Alibaba getting thieved? - INDEX INSIGHTS
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
INDEX INSIGHTS
Alibaba getting thieved?
By: Mat Lystra, Senior Research Analyst JUNE 2014
Key benefits:
The recently announced IPO of Alibaba Group Holding Ltd. may make the company one of
the 100 largest public companies in the world.
Due to its complex corporate structure, Alibaba is likely to be left out of some popular global
benchmarks. Other companies like Alibaba are also being left out of global benchmarks, and
this creates a lost opportunity gap the size of Mexico.
The Russell Indexes home country assignment methodology retains these companies as
important pieces of the global equity opportunity set.
China’s Alibaba Group Holding Ltd. is the world’s largest e-commerce company. According to
Economist magazine, it sells more “stuff” than eBay and Amazon combined 1. The company
recently announced plans for an initial public offering that values Alibaba at an estimated $110
billion, although some have said its value may be as high as $200 billion2. The $110 billion
valuation would make Alibaba the 64th-largest company in the world; $200 billion, the 20th
largest, behind such well-known companies as IBM and Nestlé3. With Alibaba’s 80% market
share in China and plans for more growth and diversification, global equity investors might
naturally be excited see the company added to global equity benchmarks.
Not so fast. You see, while Alibaba is generally regarded as a Chinese company, it is
incorporated in the Cayman Islands, headquartered in Hong Kong, and to be listed on the New
York Stock Exchange (NYSE). This complex corporate structure means that Alibaba likely
won’t be included in many widely used equity indexes that sidestep companies with such
complex corporate structures.4
1
From bazaar to bonanza. (2014, May 10). The Economist. Retrieved May 10, 2014, from:
http://www.economist.com/news/business/21601869-chinas-e-commerce-giant-has-just-revealed-details-its-long-
awaited-flotation-america-it
2
Oreskovic, A., & Seetharaman, D. (2014, May 7). Alibaba files for what may be biggest tech IPO. Reuters. Retrieved
May 19, 2014, from http://www.reuters.com/article/2014/05/07/us-alibaba-ipo-idUSBREA450VV20140507
3
Based on Russell Indexes unadjusted market capitalizations as of April 28, 2014.
4
The non-Russell index holdings projections made in this paper are based on a survey of home country assignment
treatment across 2014 global index methodologies published by FTSE, NASDAQ, MSCI, and S&P Dow Jones, as
applied to the membership of the Russell Global Index at Reconstitution 2013. No direct index holdings comparisons
could be conducted.
Russell Investments // Alibaba getting thieved?Non-Russell methodology leaves gaps in coverage For observers learning this, perhaps a few obvious what, why and how questions will jump to mind. For starters: What would cause the world’s largest virtual marketplace to be excluded from some global and emerging markets benchmarks? The answer is simple, but the reason complex: index methodology. Index methodology governs, or should govern, which stocks are ultimately eligible or ineligible for index membership. But the rules around index construction and how those index rules are applied can differ, sometimes significantly, among global index providers. In this case, index methodology is responsible for evaluating Alibaba and assigning it a home country. Russell Indexes uses an approach started in 2010 that looks at three primary home country indicators (HCIs): place of incorporation, place of headquarters and place of primary trading. If all three of these HCIs point to the same country, then our task is done, and the company is assigned a home country. However, in an increasingly globalized market, there are plenty of companies for which our HCI test does not yield a conclusive answer – more on that shortly. Russell’s rules-based approach can accommodate companies with complex corporate structures Other index providers use a variety of indicators to gauge where a company belongs, but none use an objective and rules-based process such as Russell Indexes follows.5 One might expect that index providers unencumbered by specific rules would have the flexibility to always get the “right” answer. But, perhaps surprisingly, that’s not the case when it comes to a company like Alibaba. When a company maintains a complex corporate structure, listing its stock in one region of the world but doing most of its business in another, some non-Russell index methodologies can’t make sense of where the company should belong; they short-circuit, like robots caught in the rain, and exclude companies with greater degrees of ambiguity from their indexes. When Russell gets an inconclusive result, we then go a step further, analyzing the geographic segmentation of a company’s assets or revenues. If we are able to tie a majority of a company’s assets to (let’s say, for example) China, then China becomes the home country.6 5 Based on a survey of home country assignment treatment across 2014 global index methodologies published by FTSE, NASDAQ, MSCI, and S&P Dow Jones. 6 For a detailed explanation of Russell Indexes’ company-to-country assignment process please refer to the Russell Global indexes Construction and Methodology at: http://www.russell.com/documents/indexes/construction-methodology- us-indexes.pdf Russell Investments // Alibaba getting thieved? /p2
Figure 1: Russell Indexes company-to-country determination process
If a majority of the
If yes, country assignment
Do the three HCIs all company's assets or
is complete; if no, move to
point to the same revenues can be tied to
the assets or revenues
country? one of the HCIs, country
test.
assignment is complete.
If results are still
Company-to-country
inconclusive, default to
assignment process is
country where
complete.
headquarters is located.
