Source: Visual China
Author 丨Lius
Editor 丨 Kang Xiao
Produced | Shenzhen Network Tencent News Xiaoman Studio
Affected by multiple factors such as policies and international relations, The Internet Chinese stocks, after experiencing many days of continuous decline and fall since the beginning of the year, finally opened a rebound market and made new adjustments after the financial commission spoke out.
On the morning of March 22, Alibaba announced that it would continue to expand its repurchases, raising the size of the original share repurchase program from US$15 billion to US$25 billion (158.9 billion yuan), and the repurchases will continue until the end of March 2024.
The above-mentioned repurchase scale accounts for nearly 9% of Ali's current market value of $280 billion, which can be described as the largest repurchase in Ali's history and a historical record for the repurchase scale of Chinese stocks.
Affected by this news, Ali Hong Kong stocks rose 11.2% on the day to close at 110.2 Hong Kong dollars per share; then Ali U.S. stocks rose 11% on the day to close at 114.99 US dollars per share.
Subsequently, Tencent, Xiaomi, Bilibili and others also released repurchase plans. According to other data, as of March 22, a total of 100 Hong Kong stock companies repurchased, with a cumulative repurchase amount of HK$8.36 billion, an increase of 258.0% over the same period last year. Among them, 80 companies repurchased HK$5.8 billion in January 2022, an increase of 495.5% over the same period last year, the highest level in the past six years.
Tiger International Investment Research Team told "Deep Net" that overseas listed Internet companies have suffered irrational declines, valuations are at a historic low, Alibaba, Xiaomi threw out a huge repurchase plan behind the reason or from two points, one is that the management believes that the current stock price does not truly reflect the company's value; the second is that the management is full of confidence in the company's future development prospects.
The Futu investment research team told The Deep Web that from the perspective of historical experience, stock repurchase is often a medium-term bottom signal of the market, often indicating that the medium-term market may stabilize and rebound.
Ali and other Chinese stock repurchase waves may be expected to drive the previous serious oversold Chinese stocks, because the significance of stock repurchase to the capital market is that it can avoid the phenomenon that the investment value of listed companies is generally underestimated in the market for a long time, and it is of great significance to stabilize the stock market at this stage, "confidence is more precious than gold". But in the end, whether it can really reverse depends on the company's fundamentals.
So, what is the logic and law behind the large-scale repurchase wave of Chinese stocks in the Internet? Does it mean that the market has come to the end?
Ali scale repurchase protection disk
In fact, this is the second time that Ali has expanded the scale of repurchases in the past three quarters.
The first review was on December 28, 2020, when Ali's board of directors authorized the repurchase of $10 billion of American Depositary Shares. Subsequently, on August 3, 2021, Ali announced that it would expand its share repurchase program from $10 billion to $15 billion; this time, it once again increased the upper limit of the repurchase size to $25 billion.
For the scale increase, Ali said that "the board of directors is full of confidence in the company's future continued growth", and the share repurchase plan announced this time is valid for two years until March 2024.
Xu Hong, deputy chief financial officer of Alibaba Group, believes that this shows that the management is full of confidence in Ali's long-term sustainable growth potential and value creation. "Based on our strong and robust financial performance and growth plans, Alibaba's current share price does not fairly reflect the value of the company."
Since October 2020, Alibaba's stock price has fallen all the way, falling from a high of HK$309 per share to a minimum of HK$71 per share, thus calculating that the market value has evaporated by 77%.
Judging from the history of buybacks by listed companies, the repurchase of shares is often carried out when the market reaches the bottom. It can greatly boost investor confidence in the future direction of the company.
The Futu investment research team told The DeepNet that the company's repurchase will give a basic anchor to the stock price, which is conducive to stabilizing the company's stock price, conveying to the market multiple information such as the company's stable performance, abundant cash flow, and undervaluation, enhancing investors' confidence in the company and providing support for the stock price.
