxin filed confidentially for a Hong Kong listing on January 1, and Baidu also expects Kunlunxin to remain a subsidiary. GPU designer MetaX, which already trades in Shanghai, has filed confidentially for a Hong Kong listing, the South China Morning Post reported in July. Our AI IPO tracker logs each of these listings with dated, sourced events.
