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Alibaba investors have reason to worry, say analysts


Alibaba Technology headquarters in Hangzhou, China.

After two weeks of road shows in cities in the U.S. as well as in Hong Kong and Singapore, e-commerce giant Alibaba Group Holding Ltd. BABA, -3.03% finally held its initial public offering on the New York Stock Exchange (NYSE).

The IPO raised $21.8 billion. The company’s share price surge 38% to $93.89 on its Sept. 19 debut under the ticker symbol BABA. The overwhelming demand promoted underwriters to exercise an option to sell an additional 48 million shares, raising the total value of the fundraising to $25 billion, a world record.

“Considering the market reaction, Alibaba set the IPO price quite low, so getting the shares meant earning money,” one fund manager said. “The pricing was in consideration of the huge size of the fundraising, pursuing less profit but more sales for a successful offering. If the price was set too high, there might be risks of a future decline.”

According to market information provider Wind Info, the 10 Chinese companies that listed in the U.S. over the first half of this year have posted an average 10% daily increase in first-day trading.

Investors have aggressively sought Alibaba’s shares. A source close to the IPO said 1,700 institutional investors subscribed to Alibaba shares, which were oversubscribed 14 times. Half of the subscribers did not get their wish.

Based on the first-day closing price, Alibaba’s market value exceeded $241 billion, surpassing Facebook FB, +1.94% to become the world’s second-largest Internet company after Google GOOG, -1.06%

The frenzy signals investor optimism on the company’s business outlook backed by China’s exploding e-commerce market. However, some analysts expressed concerns over the long-term challenges the company may encounter, including the rising costs of the country’s e-commerce operations and the firm’s highly disputed variable interest entity (VIE) structure.

The mega IPO

At 9 a.m. on Sept. 19, traders at the NYSE crowded around the counter of Barclays, Alibaba’s designated market-maker, in anticipation of the start of trading in which Alibaba would sell 320 million American Depository Shares.

Initially priced at $68 per share, Alibaba’s share price started to surge before the public trading kicked off. The final opening price was set at $92.70 at 11:52 a.m. Afterward, the shares were publicly traded.

The shares shot upward in the first 10 minutes of trading, surging as high as $99.70 and then gradually falling. They closed at $93.89, a 38.07% rise from the offering price. Trading on the debut day is usually volatile, but Alibaba had an exciting start.

David Ethridge, vice president of the NYSE’s IPO division, said that to ensure a smooth IPO, the exchange tested its system twice beforehand to make sure it could handle a huge amount of messages and orders. The NYSE predicted that it would take one to two hours for the call auction before Alibaba’s trading started.

During that period, orders from global investors flooded into Barclays, and Goldman Sachs, the stabilization agent for Alibaba, monitored demand. The two decided the final opening price.

“What we needed to do is to ensure the call auction went smoothly for 10 minutes, 30 minutes or even longer,” Ethridge said.

In May 2012, the high volume of orders for the $16 billion debut of Facebook overwhelmed Nasdaq’s programs and caused a breakdown, delaying trading confirmations and sparking investor confusion. The exchange paid $10 million to settle charges over botching the IPO.

A smooth IPO would bring other benefits to the NYSE. “We hope to attract at least 15 Chinese companies to list on the NYSE this year,” said Ethridge, who just visited Beijing to meet potential customers.

Eager investors

Alibaba launched its first road show at the Waldorf Astoria hotel in New York on Sept. 8. The company expected around 500 investors to attend, but around 800 showed up.

A source who attended the event said investors were curious about the company’s growth outlook and business-model transformation, such as development in cloud computing, as well as ensuing plans, the source said.