Alibaba Extends December Drop as Lockup Expires: China Overnight

By Belinda Cao

Alibaba Group Holding Ltd. (BABA), China’s biggest e-commerce company, fell in New York, extending the first monthly decline since its September debut as an agreement preventing early investors from selling their shares expired.
Alibaba, which raised $25 billion Sept. 18 in the largest initial public offering in history, slipped 3 percent to $105.52. The American depositary receipts are down 5.5 percent this month, paring their post-IPO return to 55 percent. NQ Mobile Inc. (NQ) surged 35 percent, the most on record, after saying it plans to buy back $80 million in shares. The Bloomberg China-US Equity Index dropped 0.5 percent to 108.63.
An accord preventing the sale of 8.1 million Alibaba ADRs held by insiders expired Dec. 19. More shares are expected to enter the market next year, with the lockup of 1.6 billion shares set to end in September. Chinese stocks slumped as U.S. equity indexes advanced to
records on Tuesday after faster-than-forecast growth in gross domestic product boosted confidence in the world’s largest economy.
“Some Alibaba shares are becoming tradable this week after their lockup agreement expired, this should be having an impact on its stock price,” Jun Zhang, head of China equity research at Rosenblatt Securities Inc., said by phone from Beijing. “Investors who bought shares at $68 at Alibaba’s IPO may want to sell for profit after the trading restriction is removed.”
At the time of its IPO, Alibaba locked up about 80 percent of its stock, according to the prospectus. In March, 429 million shares become free to trade and in September another 1.6 billion shares, including those held by Yahoo! Inc. Lockup agreements are intended to help provide price stability in the aftermath of a deal; once they are lifted, the flood of new stock can put pressure on the price.

Market ‘Rotation’

The Dow Jones Industrial Average rose above 18,000 for the first time. The gauge has gained 175 percent during the five-year bull market that began in March 2009, propelled by better-than-estimated corporate results and three rounds of Fed bond purchases. The Standard & Poor’s 500 Index has more than tripled in that time.
The Deutsche X-trackers (ASHR) Harvest CSI 300 China A-Shares ETF, the largest U.S. exchange-traded fund that tracks mainland Chinese stocks, dropped 3.8 percent to $34.07. The iShares China Large-Cap ETF, the largest Chinese ETF in the U.S., slipped 1.4 percent to $40.66.
“It’s a bit of rotation in the market,” Gabriel Wallach, founder of North Grove Capital LLC., said by phone from Boston. “The Dow and S&P are getting all-time highs because of the strengthening in cyclical and financial stocks. So there’s maybe some profit-taking in the best-performing stocks this year, such as Internet, biotech.”

NQ Buyback

NQ Mobile Inc., the Chinese mobile-security company accused by short seller Carson Block of overstating revenue, surged to $4.68. It is still down 80 percent since October 2013, when Muddy Waters LLC, the research firm founded by Block, said that the company misrepresented cash balances and was a “massive fraud.”
Under the plan approved by its board, NQ Mobile may complete the buyback over the next 12 months with its existing cash balance. The company, whose market value has shrunk to about $290 million from a high of $1.6 billion in March, last week said it was selling its FL Mobile game unit to a Hong Kong-listed apparel company and released unaudited financial results for the first three quarters of this year.
The buyback would represent “a pretty sizable percent of the outstanding shares based on market value,” Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co., said by phone. “For short sellers they have to buy shares to cover their positions. So when NQ actually does this, there’ll be fewer shares available for borrowing, then the shares the short sellers have borrowed may become more expensive.”
The company said in June that an internal investigation found no evidence that it engaged in the fraudulent conduct alleged by Muddy Waters.