More Chinese technology companies might turn to convertible bonds after Alibaba Group Holding and JD.com raised a combined US$6.5 billion through such notes.
Alibaba sold US$4.5 billion in debt that can be turned into equity last week, a record for convertibles denominated in dollars by an Asian company, with part of the proceeds to be used to buy back shares. That came just after a US$2 billion sale by rival online retailer JD.com, which also plans buy-backs.
“Other Chinese internet majors may follow suit and tap cheaper funding to replenish the cash outflow used for buy-backs and overseas investment,” said Cecilia Chan, an analyst with Bloomberg Intelligence. That because equity valuations are still cheap and market sentiment is turning positive on Chinese stocks, she wrote in a note.
In a high interest-rate environment, convertibles become compelling compared with regular debt, particularly for companies that need foreign currency but get most of their revenue domestically. JD.com and Alibaba have high ratios of net cash to market capitalisation, so were prime candidates to sell the debt, and other similarly situated firms such as Baidu may follow suit.
“Stepping up capital returns is a trend for undervalued China tech companies this year, and share buy-backs are the preferred way rather than dividends,” said Vey-Sern Ling, a managing director at Union Bancaire Privee. “Convertible bonds provide a cheaper financing alternative to straight bonds.”
China’s biggest tech giants are trading far below historical peaks, following Beijing’s crackdown on the sector in 2021 that wiped out billions in market value. Both Alibaba and JD.com’s shares have plunged more than 70 per cent from highs in 2020 and 2021.
But shares of Chinese tech firms have been rallying since February, as the government signalled more support for the industry while cheap valuations lured investors.
Meituan, Tencent Holdings, NetEase and PDD Holdings are potential candidates to sell convertibles, according to Julia Pan, an analyst at UOB Kay Hian.
“It is likely that other companies with share repurchase plans and dividend issuances will also turn to the bond market to enhance shareholder returns,” she said.