Tencent seen joining buyback wave sweeping China tech giants

Investors are betting the company will follow Alibaba and Xiaomi, which announced massive buybacks after their earnings.

HONG KONG (BLOOMBERG) - Share buybacks are emerging as the hottest trend among Chinese tech giants and industry leader Tencent Holdings may be the next to jump on the bandwagon.

The online gaming giant climbed as much as 3.1 per cent in Hong Kong on Wednesday (March 23), just before it is expected to announce its slowest profit growth ever. Investors are betting that the company will follow in the footsteps of Alibaba Group Holding and Xiaomi, which both announced massive buybacks after their earnings, with the moves fueling a rally in their shares.

The improving sentiment in tech stocks reflects broader hopes that China's crackdown on the sector is coming to an end after the government pledged greater support for the economy and capital markets. But a recovery remains dependent on concrete action from the authorities, and Morgan Stanley's equity strategists warn that it is too early to be optimistic.

"Alibaba and Xiaomi have probably kick-started shareholders' focus on buybacks after a horrendous performance in share prices in the last year," said Mr Kerry Goh, chief investment officer at Kamet Capital Partners. "Tougher restrictions on investing in other firms, coupled with a strong balance sheet and good cash flow should motivate Tencent to do a share buyback like the others."

An 18 per cent surge in Alibaba's stock since Tuesday indicates that share buybacks have become a more rewarding strategy for Chinese tech giants, after valuations slumped to near record lows and regulatory fears eased. Still, the scale of repurchases is small compared with mega-caps in the United States, which have bought back more than US$20 billion (S$27 billion) worth of stock in each of the recent quarters.

"In consideration of cash usage, shareholder returns may now become a priority over something say like the M&A (merger and acquisition) back in the past," said Mr Vey-Sern Ling, senior analyst at Union Bancaire Privee.

Tencent boosted its dividend payout, including offering JD.com shares, to lure investors. But those moves have failed to reverse a downtrend in its stock. This year, Tencent overtook Alibaba to become the biggest loser in China's tech rout after it shed about US$450 billion in market value since last February.

Tencent certainly has the financial resources for a buyback. The company held about US$40 billion in cash and short-term instruments on its balance sheet at the end of September, a figure that may well have increased when it reports the December quarter results.

The company's business is under pressure with revenue growth projected to fall to its slowest pace on record when it reports earnings later on Wednesday. Tencent's games business has been handicapped by Beijing's freeze on new titles, while its online advertising business is expected to have contracted for the first time on record in the fourth quarter.

Still, many analysts see opportunity in a buyback after Tencent plunged during Beijing's crackdown, at one point shedding more than US$500 billion in market value. Even after their recent rally, the shares trade at about 16 times earnings compared with Baidu's 32 times and Twitter's multiple of more than 100.

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