Alibaba Reportedly Planning T-Head Spinoff — Eyeing High China Chip Valuations?

China's leading e-commerce company is reportedly considering a spinoff and separate listing for its chip-making unit, following a similar plan by Baidu

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Key Takeaways:

• Alibaba is reportedly weighing a plan to spin off and list its T-Head unit, hoping to join the ranks of other Chinese AI chipmakers with extremely high valuations
• Shares of rival chipmaker Biren have nearly doubled since their Jan. 2 Hong Kong trading debut, while Moore Threads is up nearly fivefold since its December Shanghai listing

If opening one lock doesn't work, then try another. That seems to be the latest story at e-commerce giant Alibaba Group Holding Ltd. (NYSE:BABA) ( 9988.HK), which is reportedly considering a spinoff and separate listing for T-Head, its chip-making division.

If it happens, the spinoff, often called "unlocking shareholder value," would come nearly three years after the company announced a much bigger plan to split itself into its six main divisions and make separate listings for some or all of those. Company watchers will know that plan ultimately got scrapped, and Alibaba has largely remained intact in its current form since then.

Somewhat ironically, the T-Head division now being planned for a potential spinoff is closely tied to Alibaba's Cloud Intelligence Unit, though T-Head's website only describes itself as "a wholly-owned semiconductor chip business entity of Alibaba Group." The cloud unit was one of the first of Alibaba's six units to scrap its spinoff under the original breakup plan. At the time, one of the stated reasons was U.S. restrictions that banned Chinese companies from buying advanced AI chips from Nvidia (NVDA.US) and other U.S. suppliers.

T-Head and a growing group of other Chinese chip startups are working hard to fill that gap by developing their own AI chips, formally known as graphics processing units (GPUs). Some of those companies are parts of larger names like Huawei's HiSilicon and Baidu's (NASDAQ:BIDU) (9888.HK) Kunlunxin.

Others are standalone startups like Moore Threads (688795.SH), Cambricon (688256.SH) and Biren (6082.HK), whose shares have all soared lately. Since its listing on Jan. 2, Biren's shares have nearly doubled. Moore Threads are up more than fivefold since their December IPO. All three companies have triple-digit price-to-sales (P/S) ratios, with Moore Threads and Biren both above 200.

By comparison, Nvidia currently trades at a lowly P/S ratio of just 24, while Marvell Technology (NASDAQ:MRVL), considered a second-tier GPU maker, trades at just 9.2. The sky-high valuations for the Chinese companies, which is clearly a factor behind the timing of Alibaba's potential spinoff plan, are being driven by expectation that China will provide generous state support for these companies as part of its plans to wean itself from reliance on Western technology.

Still, you can't help wondering if these valuations are a bit over-the-top and due for a correction when the current stock market rallies in Hong Kong, Shanghai and Shenzhen finally subside.

Against that backdrop, it's no surprise that Alibaba may be putting its own plan to spin off T-Head on a fast track, seeking to ride the wave of inflated valuations and raise some big money to keep the unit humming. Nearly all of these GPU companies are massive money-burners, meaning capital markets are one of the main engines that allow them to keep working.

Under its potential spinoff plan, Alibaba would restructure T-Head as a business partly owned by its employees, before exploring a potential IPO, according to a Blomberg report that broke the story. While the report says timing of a potential IPO has yet to be determined, we would expect it to come pretty quickly, perhaps as soon as the next three or four months, as the company races to take advantage of the current hot market.

Joining Baidu

Alibaba isn't the only one racing to spin off its chip unit for a separate listing. Just last month, leading search engine operator and autonomous driving aspirant Baidu announced plans to spin off its Kunlunxin unit, in a deal that media reports said could raise up to $2 billion. That unit started out mostly as an internal supplier of chips for Baidu's own use, but more recently has begun selling them to third parties as well, such as leading wireless carrier China Mobile.

T-Head is similar, selling its chips outside the company to China's second-largest carrier China Unicom. China Mobile and Unicom are two of the nation's most aggressive builders of new data centers that are expected to become many of the AI computing centers of the future, and thus require huge amounts of chips to power their operations. Alibaba's cloud unit is also a major operator of such data centers for its own cloud services, both in China and abroad, which was one of the original reasons for setting up its own internal chip unit.

The potential spinoffs have been a boon for both Alibaba's and Baidu's shares. Alibaba's New York-listed stock jumped 5% on Thursday after the Bloomberg report came out. The stock has more than doubled in the last 52 weeks, outpacing a 56% gain for Tencent, China's largest internet company, over that period. Alibaba's recent rise has lifted its valuation to $423 billion, narrowing the gap with Tencent, which is still China's largest internet company with a market cap of $693 billion.

But Alibaba's recent rally has helped it catch Tencent in terms of price-to-earnings (P/E) ratios, with both companies now trading at 24 times, ahead of the 19 for takeout dining leader Meituan (3690.HK) and just 11 for PDD (PDD.US), owner of the Temu app.

It remains to be seen where T-Head and Kunlunxin might list. Our best guess is the pair would both target the more internationally focused Hong Kong, reflecting their global aspirations and also that market's more rational valuations. Meantime, you have to wonder if Huawei might also be considering a similar spinoff for HiSilicon, whose Kunlun chips are generally considered the most advanced in China.

A T-Head spinoff would continue a string of relatively positive developments for Alibaba, whose stock languished for a while after it scrapped its original breakup plan. The company's latest results showed its revenue rose 5% to 248 billion yuan ($35.6 billion) in the quarter through September, though the gain would have been 15% excluding two big brick-and-mortar retailing assets being sold off.

The company's cloud unit continued to be one of its star performers, reporting 34% revenue growth for the quarter, lifting it to about 40 billion yuan, or about 16% of the company's total. Another exciting area for the company is instant commerce, which has seen Alibaba merge its Ele.me takeout dining unit into its more general delivery Taobao Instant Commerce service. That unit shows up in Alibaba's "quick commerce" segment, which reported 60% year-on-year growth to 23 billion yuan in the September quarter, lifting it to 17% of revenue for the company's core e-commerce unit.

The bottom line is that Alibaba's latest spinoff plan is quite opportunistic, driven by the huge valuations investors are giving to Chinese AI chip makers right now. That step, together with the strong growth for the company's cloud and instant e-commerce stories, could provide some continued momentum for the stock as it tries to regain some of its former glory.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.