Alibaba & Tencent – The backstop

Alibaba moves to support the recovery.

• Alibaba has increased its share buyback in a move that should help put a bottom under the recent rout, while Tencent is likely to have a difficult set of results tomorrow and there is still regulatory (albeit declining) risk hanging over the company.
• Alibaba is breaking out one of the last tools in a company’s arsenal to fight a collapse in its share price by announcing that it will increase its share buyback to $25bn.
• This is significant as the market cap of the company has fallen to $276bn meaning that over two years a significant proportion (8-9%) of the outstanding shares will be repurchased by the company.
• However, it is critical to remember that the value has not been returned to the shareholder until the shares themselves have been cancelled and the share count reduced.
• Most technology companies are very bad at cancelling bought back shares and instead, hand them back out to employees as part of their performance-related or retention schemes.
• Time will tell whether Alibaba really intends to return money to its long-suffering shareholders.
• I continue to think that the regulatory shadow has long since passed over Alibaba but that has not stopped the shares from halving from the point at which I thought they represented good value.
• This combined with state-sponsored commentary effectively stating that it has had enough of the market crushing its technology sector means that the current outlook for recovery is good.
• However, before this materialises, China has to abandon its absurd Covid-zero policy because it is never going to work with the Omicron variant, and it is currently holding up the economic recovery.
• I am hopeful that this will gradually occur this year meaning that 2023 compared to 2022 should be a much better year for China.
• Hence, the outlook for consumer expenditure should improve and with it the fortunes of retail and e-commerce.
• This will also greatly improve the outlook for online finance but here the regulatory risk does remain.
• However, the state’s commentary does suggest that if it does go after Tencent’s finance business, the impact may be less severe than that metered out to Ant Group.
• Tencent reports results tomorrow and I suspect that the numbers will be dominated by slower growth from its non-finance businesses as well as the regulatory shadow.
• Fintech is 30% of Tencent’s revenue and the engine of its growth and if the state forces Tencent to hive off WeChat Pay into a holding company like Ant Group, then this growth engine will take a huge hit.
• Hence, I still see risk in Tencent but a decimation analogous to Ant Group would now appear to be less likely than it was a few months ago.
• I am still hanging onto Alibaba and hopeful that this is the beginning of a recovery, but I remain cautious on Tencent although less worried than I was.