Legendary Chinese bets unwind as Buffett, SoftBank, Naspers sell

(Bloomberg) — For early backers, they are among the most profitable Chinese stock investments of all time: Tencent Holdings Ltd., Alibaba Group Holding Ltd. and BYD Co.

But now big-name investors who made billions in those stocks are pulling cash off the table, underscoring growing anger about the outlook for China’s biggest companies as President Xi Jinping tightens the government’s grip on the private sector and the economy falters under the persistent Covid lockdowns.

In the latest development, $7.6 billion worth of Tencent shares appeared on Hong Kong’s clearing and settlement system, usually a precursor to a share sale. Naspers Ltd., which invested through its Dutch unit Prosus NV, is the most likely seller because it is one of the few investors that can handle such a sizeable deal and is said to sell Tencent to fund a buyback.

This comes a month after Japan’s SoftBank Group Corp. said it had offloaded a huge chunk of Alibaba, the e-commerce pioneer that has long been China’s most valuable company. SoftBank, under pressure from failed startup bets, raised more than $17 billion by selling stock forward contracts. Berkshire Hathaway Inc. of Warren Buffett is reducing his stake in electric vehicle maker BYD.

Taken together, these moves represent a striking retreat from China’s private sector by investors who have been staunch defenders for decades. SoftBank founder Masayoshi Son invested about $20 million in Jack Ma’s Alibaba in 2000 and held on through the dot-com crash and the Chinese company’s IPO in 2014. Naspers invested in Tencent in 2001, while Berkshire bought shares in BYD in 2008.

“There is a big question mark over the growth model of Chinese tech giants like Tencent and Alibaba,” said Ke Yang, an analyst at Singapore-based DZT Research. “Government crackdowns have brought significant uncertainty.”

Sinn’s bet has long been considered one of the best venture capital investments of all time, increasing the value of his stake to more than $200 billion. But Alibaba and its affiliate Ant Group have been the main targets of the Communist Party’s crackdown, and its shares have tumbled more than 70 percent from their peak in 2020. Son said he would reduce new investment in China due to regulatory uncertainty.

Naspers’ backing of Tencent was also considered a legendary start-up investment. However, in June Prosus, the Naspers subsidiary, unveiled an “unrestricted” Tencent share sale program to fund a buyback of its own shares. Berkshire disposed of a total of 3.05 million shares, or 1.4% of its known stake of 225 million shares in BYD.

“There is a lot of de-risking on the part of China ahead of the party congress,” said Jason Hsu, chief investment officer at Rayliant Global Advisors, referring to the Communist Party gathering, which is likely to give Xi an unprecedented third term as president. “While some are betting on China returning to an aggressive growth mode, many are also betting on a structural shift towards central planning and state-owned enterprise-led economic policies focused on employment and general prosperity.”

Both Alibaba and Tencent have seen their business deteriorate significantly over the past two years. Both companies reported their first revenue declines last quarter. They were also forced to put money into government causes and reduce investments in Chinese startups.

Tencent, now China’s most valuable firm, is spending more judiciously after profits fell more than 50% last quarter. Authorities in Beijing have been slow to approve new game titles during the crackdown, cutting off a key opportunity for growth. It has been selling off assets, including some of its investment in Chinese online retailer JD.com Inc. and Singapore’s Sea Ltd., while increasing its stakes in global gaming companies such as Ubisoft Entertainment SA.

Alibaba’s net income fell 50% in the latest quarter as revenue at its core China commerce unit shrank for the first time. The company cut 9,241 jobs in the three months to June, according to the latest company filing, after cutting 4,375 in the first quarter of the year.

Cuts from tech leaders such as Alibaba, Tencent and Xiaomi Corp. exacerbated China’s jobs crisis, pushing youth unemployment to around 20%.

In recent quarters, the SoftBank son has been vocal in his growing concerns about the Chinese market. After seeing Alibaba’s value plummet, he pulled back from new investments in addition to selling shares in the e-commerce giant.

“We have reduced the reliance on China in our portfolio, so we believe we should not worry too much about the situation in China,” he said on an earnings call in May.

Alibaba and Tencent have long been among China’s most active startup financiers, helping to spur innovation across the economy. However, both companies had to withdraw due to Beijing’s concerns that they had too much control over their portfolio companies. This has increased their cash holdings, with Tencent holding over $40 billion on its balance sheet, while Alibaba has over $100 billion.

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