Alibaba to Baidu Increase U.S. Share Buybacks as Prices Slump

  • Chinese companies authorized $7.6 billion in U.S. buybacks
  • China ADRs trade near cheapest level since the start of 2014

The selloff that has pushed an index of U.S.-traded Chinese stocks down more than 30 percent since June has some of the biggest companies seeking to buy back record numbers of shares.

Alibaba Group Holding Ltd., the online retailer that went public with a record $25 billion initial public offering a year ago, said last month it plans to repurchase as much as $4 billion of stock over two years. JD.com Inc. has authorized $1 billion for the purpose. Baidu Inc.’s $1 billion share-buyback plan announced in July was its biggest ever. NetEase Inc., an online game operator, increased its planned repurchases five times to $500 million this month.

The buyback programs come as the Bloomberg China-U.S. Equity Index trades near the lowest levels in 18 months. American depository receipts have tumbled in tandem with mainland-traded shares amid concern the magnitude of the slowdown in the world’s second-largest economy is worsening. The plunge has pushed the ADR gauge to trade near the lowest level since February 2014.

“It’s a positive sign that they believe in their growth opportunities and their strategies,” Brad Gastwirth, chief executive officer of ABR Investment Strategy, said by phone from San Francisco. “More companies may follow suit if shares continue to trade at discounts. But there is certainly selling pressure from U.S. institutions given the uncertainties in the region.”

Chinese stocks have pulled back amid concern the country’s slowest economic expansion in 25 years will damp corporate earnings. Alibaba’s shares have tumbled 50 percent since a high in November to trade below their public offering price of $68. JD.com has lost 32 percent since its high in June, while Baidu is down 41 percent this year.

Companies on the Bloomberg ADR benchmark have authorized $7.6 billion in repurchases this year putting it on track for the highest annual total on record, according to data compiled by Bloomberg.

There are different motivations for why companies are boosting buybacks at this time. For some it’s the appeal of cheaper valuations after the stock rout.

JD.com is “constantly looking for ways to maximize returns for shareholders,” and their recent repurchases “added flexibility” for them to “use cash most effectively,” Beijing-based spokesman Josh Gartner said in an e-mailed response to questions.

Jack Ma, Alibaba’s chairman and co-founder, isn’t known for coddling investors. He has said several times that shareholders are a third priority after customers and employees. The company’s share-purchase plan is primarily designed to offset dilution such as share-based compensation programs, according to an Aug. 12 statement.

Buyout Offers

For others it may be part of a move to delist in the U.S. At least 30 Chinese companies, a record, have received offers to go private since the beginning of the year, aiming to return to China’s local exchanges to get seek higher valuations.

“We could take the share buyback moves as the management trying to get the company prepared to go back to China,” said Daniel Wang, a Hong Kong-based fund manager at Rongtong Global Investment Ltd., who manages $1 billion assets.

Chinese companies have long complained that investors on Wall Street don’t fully appreciate their business prospects, but simply invest based on the direction of economic data out of China.

Vipshop, Baidu

“It is very hard for us to explain to foreign investors that our business hasn’t been really affected by the economic slowdown,” Donghao Yang, chief financial officer of Vipshop Holdings Ltd., said in a Sept. 9 interview in New York. “We’ve tried again and again. We can only hope one day investors will give us a fair valuation.”

The company’s “core business” of selling fashion goods at discounts online is “counter economic cycle,” according to Yang, who said the company is making plans to buy back shares, which trade at 20 times forward earnings compared with an average for its global peers of 48.

Baidu’s Chairman Robin Li shared the same view. It is possible that he would delist the company from the U.S. entirely in favor of the Chinese market, he said in an interview on Sept 14.

The planned buybacks may have limited impact on shares prices as company fundamentals are overshadowed by economic concerns, according to Henry Guo, an analyst at Summit Research Partners in New York.

Economic Slump

“There’s actually not much left for the management to do in terms of boosting share prices,” Guo said. “In this market, no matter whether you buy back shares or issue comments, it doesn’t matter. As long as the macro Chinese environment continues to weaken, your share prices will not react much.”

A private report showed last week that a preliminary manufacturing gauge unexpectedly fell to a six-year low, helping push mainland stocks to a second week of losses.

The Bloomberg gauge of Chinese ADRs slumped 4 percent in the five days through Friday, ending a two-week streak of gains. Alibaba contributed the most to the decline, falling 9.9 percent.

“Buying at a low market prices saves a lot of costs and the privatization trend for Chinese companies will continue, because valuations in U.S. are still low even after A shares slumped,” Wang of Rongtong Global Investment said.

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