In addition, from the logic behind it, although the stock repurchase will not affect the total market value of the company, it will reduce the number of shares in circulation issued in foreign shares, thereby increasing the stock price; at the same time, it can also improve the financial indicators such as EPS (earnings per share) and ROE (return on net assets) of listed companies.
Alibaba's average repurchase price is $164, and the latest closing price is $112.9 (as of the U.S. stock close on March 25), and the current share price is still below its average repurchase price, which means that if the subsequent market environment stabilizes, it will bring potential upside.
Chen Da, a senior U.S. stock investor in Snowball, commented that this round of Ali's additional share repurchase plan has given people a glimmer of hope and is a better demonstration action.
He believes that "confidence is more important than gold" and that the "currency multiplier effect" in corporate buybacks can just boost confidence. For example, he said, if you buy back 25 billion, the market will give you "capital allocation" because your buyback shows your confidence in long-term development - the market will have more long-term investors willing to pitch in, work with you to "buy back" the company's shares, and be a long-term shareholder of the company.
Alibaba's third quarter results for fiscal 2022 show that as of December 31, 2021, Alibaba's revenue for the quarter was 242.58 billion yuan, an increase of 10% year-on-year; due to the increase in investment in growth businesses such as Taote, Taocaicai, LAZADA and Ele.me, net profit decreased by 75% year-on-year to 19.224 billion yuan, excluding the impact of fair price changes in equity investment, net profit fell by 27%.
However, some investors firmly believe that due to the impact of antitrust and international relations, Alibaba's stock price is still high.
Market bottom?
Not only Ali, But also Tencent, Xiaomi, JD.com, etc. have also joined the buyback army.
On March 25, Tencent announced that it had repurchased about 838,000 shares at a price of HK$352.8-365, costing about HK$300 million. The number of repurchases this time is almost twice the average number of previous repurchases.
According to the above statistics of Futu Information, Tencent has repurchased 12 times this year, with a total repurchase of 5.6694 million shares, costing HK$2.496 billion. Compared with tencent's repurchase scale of HK$2.599 billion in 2021, the repurchase amount since this year is equivalent to 96% of last year's total.
In addition, Xiaomi issued an announcement on the evening of March 22 that the board of directors formally resolved to exercise the share repurchase authorization to buy back shares in the open market at an irregular rate of up to HK$10 billion.
Tencent Music announced its results on March 21, saying that the company's $1 billion share repurchase program announced in March 2021 was more than half complete, and the remainder of the plan will be completed in 2022.
On March 3, Bilibili announced that its Board of Directors has approved a share repurchase program to repurchase up to $500 million of American Depositary Shares over the next 24 months.
On December 29 last year, JD.com raised its plan on March 17, 2020 to repurchase up to $2 billion in shares over the next 24 months, to $3 billion, and extended the implementation period to March 17, 2024.
Buybacks are seen as bottom-reading indicators to some extent, but has the market really reached the bottom now?
According to CICC data, after the market experienced a peak in the total number of monthly repurchases, the main Hong Kong stock indexes (Hang Seng Index, Hang Seng State-owned Enterprises and MSCI China) showed a gradual stabilization and rebound trend, and this upward trend often peaked six months after the peak of repurchases.
However, it pointed out that specifically, whether the overall confidence of China-wide Internet is expected to improve at present mainly depends on the policy and regulatory trends, the company's performance and market expectations.
Tiger International Investment Research Team also analyzed the "Deep Net" that the intensive launch of a large-scale repurchase plan will enhance investor confidence and increase the market buying power, but the repurchase does not mean that the stock price has bottomed out, after all, the stock price rises and falls by many factors, the repurchase is only one of the positive factors, whether the future can be reversed, more dominated by the company's fundamentals.
Buybacks may not support the rise in stock prices
Stock buybacks are usually initiated by the company's management, which uses the company's own funds to buy its own shares directly in the secondary market.
There are usually two outcomes for the repurchased shares, one is to write off all the shares repurchased, that is, to cancel the repurchased shares, and the other is to make the repurchased shares into treasury shares, which can be used for other purposes in the future, such as issuing convertible bonds, employee welfare plans, etc., or selling when funds are needed.
