Alibaba seeks a Hong Kong listing for T-Head, the unit behind its Zhenwu AI chips

Alibaba Group (HKEX: 9988; NYSE: BABA) said on Tuesday, November 10, that the Hong Kong stock exchange has allowed it to proceed with a spin-off and separate listing of T-Head, its data center chip unit, according to an announcement filed with the SEC. T-Head had applied confidentially on September 11.

The chip unit Alibaba wants priced on its own

T-Head (Shanghai) Technology is a wholly owned subsidiary that Alibaba describes as "a leading provider of full-stack data center chips which enable system-level compute solutions in China." Its portfolio spans GPU, CPU, storage and networking chips, according to Alibaba's June-quarter results. Its Zhenwu AI processors, including the Zhenwu M890, are used through Alibaba Cloud by more than 650 external customers across over 20 industries, among them autonomous driving, internet and financial services companies, Alibaba said in that release.

Alibaba does not report T-Head's revenue separately. In the June quarter it merged T-Head with its cloud business into a segment called AI Cloud and Compute Services. Chief Executive Eddie Wu said in that release that Alibaba Cloud's "external revenue growth accelerated to 45%."

Alibaba said the listing should let investors "better assess and value" the rest of the group and appraise T-Head "separately and distinctly." It added that a listing would let T-Head raise equity and debt on its own and improve its access to bank credit.

No guaranteed shares for Alibaba's own investors

Hong Kong's listing rules normally require a parent to give its shareholders an assured entitlement to shares in a spun-off company. Alibaba said the exchange granted it a waiver from that requirement. Among its reasons, Alibaba said an entitlement would require T-Head to register a public offering with the SEC in the US, which it called "unduly burdensome," and that the spin-off is "insignificant to the Company and its Shareholders with reference to the Company's total assets, revenue and net income."

The plan is a global offering of T-Head's H shares: a public offering in Hong Kong and a placing with institutional and professional investors. T-Head is expected to remain a subsidiary after the listing. The size and structure of the offering, and how far Alibaba's stake would fall, "have not yet been finalized," the company said.

Approvals still ahead, and a capital-spending backdrop

The listing still needs approval from the exchange's Listing Committee and a completed filing with the China Securities Regulatory Commission, and Alibaba said there is "no assurance" that the spin-off will take place or when.

The plan comes as Alibaba spends heavily on computing capacity. Its capital expenditure was RMB67,678 million ($9,975 million) in the June quarter, which it attributed in part to "higher pricing of a broad range of chip components," and its free cash flow was an outflow of RMB44,670 million ($6,584 million), according to the results release.

Alibaba's Hong Kong-listed shares traded 1% lower on Wednesday morning and were down about 29% for the year, CNBC reported. Alibaba's board will meet on November 18 to discuss results for the quarter to September 30, which will be announced on November 19, according to a separate filing.

A listing that prices the chips, not the customers

We think the spin-off is a capital-allocation move first: a separate listing gives T-Head its own access to equity, debt and bank credit at a time when Alibaba's own spending on computing capacity is far ahead of the cash its businesses generate. Our reading is that the chip unit's value rests on Alibaba Cloud, because the 650-plus outside customers reach the Zhenwu chips through Alibaba's own cloud, and the announcement gives no revenue figure for T-Head itself.

The opportunity is a market price for one of China's few in-house AI chip businesses, and a source of funding that does not draw on Alibaba's balance sheet. The threat is that public investors are asked to value a unit whose revenue, margins and dependence on its parent are not yet disclosed, while existing Alibaba shareholders get no assured allocation. We would watch the prospectus for how much of T-Head's revenue comes from Alibaba, and we would change this view if it shows a large and growing base of outside buyers.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.