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Aug 18, 2017

S3 Analytics: Alibaba Short Sellers Down $2.0 billion in MTM Losses This Week

Chinese e-commerce retailer Alibaba Group Holding Ltd (BABA US) reported 1st quarter earnings that beat analysts’ expectations handily. Both revenues and net income outperformed with CNY earnings per share up 62% year-on-year and CNY revenues up 56% year-on-year. Besides its ad driven e-commerce business, Alibaba’s digital media, entertainment and streaming businesses as well as cloud computing business also showed strong growth and profitability. Alibaba’s stock price is up 8% this week.

Alibaba is not only the largest short in the Hong Kong/Chinese region but it is also the largest short worldwide, more than doubling Tesla’s (TSLA US) short interest.

In the Hong Kong/China region Alibaba is over two and a half times larger than its runner-up Ping An Insurance (2318 HK) and Alibaba’s short interest more than doubled in 2017. We track $79.2 billion of total short interest in the HK/China region and short interest continues to grow in the region, with an additional $178 million in new shorts over the last month. The largest increase was in the Internet Software & Services sector with $923 billion in growth, with Tencent Holdings (700 HK) making up $831 million of this increase, while the Internet & Catalog Retail sector saw a $441 million reduction in short interest, with Ctrip.com ADR (CTRP US) down $456 million.

Alibaba was up 2.8% on Thursday and shorts were down $597 million in mark to market losses on the day. With an additional $2.75 stock price increase today adding $371 million of losses, Alibaba short sellers are now down $2.0 billion in mark to market losses for the week, bringing their year-to-date mark to market losses to $9.8 billion, down 66.4% for the year. Alibaba is the worst performing worldwide short year-to-date.

Hong Kong/China short sellers have had strong conviction throughout 2017, increasing their short positions and incurring large mark to market losses even as the Hang Seng is up 23% for the year. The chance of a price driven short squeeze for the larger shorts in the Hong Kong/Chinese market seems to be pretty slim. Having checked, called and raised the pot through the turn, the short sellers that remain at this poker table are waiting to see if they will be riding down the river on a rowboat or a yacht. Short sellers are hoping that if there is stock market correction in HK/China, Alibaba will bear the brunt of the decline.   

Want deeper insight into the above analysis? Contact:
Head of Research, S3 Partners
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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