Alibaba and Chinese tech stocks: Record $25 billion stock buyback is the buy signal you need

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Investment thesis

Alibaba Group (NYSE: BABA) has had a solid week of recovery since last week’s massive capitulation. We also discussed in our previous article the argument that now is the time for investors to stock up. We also recently upgraded our Hold to Buy rating. We were driven by signs of deeply oversold conditions, coupled with extreme street pessimism. Then, the Council of State followed with a massive movement of stabilization. It helped calm nerves amid the sellout, attracting large swathes of bottom anglers.

Soon after, Chinese President Xi Jinping stressed that state authorities should minimize disruptions to China’s economy despite rising COVID-19 cases. This was the signal we needed from the government. Notably, he did not specify that China would move away from its zero-COVID policy. Given China’s current vaccination rates and massive population of 1.4 billion, we shouldn’t expect that to happen anytime soon. But it demonstrated that China is focused on stabilizing its economy and financial markets in 2022 as President Xi could potentially run for his third term.

Then Alibaba surprised us with another massive $25 billion stock buyback authorization. The company even pointed out that it was “the biggest ever takeover of Chinese internet stocks”.

We think Alibaba thinks the worst is over for Chinese tech stocks. He is ready to deploy even more of his massive $78 billion horde to buy back his shares on the cheap. Therefore, investors should follow suit. Additionally, we believe that BABA stock is now significantly undervalued as the policy overhang appears to be neutralized.

Why the $25 billion buyout is massive

Alibaba has had two major share buyback programs in place since its shares fell dramatically at the end of 2020. However, the current program and the third easily exceeded its previous authorizations of $10 billion and $15 billion. as management went on the offensive. Deputy Chief Financial Officer Toby Xu said, “The large-scale share buyback underscores our confidence in Alibaba’s long-term, sustainable growth potential and value creation.

Alibaba’s new program runs until March 2024 and replaced the previous authorization of $15 billion. Additionally, the company pointed out that it spent $9.2 billion of its last program on buyouts. Therefore, we believe management wanted to let investors know that it was ready to go on the offensive to crush bearish bets and help Alibaba shares cross the milestone into 2022.

China’s recent political communication has been constructive

China’s State Council has sent a clear message to the market that it will “actively introduce policies that benefit markets.” This helped stem the deepening unease, which culminated in what we believe to be a sellout. Several financial institutions like JPMorgan (JPM) have pointed out that Chinese stocks are “uninvestable”. It had undoubtedly triggered significant risk aversion among global institutional investors. Caixin reported (edited):

Some Institutional Investors Are Ditching Them All once companies are put on the provisional delisting list, as managers of pension funds, university endowments and mutual funds are cautious about avoiding risky assets. – Caixin

However, the world’s largest asset manager, Blackrock, followed up with a note to clients pointing out that (edited): “Hong Kong-traded stocks have become ‘extremely attractive’ after recent declines. In times of crisis, some valuations may reach levels previously unimaginable.” Notably, the asset manager had reduced its holdings of Chinese stocks in 2021, such as JD.com (JD). Therefore, a vote of confidence from Blackrock is definitely going in the right direction.

Additionally, Bloomberg reported that “the Chinese government has said it will step up policy support for the economy and capital market.” This is the first clear indication that China was ready to introduce targeted monetary policy measures to strengthen the economy’s demand equation since its message last week. Notably, China’s State Council “called for the adoption of monetary policy tools to keep credit expansion at a steady pace. ‘avoid measures that could damage confidence in the capital market’.

In addition, the Chinese government also significantly increased its cash surplus between January and February, to levels not seen in 2000. T yuan ($184 billion) in January-February. This is the largest increase for the two-month period since comparable data dating back to 2000.”

In addition, ANZ Group (OTCPK:ANZBY) pointed out that this is a sign that the government is preparing to increase budget spending on infrastructure. He added (edited): “There will be plenty of room for further fiscal stimulus, and fiscal spending will be accelerated significantly from March.”

Therefore, we believe signs are becoming increasingly clear that China will ease its equity bottom by H2’22. China is actively preparing to stabilize the economy and financial markets, heading for the pivotal Chinese National Congress later this year.

Zero-COVID policy adjustment Demonstrated flexibility

China is not expected to reverse its zero-COVID policy anytime soon, and it is justified. Given its massive population of 1.4 billion, the potential strain effect on its healthcare system could be unsustainable. Additionally, Caixin reported (edited):

As of March 14, 88% of China’s 1.4 billion people, or 1.24 billion, were fully vaccinated, according to official data. But only 44.7% of the population received a reminder shooting for better protection. Moreover, only half of Chinese people aged 80 or over are fully vaccinated. – Caixin

However, China has recently introduced significant adjustments to its dynamic zero COVID policy. These adjustments have shortened quarantine requirements and lowered hospital discharge criteria. It has also added antigen testing as part of its testing regimen.

Therefore, state authorities are putting in place measures to deal with President Xi’s edict to minimize disruption to the economy and society. He stressed, “Strive to achieve the greatest prevention and control effect with the least cost, and minimize the impact of the pandemic on economic and social development.”

Consequently, Shenzhen is said to have emerged from its lockdown, despite rising COVID-19 cases in other parts of the country. Nikkei reported (edited):

China’s Shenzhen tech hub ended its coronavirus lockdown on Monday. Shenzhen “will ensure the security and stability of industrial supply chains,” a city official told reporters on Sunday ahead of movement restrictions being lifted on Monday. – Nikki

Shenzhen’s importance to the technology supply chain cannot be underestimated. Apple’s (AAPL) main contract manufacturer, Foxconn (OTCPK:HNHAF), allocates around 20% of its iPhone production capacity to Shenzhen. Many other companies also rely on Shenzhen as a manufacturing and R&D hub. Therefore, we believe China is confident that it will manage its COVID-19 strategy with the right amount of flexibility. The focus will be on minimizing disruption as much as possible, using all available tools at their disposal. Therefore, this is an important political development for China’s COVID strategy.

Is the BABA share a buy, sell or hold?

We believe BABA’s massive buyback authorization coupled with recent Chinese government measures are very constructive for discretionary consumer spending from H2’22 onwards. Additionally, we believe these are crucial steps taken by the government to help Alibaba and its Chinese tech peers hit rock bottom this year.

As such, we are revising our rating on BABA stocks from Buy to Strong Buy.

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