Internet stocks actively rewarding shareholders

Recently, internet stocks have successively disclosed their financial reports. Although in a low-growth environment, the performance growth rate has not surprised the market, the most intuitive feeling is that all companies are increasing shareholder returns, whether it is doubling the repurchase amount or increasing dividends. This is a sign that internet stocks are getting better and better. Of course, in the current challenging environment, foreign investors have not yet changed their attitude towards Chinese assets. Even with increased shareholder returns, it is difficult for stock prices to rise significantly in the short term. It still requires continuous efforts from shareholders of various companies to get through this period of lowest valuation. I. Chinese concept stocks at different valuation stages After releasing their performance reports, Tencent's market stock price has not reacted much in the past few days, while Alibaba's stock price has risen by nearly 10% and JD.com's has risen by over 12%. From the perspective of shareholder returns, these three companies performed well in the first half of the year. However, considering the valuation and the proportion of direct shareholder returns, these three companies are in different competitive stages, so the degree of stock price reaction is also different. Looking at Tencent's performance in the second quarter, the advertising business grew by 20% beyond expectations, game growth rebounded, local games grew by 9% year-on-year, better than the expected 5-8%, and there are expectations for the growth of video accounts. Despite concerns about a weakening environment in the second quarter, Tencent has shown strong resilience. There is no need to worry too much about Tencent's growth, after all, unlike Alibaba and JD.com, it is not being aggressively pursued by Pinduoduo and Douyin. In terms of competitive landscape, Tencent's foundation is more stable, and it will continue to increase its dividend amount year by year, which is highly probable. Assuming Tencent maintains a daily repurchase of 1 billion yuan for the rest of the year, deducting the repurchase silent period + public holidays, Tencent's annual repurchase can reach 140 billion yuan, plus a dividend of 33 billion yuan, the overall shareholder return rate reaches 5%. Adding an expected 8% performance growth, an EPS exceeding 10% for the whole year is foreseeable. Looking at shareholder returns in recent years, Tencent is the company with the highest shareholder return intensity. In 2021, Tencent distributed JD.com shares, with a shareholder dividend rate of about 3.87%; in 2022, distributing Meituan shares + repurchase, the shareholder return rate for 2022 is 5.4%. Even in the past 2 years, Tencent no longer sells assets to pay dividends, relying solely on its own repurchase + dividends can also reach a level of 5%, which is sustainable in the future. Additionally, as mentioned earlier, the recent reduction of holdings by major shareholders in South Africa has no impact on Tencent, as the company's own hundred billion repurchase + inflow of funds from the south completely overwhelms the reduction in holdings by major shareholders in South Africa. So, why did Tencent's performance outshine Alibaba and JD.com this time, yet the stock price did not rise much? II. Alibaba and JD.com, sustainability of repurchases On the one hand, from the perspective of valuation odds, at the current stage, Alibaba and JD.com have higher elasticity than Tencent. Currently, Tencent corresponds to a PE of around 14 times next year, while Alibaba had a PE of 9.3 times before the significant rise, and JD.com had only 8 times before the significant rise

On the other hand, the market's positioning of Tencent is to have growth potential + stable shareholder returns. Shareholder returns are the safety net, while growth is the key factor driving Tencent's rise. The market's positioning of Alibaba and JD.com will be slightly lower. As long as they can maintain their current market share, stabilize their base, and prevent their performance from deteriorating, currently trading at a low PE valuation of 8-9 times, coupled with sustainable shareholder returns, these marginal positive changes can drive a wave of upward movement. In the first half of this year, the core customer management and product revenue of Alibaba and JD.com both grew in the range of 0-1% year-on-year, indicating stagnant growth, being defensively challenged by e-commerce platforms such as Pinduoduo and Douyin. According to a foreign report, the e-commerce landscape is expected to change by 2024. Taobao's market share will decline from 18% in 2023 to 17% in 2024, and further to 16% in 2025. It