On July 3, Alibaba announced that it plans to issue zero-coupon exchangeable bonds with a total principal amount of about HK $12 billion and due in 2032, and the exchange target is the shares of Alibaba Health. Even if all are exchanged, Alibaba will still maintain a controlling position in Ali Health.

Compared with conventional debt expansion, the issuance is a low-cost financing anchored to the equity value of Alibaba Health, reflecting the optimism of institutional investors about the future share price of Alibaba Health.

What is a Zero Coupon Exchangeable Bond?

Zero coupon means that investors will not receive interest on the bond during the decade. Exchangeable bonds are bonds that can be swapped for shares of Alibaba Health at some point in the future.

In other words, this is a "share-for-debt" method, where Ali borrows money now without paying interest, and can use Ali Health's shares to repay the money in the future.

Why choose this method? Compared with traditional borrowing methods (such as issuing ordinary bonds), this financing method has several highlights:

Low-cost financing: Because there is no interest expense, this is very cost-effective for Alibaba.

Optimistic about Alibaba Health's stock price: This approach actually reflects institutional investors' confidence in Alibaba Health's future stock price. They are willing to accept this "interest-free loan" because they believe that Ali Health's stock price will rise, and when the time comes, they will be able to make more money by exchanging bonds for stocks.

By issuing zero-coupon exchangeable bonds, Alibaba has cleverly leveraged the equity value of Alibaba Health for low-cost financing, while also showing the market's optimistic expectations for the future development of Alibaba Health.

Alibaba launched a large-scale offshore private placement financing

Nearly one year after the completion of Alibaba's dual primary listing in Hong Kong, the company plans to issue about HK$12 billion of zero-coupon exchangeable bonds, which will be raised mainly for professional institutional investors such as sovereign wealth funds and hedge funds in Asia.

The bonds will mature on July 9, 2032 and, if redeemed, at a price equal to 100% of the principal amount of the bonds to be redeemed. However, most investors should choose to convert their shares, including Alibaba Health shares, cash, or a combination of both.

Alibaba Health's share price is up about 40% year-to-date, which helps reduce Alibaba's financing costs. The benchmark interest rate of Hong Kong-dollar-denominated exchangeable bonds is lower than that of the US dollar, making financing more advantageous.

Since 2025, the issuance of exchangeable bonds in Hong Kong stocks has been relatively active, and Alibaba's HK$12 billion issuance scale is at the forefront of the industry. There was a similar case before: Baidu issued US$2 billion (about HK$15.7 billion) of exchangeable bonds in March, which was exchanged for Baidu's Hong Kong shares in Ctrip. Sinopec also issued HK$7.75 billion of exchangeable bonds in May with its overseas subsidiaries as the subject of exchange.

The charm of this type of bond is that it gives the holder the right to exchange the underlying stock at an agreed price in the future, and its attractiveness depends on the investor's judgment of the prospect of the underlying stock.

As Alibaba's flagship platform in the field of healthcare, Ali Health is mainly engaged in pharmaceutical e-commerce, medical and health services and other businesses. In fiscal year 2025, Alibaba Health achieved adjusted net profit of RMB1.950 billion, up 35.6% year-on-year, and adjusted net profit margin increased from 5.3% to 6.4%.

The initial exchange ratio of the Alibaba Bonds is that approximately 160,500 Alibaba Health shares can be exchanged for each HK$1 million principal amount of the bonds, at an initial exchange price of HK$6.23 per share, which is 37.83% higher than the closing price of Alibaba Health on the announcement date.

This high premium reflects the market's continued optimism about Ali Health's share price.

However, it is worth noting that this exchangeable bond is also a disguised reduction, so Ali Health's share price fell in response. Since the announcement on July 3, Ali Health's share price has fallen for two consecutive days, with a cumulative decline of more than 9%.

At present, Alibaba holds about 64% of the shares of Alibaba Health, and stressed that even after the full exchange, Alibaba Health will still be its flagship medical and health platform and consolidated subsidiary.

By issuing zero-coupon exchangeable bonds, Alibaba has cleverly leveraged the equity value of Alibaba Health for low-cost financing, while also demonstrating the market's confidence in its health industry. While the stock price has fluctuated in the short term, it is a win-win option for both parties in the long run.

Alibaba's new strategy: pay equal attention to e-commerce and AI

After two years of strategic adjustment, Alibaba has clarified two core development directions:

E-commerce: especially to accelerate the expansion of international markets.

AI: This is Alibaba's future star, which is currently in the early stages of investment.

Historically, Alibaba's new business investments have been supported by cash flow from its core business, Taobao Tmall (Taotian). However, in recent years, Taotian has faced increasingly fierce competition, especially instant retail, which is impacting the traditional e-commerce business. In order to cope with this challenge, Taotian is also actively attacking the instant retail market, which also requires a large amount of capital investment.

Despite the challenges, Alibaba's financial position remains very strong. For the quarter ended March 31, 2025, Alibaba had net cash of RMB366.4 billion and maintained a low debt ratio, which is at the lowest level and one of the best credit ratings among China's leading internet companies.

Taking advantage of the current favorable Hong Kong stock market window for low-cost financing will undoubtedly enhance Alibaba's financial strength in AI, e-commerce going overseas and instant retail battlefields.

As Alibaba's medium- and long-term core growth engine, AI is in a critical investment period. CEO Wu Yongming has announced that more than 380 billion yuan will be invested in cloud and AI infrastructure in the next three years. According to the latest financial report, Alibaba Cloud's AI-related product revenue has achieved triple-digit year-on-year growth for seven consecutive quarters.

However, despite the rapid growth, Alibaba Cloud's adjusted EBITA profit for fiscal year 2025 is only 10.6 billion yuan, which is still a drop in the bucket compared to the AI investment of more than 100 billion yuan per year, and still needs the continued support of Alibaba Group.

At the same time, the international e-commerce business is also in a period of expansion, but it is still not profitable. In fiscal year 2025, the adjusted EBITA loss of the international e-commerce business reached 15.137 billion yuan. Jiang Fan, CEO of Ali's e-commerce business group, previously said that the profit and loss of cross-border business will improve in the next few quarters.

The refined financing with the equity of the subsidiary as the credit support shows that Alibaba is shifting to a more prudent and efficient capital allocation model after the end of the era of high-growth Internet growth. In this way, Alibaba can not only raise funds effectively, but also better control risks and ensure that funds are used wisely.