Bottom line: JD.com’s new share repurchase program looks like a good use of cash due to likelihood of a rebound for its stock, while its tie-up with a top Korean peer also looks like a good way to target Chinese consumers who like imported goods.
After amassing huge quantities of cash through a series of IPOs and other fund-raising activities, Chinese Internet companies are rapidly discovering a new use for those idle funds by buying back their own stock. The latest such move has JD.com (Nasdaq: JD), the nation’s second largest e-commerce company, announcing a new plan to buy back up to $1 billion worth of its shares, on the belief they have become undervalued in a recent sell-off.
JD was also in the headlines for another new tie-up with a major Korean retailer, announcing the opening of a flagship store to offer imported goods from South Korean e-commerce giant Lotte.com. This particular move is part of an ongoing drive by Chinese e-commerce firms to offer more imported goods to local consumers who are often wary of domestic products that are fakes and suffer from poor quality. Rival Alibaba (NYSE: BABA) has embarked on a similar drive, announcing its own new tie-up with Germany’s Metro Group the same day as the JD announcement. (company announcement)
I’ll look at JD’s new Korean tie-up towards the end of this post, but frankly am less interested in such deals due to their growing frequency. Instead, we’ll focus on the other newer trend for share buybacks, and whether such repurchasing represents good value for both the companies and their shareholders.
According to its new announcement, JD plans to buy back up to $1 billion of its American Depositary Shares (ADS) under a newly approved program with an initial authorized period of 2 years. (company announcement) The program will be funded with the company’s large cash pile that totaled about $4 billion at the end of the second quarter.
JD.com’s shares rallied 5 percent on the news
JD.com’s shares rallied 5 percent on the news, amid an upbeat day on Wall Street that saw strong gains for many other Chinese Internet shares. But even after the rally, JD’s shares are down nearly 40 percent from a peak in June when China’s stock markets crested after their own year-long rally. All that said, JD.com’s stock still looks relatively strong compared to some of its peers, and is up about 25 percent from its IPO price last year.
The same can hardly be said for many of China’s other Internet companies that made IPOs in 2015, a record year for such offerings amid a swell of positive sentiment towards such companies. JD’s biggest rival Alibaba reflects the downward pressure many companies are feeling, with its shares now trading 10 percent below their IPO price. Shares of the Twitter-like Weibo (Nasdaq: WB), one of last year’s other major IPOs, look even worse and now trade about 30 percent below their offering price.
JD’s move makes it the latest cash-rich Chinese Internet company to launch a buy-back plan to support its stock. Alibaba has launched the biggest such plan to date, worth up to $4 billion, while online search leader Baidu (Nasdaq: BIDU) has launched its own $1 billion plan. Last week online game leader NetEase (Nasdaq: NTES) announced a similar plan worth up to $500 million. (previous post)
I’m not usually a big fan of such plans, as they often don’t seem to have much effect on share prices and it seems like the cash could be better used on new initiatives. But in this case most of these companies already have too much idle cash, so such buybacks could represent a money-making opportunity if the stock rises. In this case I do tend to agree that many shares are oversold right now due to overblown panic about China’s economy. Thus many of these buybacks could represent a shrewd use of company cash.
We’ll close with a brief look at JD’s latest international tie-up, which will see it offer Korean goods through an online store stocked by local e-commerce giant Lotte.com. (company announcement; Chinese article) The 5-year tie-up is exclusive, and looks like a smart move due to the growing popularity of Korean goods in China.
I doubt this particular tie-up will add significantly to JD’s top or bottom lines. But collectively such overseas deals should help the company win some new business in China’s ultra-competitive e-commerce market, as it uses its scale and global connections to try to differentiate itself from its many rivals.
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