Alibaba's upscaled buyback may be a sign of things to come

[HONG KONG] Alibaba Group Holding's US$25 billion share buyback may kickstart a wave of such returns by cash-rich Chinese internet firms, giving investors a reason to revisit the battered sector.

Alibaba shares soared as much as 13 per cent in New York on Tuesday (Mar 22) after the e-commerce giant ramped up its repurchase program, fueling rallies in the likes of Baidu, JD.com, Xiaomi and Tencent Holdings on optimism that more Chinese technology giants will follow suit, and at scale.

"It is very likely that Tencent and Xiaomi will start share buybacks post results given their past practice," said Willer Chen, an analyst at Forsyth Barr Asia Ltd. Companies listed on Hong Kong's Hang Seng Tech Index bought back HK$2.5 billion (S$434 million) worth of shares in January, led by Xiaomi, according to data compiled by Bloomberg.

Though buybacks are common practice among US firms and have had a significantly positive impact on the S&P 500 for more than a decade, Chinese companies aren't known for making sizeable repurchases. While Alibaba's programme is the largest in the region, it is still dwarfed by those of megacaps Apple, Meta Platforms and Microsoft. Apple expanded its repurchase program by US$90 billion last year and has been buying back more than US$20 billion worth of stock in each of its recent quarters.

The Chinese firms aren't short of funds. Alibaba had accumulated US$46 billion in cash as of the latest quarter, Bloomberg data shows. Online gaming giant Tencent and e-commerce giant JD.Com also have tens of billions stashed, which could be used to start buybacks and boost the value of stocks that have nearly halved in value since their peak last February.

While Tencent and Xiaomi have already bought back some shares in the market, adding to those purchases has potentially become more rewarding as investors refocus on valuations and earnings following Beijing's vow to keep markets stable. Besides boosting confidence, reducing cash positions might be a wise move, since excessive liquidity would risk triggering concern about a company's limited ability to utilize capital.

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Investors have been buying the dip in US technology stocks, even as bond yields surge to the highest level in nearly 3 years. The Nasdaq 100 Index has bounced more than 10 per cent since its Mar 14 low after entering a bear market, despite the hawkish turn in Federal Reserve policy. Tech companies can continue to generate robust or stable earnings and are less affected by higher commodity prices, even if broader economic growth will be slower going forward, according to State Street Global Markets strategist Marija Veitmane, who has a preference for US tech stocks. BLOOMBERG