China’s legendary bets unravel as Buffett, SoftBank, Naspers Sell

(Bloomberg) — For early backers, it was some of 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 have made billions in those stocks are taking money off the table, underscoring growing anxiety about the outlook for China’s biggest companies as President Xi Jinping tightens government control over the private sector and the economy falters due to 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 invests through its Dutch unit Prosus NV — is the most likely seller because it is one of the few investors that can handle such a large transaction and is said to sell Tencent to fund acquisitions.

This comes a month after Japan’s SoftBank Group Corp. said he unloaded a huge gash on Alibaba, the e-commerce pioneer that had long been China’s most valuable company. SoftBank, under pressure from bets made by botched startups, raised more than $17 billion by selling futures on the stock. Berkshire Hathaway Inc. of Warren Buffett is reducing its stake in electric vehicle maker BYD.

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

“There is a big question mark over the growth model of Chinese tech giants like Tencent and Alibaba,” said Ke Yan, an analyst at Singapore-based DZT Research. “The government crackdown has brought significant uncertainty.”

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

Naspers’ backing of Tencent was similarly considered a legendary startup investment. However, in June Naspers subsidiary Prosus unveiled an “unrestricted” plan to sell Tencent shares to fund buybacks of its own shares. Berkshire divested a total of 3.05 million shares, or 1.4% of its known 225 million share stake in BYD.

“There is a great deal of de-risking from China ahead of the party congress,” said Jason Hsu, chief investment officer at Rayliant Global Advisors, referring to the Communist Party gathering that will likely give Xi a record third term as president. . “While some are betting on China’s return to aggressive pre-growth, many are also betting on a structural shift towards central planning and an SOE-led economic policy focused on employment and shared prosperity.”

Alibaba and Tencent have seen their businesses deteriorate noticeably over the past two years. The two companies reported their first revenue declines in the most recent quarter. They were also forced to invest money in government purposes and cut back on investment in China’s startups.

Tencent, now China’s most valuable company, is spending more wisely after profits fell more than 50% in the most recent quarter. Beijing authorities have been slow to approve new game titles during the crackdown, cutting off a key opportunity for development. It sold assets, including some of its investments in Chinese online retailer 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 from its core China business shrank for the first time. The company laid off 9,241 employees in the quarter to June, according to the latest company filing, after cutting 4,375 in the first quarter of the year.

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

In recent quarters, SoftBank’s son has expressed growing concerns about China’s market. After seeing Alibaba’s value sink, it pulled back on new investments in addition to selling shares in the e-commerce giant.

“We’ve reduced the reliance on China in our portfolio, so we don’t think we need to worry too much about the situation in China,” he said during an earnings call in May.

Alibaba and Tencent have long been among the most active funders of Chinese startups, helping to drive innovation across the economy. However, both companies were forced to back down due to Beijing’s concerns that they were exercising too much control over their portfolio companies. That swelled their cash, with Tencent holding more than $40 billion on its balance sheet, while Alibaba has more than $100 billion.

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