Alibaba says more than 60% of T-Head’s computing capacity serves customers outside the group. Some of them are carmakers that use its Zhenwu chips to develop driver-assistance systems. They can do that by renting computing power from Alibaba Cloud, without ever buying a chip from T-Head. For Alibaba, that is a sale. For someone buying shares in T-Head, the question is how much of that sale belongs to the chip company. Alibaba disclosed both figures in its fiscal-year update.
On November 10, Alibaba confirmed that T-Head had filed confidentially for a Hong Kong listing in September. Alibaba would retain control. International Financing Review reported that the IPO could raise at least US$2 billion. Estimates of what the whole company is worth vary widely. JPMorgan reportedly estimated its value at US$25 billion to US$62 billion, while Nomura reportedly put it at US$85 billion. Before investors can settle on a price, they need a clearer picture of how much business T-Head does on its own.
Why Alibaba wants to list it
T-Head began in 2018 as Alibaba’s chip design arm. It now makes Zhenwu processors for training and running AI models and Yitian CPUs for cloud servers. It also licenses Xuantie processor designs, based on the open RISC-V standard, to companies building their own chips. Earlier this year, Alibaba CEO Eddie Wu put T-Head’s annualised revenue at around RMB10 billion.
Alibaba is still bringing the two businesses closer together. In August, it said it had combined Alibaba Cloud and T-Head into one reporting segment. A month later, it unveiled a server that brings together T-Head’s next AI processor, networking hardware and storage controller. The cloud business gives the chip team somewhere to deploy new designs at scale, and the chip team gives Alibaba more control over what goes into its data centres.
That arrangement takes money. Alibaba reported a free cash outflow of nearly RMB45 billion in the June quarter and attributed the deterioration mainly to higher spending on cloud infrastructure. A listing would let T-Head raise money from investors of its own while Alibaba keeps control and continues to use its chips.
Whose customers are they?
Alibaba Cloud has already done something valuable for T-Head. It has put the chips in front of companies with real work to run. By August, Alibaba said more than 650 external customers had adopted the Zhenwu M890 through its cloud services. A carmaker can start a training job on a chip it has never used before without buying servers or setting up a new data centre.
Now follow the payment. When that carmaker rents computing power from Alibaba Cloud, the cloud business bills it. How much does Alibaba Cloud pay T-Head for the chips? How much of T-Head’s revenue comes from those sales within the group? And how much comes from customers that buy chips, systems or processor designs directly from T-Head? Alibaba’s listing announcement leaves those questions open.
Selling through Alibaba Cloud can be a good business for T-Head. The cloud brings in customers and gives the chip team a reason to keep improving its products. But an investor needs to know how that arrangement works for the company whose shares they will own. A chip order from a customer outside Alibaba and a chip order from Alibaba Cloud can both end up serving the same kind of AI workload. They tell investors different things about who sets the price and who decides whether to place the next order.
What to look for in the prospectus
The first thing to look for is a breakdown of who pays T-Head. How much comes directly from customers outside Alibaba, what do they buy, and do they come back for more? The terms of its business with Alibaba Cloud matter too. Together, those disclosures would give investors a clearer picture of where T-Head earns its money today and what could grow from here.
The second is what customers build with Xuantie. T-Head lists uses ranging from storage to industrial networking. The next signal would be a carmaker, robotics company or cloud provider choosing a Xuantie design for a product it expects to sell and support for years. A chip running inside Alibaba’s cloud shows what T-Head can build with its parent. A customer building its own product around a T-Head design shows what it is willing to build with T-Head.