Sources: Russell Indexes
Under a rules-based system like Russell’s, which is applied to over 10,000 stocks worldwide,
we understandably end up with a small group of companies each year that, even after our
assets or revenues test, do not give us a clear answer. In these instances, our ultimate default
is to the country in which the company’s headquarters is located. While those outcomes can be
debated, Russell’s approach provides a clearly articulated path that leads to a specific
classification, and companies like Alibaba are not arbitrarily dropped from the Russell Global
Indexes (RGI).
Lost opportunities from around the world add up to another country the size
of Mexico
You might ask yourself: “But does this really matter? We’re talking about one company, right?”
Wrong. Russell estimates that more than 180 companies worldwide have similar corporate
structures. These companies are held in the RGI but may be left out of other popular
benchmarks as a result of following their stated processes and methodologies. That’s a
combined market capitalization of approximately $553 billion. To put that number into context:
It’s roughly as large as the market capitalization of Mexico, one of the larger countries in the
Russell Emerging Markets Index.
Other large companies from China, such as Baidu – the so-called “Google of China” – are
being left out of standard benchmark offerings.7 As are other prominent companies, such as
Italian luxury-goods maker Prada – which listed on the Hong Kong Stock Exchange (HKSE) in
order to raise brand awareness in the region – and United Company Rusal, one of the world’s
largest aluminum producers, which is headquartered in Russia but listed on the HKSE in order
to escape the operational and geopolitical risks of its home country, which Russell Indexes
designates as Russia. Also in the news recently: U.S. pharmaceutical giant Pfizer pursued a
takeover of the UK’s AstraZeneca that would have seen Pfizer headquarters and incorporation
shift to Britain – although the combined company’s listing would likely have remained in the
U.S.8
7
Of the four non-Russell methodologies surveyed only the S&P Dow Jones methodology appears to allow for the
inclusion of Chinese companies with corporate structures like Baidu.
8
“A matter of trust”. The Economist. Accessed May 17, 2014 at: http://www.economist.com/news/britain/21602234-
british-politicians-are-understating-their-nations-appeal-drugs-firms-matter-trust
Russell Investments // Alibaba getting thieved? /p3Figure 2 shows, by Russell Indexes home country designation, the market cap associated with
companies most likely to be left out of standard non-Russell benchmarks when their countries
of incorporation and primary listing differ. Figure 2 also provides names of the 10 largest (by
market cap) companies currently included in the RGI that have complex corporate structures.
Figure 2: Scope of current complex corporate structure companies in the RGI by resulting
home country, and the 10 largest such companies
Market cap
Market cap (billions
Country (billions USD) Top 10 companies USD)
China 200.67 Jardine Strategic Holdings Ltd 44.93
Hong Kong 127.44 Jardine Matheson Holdings Ltd 44.51
Switzerland 34.42 Baidu Inc - Spon Adr 33.83
Netherlands 28.10 Prada S.P.A. 24.67
Russia 25.06 Dairy Farm International Holdings Ltd 17.31
Italy 24.67 Hong Kong Land Holdings Ltd 16.35
United Kingdom 17.69 Wolseley PLC 14.04
Luxembourg 17.05 Thai Beverage PCL 13.01
Israel 16.96 Yandex NV-A 10.80
Thailand 13.01 Check Point Software Technologies Ltd 9.85
Ireland 10.13 Total 229.3
Other 37.99
Total 553.20
Sources: Russell Indexes as of Reconstitution 2013.
Conclusion
As large public companies (particularly, large multinationals) increasingly make strategic
decisions about where to incorporate, base their headquarters and list their stock – often on
opposite sides of the world – Russell Indexes has a responsive methodology that includes,
rather than excludes, these investment opportunities. As investors decide among global
benchmarks, it’s important that they understand how companies with complex corporate
structures are addressed by indexes’ underlying methodologies – or risk missing out on big
opportunities like Alibaba.
Russell Investments // Alibaba getting thieved? /p4About Russell Indexes Russell’s indexes business, which began in 1984, accurately measures U.S. market segments and tracks investment manager behavior for Russell’s investment management and consulting businesses. Today, our series of U.S. and global equity indexes reflect distinct investment universes – asset class, geographic region, capitalization and style – with no gaps or overlaps. Russell Indexes offers more than three dozen product families and calculates more than 700,000 benchmarks daily, covering 98% of the investable market globally, 80 countries and more than 10,000 securities. Approximately $5.2 trillion in assets are benchmarked to the Russell Indexes. For more information about Russell Indexes, call us or visit www.russell.com/indexes. Americas: +1-877-503-6437; APAC: +65-6880-5003; EMEA: +44-0-20-7024-6600 Disclosures Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group. Russell Investments is the owner of the trademarks, service marks and copyrights related to its respective indexes. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty. This is not an offer, solicitation or recommendation to purchase any security or the services of any organization. Copyright © Russell Investments 2015. All rights reserved. First use: June 2014. Revised: February 2015. CORP-9555-06-2016E Russell Investments // Alibaba getting thieved? /p5
You can also read
