(Bloomberg) -- Share buybacks are emerging as the hottest trend among Chinese tech giants and industry leader Tencent Holdings (OTC:TCEHY) Ltd. may be the next to jump on the bandwagon.
The online gaming giant climbed as much as 3.1% in Hong Kong on Wednesday, just before it’s expected to announce its slowest profit growth ever. Investors are betting that the company will follow in the footsteps of Alibaba (NYSE:BABA) Group Holding Ltd. and Xiaomi (OTC:XIACF) Corp., which both announced massive buybacks after their earnings, with the moves fueling a rally in their shares.
The improving sentiment in tech stocks reflects broader hopes that China’s crackdown on the sector is coming to an end after the government pledged greater support for the economy and capital markets. But, a recovery remains dependent on concrete action from the authorities, and Morgan Stanley’s equity strategists warn that it’s too early to be optimistic.
“Alibaba and Xiaomi have probably kick-started shareholders’ focus on buybacks after a horrendous performance in share prices in the last year,” said Kerry Goh, chief investment officer at Kamet Capital Partners Pte. “Tougher restrictions on investing in other firms, coupled with a strong balance sheet and good cash flow should motivate Tencent to do a share buyback like the others.”
An 18% surge in Alibaba’s stock since Tuesday indicates that share buybacks have become a more rewarding strategy for Chinese tech giants, after valuations slumped to near record lows and regulatory fears eased. Still, the scale of repurchases is small compared to megacaps in the U.S., which have bought back more than $20 billion worth of stock in each of the recent quarters.
“In consideration of cash usage, shareholder returns may now become a priority over something, say like the M&A back in the past,” said Vey-Sern Ling, senior analyst at Union Bancaire Privee.
Tencent boosted its dividend payout, including offering JD (NASDAQ:JD).Com Inc. shares, in order to lure investors. But, those moves have failed to reverse a downtrend in its stock. This year, Tencent overtook Alibaba to become the biggest loser in China’s tech rout after it shed about $450 billion in market value since last February.
Tencent certainly has the financial resources for a buyback. The company held about $40 billion in cash and short-term instruments on its balance sheet at the end of September, a figure that may well have increased when it reports the December quarter results.
The company’s business is under pressure with revenue growth projected to fall to its slowest pace on record when it reports earnings later Wednesday. Tencent’s games business has been handicapped by Beijing’s freeze on new titles, while its online advertising business is expected to have contracted for the first time on record in the fourth quarter.
Still, many analysts see opportunity in a buyback after Tencent plunged during Beijing’s crackdown, at one point shedding more than $500 billion in market value. Even after their recent rally, the shares trade at about 16 times earnings compared with Baidu Inc (NASDAQ:BIDU).’s 32 times and Twitter Inc (NYSE:TWTR).’s multiple of more than 100.
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