In most cases, the repurchased shares are to maintain the company's image, improve the efficiency of the use of funds, or for equity incentives. But buybacks are not a panacea for bottoming out. For example, Xiaomi, which has frequently repurchased shares in the past year, has failed to pull back its shaky stock price.
According to the data, since its listing in 2018, Xiaomi has repurchased shares more than 50 times, with a total repurchase amount of HK$8.65 billion. Its first repurchase was in March 2021, and it has been frequently repurchased in the short term for 11 trading days, but the stock price has not seen the expected sharp rise. Since the beginning of this year, Xiaomi has repurchased nine times again, with a total repurchase of 14.295 million shares, costing HK$261 million.
The reason is because Xiaomi released the good news of repurchase on the one hand, but on the other hand, it was quietly increasing.
Xiaomi's total share capital at the time of listing on July 9, 2018 was 223.761 shares, compared with 24.977 billion shares as of March 23, 2022. That is to say, since its listing, Xiaomi's total share capital has increased by 2.6009 billion shares, and the proportion of additional issuance is as high as 11.6%.
On December 2, 2020, Xiaomi issued an additional 1 billion shares at one time, when Xiaomi's stock price was still in the high point area, according to the stock price at that time, Xiaomi raised HK$85.1 billion, while the total amount of Xiaomi's previous repurchases was 538.4 million shares, and the repurchase scale was much lower than the scale of additional issuance.
Be wary of buyback risks
Generally speaking, there are two sources of funds for listed companies to repurchase shares, one is the company's own funds, and the other is to borrow money and leverage to achieve share repurchase through bond issuance and other means.
Wind data shows that since March, as of March 21, a total of 164 A-share companies have disclosed announcements of repurchased shares. Among them, a number of listed companies such as Southern Media, Mountain Eagle International and Luoyang Molybdenum intend to repurchase the company's shares by issuing bond financing.
For the two different repurchase methods, the Tiger International investment research team pointed out that for enterprises, the repurchase will reduce the company's total share capital and increase shareholder returns, but it may consume a lot of funds. Which method to choose depends on whether the listed company has sufficient funds and whether it has a large operating investment plan.
It pointed out that the advantage of issuing bonds for repurchase is that it does not consume cash on the account, does not hinder normal business operation and investment, and can better manage funds. However, there is interest in issuing bonds, and the cost of funds paid has a slight impact on corporate profits. Bond repurchase is suitable for cash constraints, or when the company has a better investment plan in the near future, or when the cost of issuing bonds is lower than the cash wealth management income.
Cash buybacks are more suitable for having a lot of cash on the books, and the company has no major investment plans or better ways to manage money in the short term, at this time, using cash for buybacks can greatly improve shareholder returns.
But buybacks are not a panacea, and their risks coexist with opportunities.
Futu Investment Research Team pointed out that large-scale repurchase will affect the expansion of enterprise re-production capacity to a certain extent, limiting the investment of enterprises in research and development, fixed assets, employee training, etc.; if the bond repurchase is adopted, the debt cost will rise, the financial leverage effect will be enhanced, and the financial risk will increase. "Once there is a problem with cash flow, the probability of debt default will increase, which will eventually be reflected in the stock price."
It may also result in a negative net worth of the business. "A large number of bonds resulted in total liabilities being greater than total assets, and then net assets were negative. At this time, ROE, PB and other indicators do not have direct reference significance. ”
For example, futu investment research team said that due to the low interest rate environment in the United States, "bond repurchase" has become a common way for many listed companies in the United States. Starbucks, for example, has significantly increased its asset-liability ratio since 2018, and stock buybacks have led to an asset-liability ratio greater than 1 in the past three years.
All in all, buybacks can boost market confidence to a certain extent, indicating that the stock price is attractive from the perspective of the company's management, but whether it has performance support and has the ability to execute the buyback is the key.
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