Alibaba Group said on Tuesday, Nov. 10, that it plans to spin off T-Head, its data center chip unit, through a separate listing on the Main Board of the Hong Kong stock exchange, and expects to remain the unit's parent company after the deal. T-Head confidentially filed its listing application on Sept. 11, Alibaba said in a filing to the exchange.

The plan gives investors in Asia a rare way to buy into one of China's largest in-house AI chip designers on its own, rather than as a small part of an e-commerce and cloud group. It would also put a market price on a unit that has so far been valued only inside the Alibaba group.

What Alibaba disclosed about the T-Head listing

T-Head (Shanghai) Technology Co. is wholly owned by Alibaba and describes itself as a provider of full-stack data center chips, according to the announcement. The listing would take the form of a global offering of T-Head H shares, split between a public offering in Hong Kong and a placing with institutional and professional investors.

Alibaba did not say how much it hopes to raise. The size and structure of the offering, and how far its own stake would be diluted, have not been finalized, the company said. The deal still needs approval from the exchange's Listing Committee and completion of a filing with the China Securities Regulatory Commission, and both companies must make final decisions on whether to go ahead. Alibaba said there is no assurance the spin-off will happen, or when.

The company gave three reasons for the move. A separate listing would let investors value T-Head and the rest of Alibaba on their own merits, draw investors who want direct exposure to the chip business, and improve T-Head's access to equity and debt markets and to bank loans, the filing said. Alibaba also said a listing could raise T-Head's profile with customers and partners.

The spin-off is small relative to the parent. Alibaba said the highest applicable size test under Hong Kong's listing rules is expected to come in below 5%, so the deal would not count as a discloseable transaction. Its dual primary listing in Hong Kong and New York is not expected to change.

Alibaba shareholders will not get guaranteed shares

Hong Kong rules on spin-offs, set out in Practice Note 15, normally require a parent to give its own shareholders an assured entitlement to shares in the new company. The exchange granted Alibaba a waiver from that requirement, according to the announcement.

Alibaba cited several grounds. Offering the shares to its holders in the United States would require a public offering registered with the U.S. Securities and Exchange Commission, which it called unduly burdensome. Chinese legal and operational rules, including lock-ups on shares issued before an offering, would also complicate a distribution, and seeking shareholder approval would be costly and impractical, the company said. It added that T-Head is not significant compared with Alibaba's total assets, revenue and net income. The board said it considers the spin-off and the waiver fair and reasonable.

For minority holders, the practical result is that anyone who wants T-Head shares will have to buy them in the offering or on the market after listing. The announcement was signed by Kevin Jinwei Zhang, Alibaba's company secretary.

The plan surfaced in January, when Benzinga reported that Alibaba was considering a separate listing for the unit and noted that Baidu had been weighing a similar move for its Kunlunxin chip arm. At the time, Chinese AI chip stocks that had recently gone public, including Biren in Hong Kong and Moore Threads in Shanghai, were trading at more than 100 times sales, Benzinga reported. Those valuations help explain why parent groups see value in listing their chip units separately.

Hong Kong tech shares slip

The confirmation did not lift the stock. Alibaba opened 0.98% lower in Hong Kong on Wednesday as technology shares fell across the board, The Standard reported. The Hang Seng Index dropped 202 points, or 0.83%, to 24,354 at the open, and the Hang Seng Tech Index lost 0.96% to 4,045. Tencent fell 0.86%, Meituan 1.06%, JD.com 0.98% and Xiaomi 0.52%, according to the newspaper.

Rate worries weighed on the market after U.S. data showed consumer prices rose 0.4% in October, The Standard said. Investors who have followed Alibaba's AI tie-ups in China and the capital flowing into Chinese AI developers will look to the T-Head prospectus for the first detailed public numbers on the unit's revenue, profit and customers.

The next steps are the Listing Committee hearing and the CSRC filing. Alibaba said it will make further announcements as the spin-off proceeds.