China’s Internet bonds are lagging behind as disappointing earnings and plans for buybacks to shore up slumping shares fuel concern finances will deteriorate.
Alibaba Group Holding Ltd., China’s largest e-commerce company, announced a $4 billion share repurchase last week, while Baidu Inc., its most-popular search engine, unveiled a $1 billion plan in July. Their bonds have contributed to a 0.4 percent loss on technology notes this quarter, the worst sector in a Bank of America Merrill Lynch investment-grade dollar note index for China that gained 0.4 percent.
That’s a turnaround after Baidu’s 2012 debut in global debt markets gave it a self-proclaimed “war chest” and Alibaba’s $8 billion sale in 2014 became Asia’s biggest corporate dollar bond offering. The companies’ shares have slumped at least 9 percent this quarter as authorities tighten controls on Web content and crack down on fake goods online.
“Companies such as Baidu and Alibaba came out with weaker results, and have announced cash-burning buybacks or acquisitions, which triggered a sell-off,” said Anthony Leung, a credit analyst at Nomura Holdings Inc. in Hong Kong, said. “In addition, regular negative headlines such as the sale of counterfeit goods, have hurt their bonds.”
Alibaba reported the slowest revenue growth in at least three years at 28 percent last quarter. The company, founded by billionaire Jack Ma, is being squeezed by China’s weakest economy since 1990. Authorities accused it in January of letting merchants sell fake wine and handbags, prompting Ma to say he’ll work to block knock-offs from its online malls.
“Alibaba Group’s cash position and cash-flow generating ability is very strong,” the company said in reply to questions.
The cooling economy is also weighing on Baidu, which gets virtually all its revenue in China. Its earnings missed analyst estimates by 6.2 percent. Planned buybacks in the industry add insult to injury for bondholders, said Jamie Grant, head of Asia fixed income at First State Investments in Hong Kong.
“Baidu’s buyback was a demonstration of our confidence in our business, in the opportunities before us, and in our ability to capture them,” the company said in reply to queries. “With $12 billion on hand we foresee no difficulties in meeting our obligations while continuing to invest to grow our business.”
Regulatory concern is rising after China said this month it will set up security offices with police at major Internet firms.
“There are a multitude of macro concerns on China, which have all contributed to poor sentiment” for tech bonds, said Jim Veneau, head of fixed income Asia for AXA Investment Managers Asia Ltd.
The extra yield investors demand to hold Alibaba’s 2024 bonds over Treasuries jumped to a record 210 basis points last week. The premium on Baidu’s 2025 notes leapt to 215 basis points, also the highest ever.
While Tencent Holdings Ltd., China’s second-largest Internet company, posted record profit, the premium on its 2025 debentures also rose to a record 212 basis points last week.
There are still bullish factors for China’s Internet industry, according to First State Investments’ Grant. “Longer term, we think China tech’s growth trajectory still looks solid because the big ones that have bond issuance dominate the domestic tech market.”
Recent stumbles in the country’s Internet securities stem in part from external factors, he said. U.S. companies expecting the Federal Reserve to raise interest rates have rushed to sell notes to lock in lower rates. The resulting surplus of investment-grade debt is causing U.S. investors to ditch foreign bonds in favor of debentures from home, he said.
The sheer number of China’s 668 million Internet users, double the entire U.S. population, had fueled investor enthusiasm that Alibaba tapped in a $25 billion initial public offering last September. The stock has fallen 21 percent since its first day of trading.
“Investor expectations of the prospects of China’s tech sector had been quite high,” said Suanjin Tan, a portfolio manager at BlackRock Inc.