Chinese stocks pick up momentum on Alibaba share buyback increase – The Average Joe
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    Chinese stocks pick up momentum on Alibaba share buyback increase


    March 23, 2022

    Alibaba announced a $25B buyback program over the next two years — sending its stock up 11%.

    What’s the big deal? Per Citigroup analysts, this is likely the largest buyback program in China (via WSJ) — signaling Alibaba management thinks its stock is undervalued.

    Execs including Jack Ma and Joe Tsai also slowed the pace of selling in the second half. Alibaba has a lot of cash to use — with a massive $77B cash & equivalents balance — nearly a quarter of its total market value (via FT). But investors should have two concerns:

    • Slowing growth: BABA reported 10% growth in the recent quarter — the slowest since going public in 2014.
    • Falling margins: Gross profit margins fell from 45% in 2020 to 37% in the past 12 months.

    Buyback effect: Per Bloomberg, stock buybacks are common in the US — positively impacting the S&P 500 — with APPL spending $85B on buybacks in 2021.

    • Alibaba increased their buyback program several times in the past two years — each failing to stop its stock from free falling.
    • But this time, its buybacks coincided with China’s top economic official announcing favorable market policies last week.

    Other Chinese tech giants will likely start share buybacks as well — per Forsyth Barr Asia analyst (via BBG).

    **All boats rising:**The news sent other Chinese tech giants up — also looking cheap based on valuation metrics. Since China revealed their updated plans on March 15:

    • Pinduoduo (NASDAQ:PDD) — with a 24x price-to-earnings (P/E) multiple — is up 83%.
    • JD (NASDAQ:JD) — with a 31x P/E multiple — is up 51%.

    Amazon — Alibaba’s North American Doppelgänger — trades at a 65x forward price-to-earnings multiple — 5 times more than Alibaba’s multiple.

    We’ve had many head fakes from China in the past two years. Alibaba is up 50% over the past week — but zooming out, its stock is still down 63% from its 2020 peak.

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