Alibaba and JD.com make successive moves

Author | Liu Baodan

Editor | Zhou Zhiyu

Since the beginning of the year, Chinese concept stocks have rebounded, boosting market sentiment. JD.com and Alibaba have also successively taken the opportunity to raise funds.

On the evening of May 23, Alibaba announced its plan to issue $4.5 billion in convertible preferred notes, maturing in 2031 with an interest rate of 0.5%. Just two days ago, JD.com announced the issuance of $1.75 billion in convertible preferred notes with an interest rate of 0.25%, maturing on June 1, 2029.

From the announcement, it can be seen that JD.com and Alibaba are hoping to take advantage of the current market sentiment to raise low-cost financing through convertible bonds, for capital management and to support business development.

Convertible bonds are usually seen as a combination of bonds and call options, with interest rates much lower than other financing methods such as corporate bonds and bank loans.

However, since convertible bonds are equivalent to a disguised increase in shares, they dilute shareholder equity, leading to a sharp short-term reaction in the capital market. After JD.com announced the issuance of convertible bonds, its stock price on the US stock market has dropped by over 12%, while Alibaba has also fallen by 7.95% during the same period.

Many institutional professionals believe that JD.com and Alibaba are mainly issuing convertible bonds for the purpose of repurchasing shares, expecting that the overall dilution of shares from debt-to-equity conversion can be offset. Global leading tech companies like Apple and Amazon have also made similar moves.

According to the announcement, Alibaba will repurchase approximately 14.8 million American depositary shares at $80.80 per share, providing funds for future repurchases; JD.com also stated that the issuance of convertible bonds will enable it to accelerate share buybacks using low financing costs.

Since 2020, Alibaba and JD.com have initiated share buyback programs. Alibaba's buyback plan amounts to $40 billion, setting a new record among Chinese concept stocks; JD.com also announced earlier this year a share buyback plan not exceeding $3 billion over the next three years.

Behind the massive buyback amounts lies the need for substantial funds to support them. However, although companies like Alibaba and JD.com have ample cash on hand, it is mostly distributed across various business segments and mostly held domestically. Whether in terms of cost of fund utilization or from the perspective of overall capital operation within the group, it is not very convenient. Especially for Alibaba, which has not yet entered the Hong Kong Stock Connect, compared to Tencent's buyback activities, the overall cost is higher and more complex.

Nevertheless, from this issuance of convertible bonds, it can be seen that JD.com and Alibaba have confidence in their future company development.

Market analysts also point out that Alibaba, with sufficient cash reserves, is issuing convertible bonds as a "smart way to develop itself," and Alibaba's overall debt-to-asset ratio is much lower than Amazon's 61.8% and Apple's 79% during the same period.

In the fiscal year 2024, Alibaba's net cash flow from operating activities was ¥182.593 billion, a 9% decrease year-on-year. As of the end of 2023, Alibaba's overall debt-to-asset ratio was only 37.3%.

Shen Meng, director of Xiangsong Capital, believes that financing for buybacks can not only reduce share capital to increase earnings per share and enhance shareholder returns, but also optimize the income structure in a tax-efficient manner during periods of performance pressure HSBC also pointed out in a report that it is not surprising for internet companies to use the bond market to enhance shareholder returns. In the current high interest rate environment, convertible bonds provide a better financing option compared to regular bonds.

Moreover, from Alibaba's buyback plan, it can be seen that the company has made some clever calculations to offset the dilution effect on shares due to convertible bonds.

The initial conversion rate of Alibaba's notes is 9.5202 American depositary shares per $1,000 principal amount of notes, at a premium of about 30%.

In addition, Alibaba plans to provide funding of $573.75 million for establishing limit call options. According to the announcement, the upper limit price of the limit call options is expected to be 100% higher than the closing price of American depositary shares on the day of note issuance. This can be understood as Alibaba purchasing call options that its stock will rise by approximately 100%.

This allows Alibaba to borrow US dollars at a lower cost, hedge the potential dilution from convertible bonds with options, and save hedging costs by leveraging options.

Standard & Poor's and Moody's both rated Alibaba's convertible bonds as "A1". Fitch also gave Alibaba's convertible bonds an "A+" rating. This reflects the low risk of these notes. As of March 31, 2024, Alibaba's debt structure includes 68.4 billion yuan in bank loans and 102.3 billion yuan in senior unsecured notes.

Shawn Xiong, Vice President and Senior Analyst at Moody's, stated, "The proposed bond issuance will enhance Alibaba's already strong liquidity, provide greater financial flexibility, and support stable revenue growth."

With the issuance of convertible bonds by Alibaba and JD.com, it is expected that Chinese concept stocks will usher in a new wave of convertible bond frenzy. HSBC predicts that Meituan and Tencent are the most likely companies to issue convertible bonds, while NetEase may maintain a more defensive stance