is expected that Alibaba's share will stabilize by 2026. Tmall's share is expected to decline more rapidly, from 19% in 2023 to 17% this year, and further to 15% next year. JD.com's share is expected to decrease from 18% in 2023 to 17% this year, and then to 16%. Comparing the shareholder returns of the three companies, although Tencent's repurchase amount is high, due to the smaller market capitalization of Alibaba and JD.com, their shareholder return ratios are higher. As of the first half of the year, Tencent repurchased a total of HKD 52.3 billion, reducing the total share capital by approximately 1.45%; Alibaba repurchased a total of USD 10.6 billion, reducing the total share capital by approximately 6%; JD.com repurchased a total of USD 3.3 billion, reducing the total share capital by approximately 7.1%. Assuming that Tencent, Alibaba, and JD.com continue to execute repurchases and dividends at the same pace as the first half of the year for the remaining trading days of the year, Tencent's total share capital will decrease by approximately 5% for the full year, Alibaba's total share capital will decrease by 12%, and JD.com's total share capital will decrease by approximately 10%. According to the statements of Alibaba and JD.com management, they both promise to continue repurchasing shares in the future. The market expectation difference lies in whether Alibaba and JD.com can maintain their base. If future profits are sustainable, market expectations for Alibaba and JD.com will improve. However, judging from the current cash flow of Alibaba and JD.com, if the base does not continue to decline, the future repurchase intensity may be discounted, and the current large-scale repurchases may be one-off. Currently, only Tencent is under little pressure to increase shareholder returns year by year. As of the second quarter, excluding interest-bearing liabilities, Alibaba's net cash was RMB 287.1 billion, a nearly 25% year-on-year decline, with an annualized operating cash flow slightly below RMB 140 billion. Considering the demand for AI capex, the sustainability of large-scale repurchases is one of the current market's points of contention. Based on the current market's expected non-GAAP net profit of around RMB 153 billion, if the repurchase intensity for the remaining trading days of the year does not decrease, the full-year repurchase will require around USD 21.2 billion, corresponding to Alibaba's full-year non-GAAP net profit level With a full-year non-GAAP net profit of 153 billion, corresponding to a current PE ratio of around 9.2. As of the second quarter, deducting interest-bearing debt and adding up liquid assets, JD.com's net cash is 139.5 billion yuan. The market expects an annual profit of around 38 billion, corresponding to a market value of 300 billion at a PE ratio of 7.9. Looking at the valuation by subtracting net cash from market value, the valuation is less than 4 times. Assuming the buyback intensity remains the same throughout the year, with an annual buyback of 6.6 billion US dollars and a total share reduction of 10%, it would cost around 47.1 billion yuan. However, JD.com currently has only 400 million US dollars left in buyback quota, and it is unknown whether they are willing to significantly increase the quota in the future. Nevertheless, just like Alibaba, JD.com has stopped expanding its business. Compared to investing or increasing AI capital expenditure, using the large amount of cash accumulated in previous years for shareholder returns would be a better choice. So, looking at shareholder returns and current valuations, are Alibaba and JD.com expensive now? Obviously not, which can explain why the recent stock price performance of Alibaba and JD.com is better than Tencent. This is because the direct shareholder return ratio is higher and the valuation is lower. In fact, the shareholder return strength of Internet companies is not inferior to some dividend stocks. Tencent, Alibaba, and JD.com do not directly pay dividends but provide returns through the reduction in the number of shares through buybacks. III. Conclusion Overall, for buying growth potential and shareholder returns, Tencent is the preferred choice. If buying for shareholder returns, then Alibaba and JD.com are the choices. If buying purely for growth potential, then Pinduoduo is the option. Another company, Meituan, has not disclosed its performance yet, and its current buyback amount is 3 billion US dollars, which corresponds to a 3.5% reduction in the total number of shares for the year. It should be noted that large buybacks can only support stock prices, and significant increases require macro improvements. When these two conditions are met, Internet stocks can generate significant returns.​