Alibaba plans $10.2 billion Hong Kong share sale to fund AI expansion

Chinese technology giant Alibaba Group is preparing to raise approximately $10.2 billion through a major share offering in Hong Kong

HONG KONG: Chinese technology giant Alibaba Group is preparing to raise approximately $10.2 billion through a major share offering in Hong Kong, with the company planning to direct all net proceeds toward expanding its artificial intelligence (AI) capabilities and related infrastructure.

The fundraising marks a significant step in Alibaba’s strategy to strengthen its position in the rapidly developing AI sector as technology companies worldwide increase spending on computing capacity, data centres and advanced AI models.

Under the offering, Alibaba plans to issue around 710 million new shares at approximately $14.38 per share. The new shares are expected to account for about 3.6% of the company’s enlarged share capital following completion of the transaction.

The deal is being described as the largest primary follow-on equity offering by a Hong Kong-listed company and ranks among the biggest share sales globally so far this year.

AI Investment Comes at a High Cost

Alibaba’s latest fundraising drive comes shortly after the company reported a sharp decline in quarterly profitability, reflecting the substantial financial burden associated with its aggressive AI expansion.

The company’s quarterly net profit fell by approximately 75% year-on-year, while capital expenditure surged as Alibaba increased investment in computing infrastructure and AI-related facilities.

Capital spending rose 75% to about $10.1 billion during the April-June quarter. The increase reflects Alibaba’s efforts to expand computing capacity and build the infrastructure required to support the development and deployment of increasingly sophisticated AI services.

Despite the pressure on short-term profits, the company’s management has pointed to strong growth in its cloud and AI operations as evidence that the investment is beginning to generate returns.

Revenue from Alibaba’s cloud and AI business increased 45% to roughly $7.2 billion during the quarter. Meanwhile, the company’s AI model services business has achieved more than $2.38 billion in annual recurring revenue, indicating rising demand for its AI-related products and services.

Alibaba Chief Executive Officer Eddie Wu has stressed the importance of building adequate computing capacity before the company can fully capture the expected growth in AI demand.

Alibaba Expands Long-Term AI Spending

The latest share sale adds to Alibaba’s already substantial financial commitment to artificial intelligence and cloud infrastructure.

The company had previously announced plans to invest around $56.5 billion over three years in cloud computing and AI infrastructure. Alibaba has already deployed approximately half of that planned investment and has suggested that total spending could ultimately exceed its original target.

The scale of the investment reflects the company’s expectation that AI will become a major source of future growth across its cloud, e-commerce and technology businesses.

Alibaba is also increasing the use of its domestically developed AI chips in its data centres. Greater reliance on its own hardware could potentially reduce infrastructure costs and improve margins as the technology is deployed on a larger scale.

Global Cloud Expansion

Alibaba’s AI infrastructure strategy is not limited to the Chinese market. The company is also expanding its international cloud network to support customers and AI workloads in overseas markets.

In June, Alibaba Cloud opened two new availability zones in Paris, strengthening its presence in Europe. The expansion gives the company a third major European cloud hub, following its existing operations in Germany and the United Kingdom.

The international expansion comes as global demand for cloud computing and AI services continues to grow, with businesses increasingly relying on large-scale computing infrastructure to develop and deploy AI applications.

Investors React to Share Sale

Despite the company’s long-term AI ambitions, investors initially responded negatively to the announcement of the new share issuance.

Alibaba shares declined by around 8% in Hong Kong, reflecting concerns over the potential dilution for existing shareholders as well as the enormous level of spending required to build out AI infrastructure.

The share sale highlights the balancing act facing Alibaba and other major technology companies: they must invest heavily today to secure a position in the future AI economy while convincing investors that these expenditures will eventually translate into sustainable revenue and profits.