Author | Liu Baodan

Editor | Zhou Zhiyu

Since the beginning of the year, the stock price of China Securities has picked up, boosting market sentiment. JD and Ali have also taken steps one after another to take the opportunity to finance.

On the evening of May 23, Ali announced that it plans to issue 4.5 billion US dollars of convertible senior notes, which expire in 2031, with an interest rate of 0.5%. Two days ago, JD just announced the sale of 1.75 billion US dollars of convertible senior notes with an interest rate of 0.25%, which will expire on June 1, 2029.

As can be seen from the announcement, JD and Ali hope to take advantage of the current recovery in market sentiment, use convertible bonds to carry out low-cost financing, carry out capital management, and obtain capital to help develop the business.

Convertible bonds are generally viewed as a combination of bonds and bullish options, and interest rates are far lower than other financing methods such as corporate bonds and bank loans.

However, since convertible bonds are equivalent to issuing additional shares in disguise, they will dilute shareholders' equity, so the capital market has reacted violently to this in the short term. After JD announced that it would issue convertible bonds, its US stocks have already fallen by more than 12%, and Alibaba also fell 7.95% during the same period.

Many institutional sources believe that JD and Ali mainly issue convertible bonds to carry out repurchases, and it is expected that the whole can offset the potential dilution of shares when debt-for-equity swaps occur. The world's leading technology companies, including Apple and Amazon, have made similar moves.

According to the announcement, Ali will repurchase approximately 14.8 million American Depositary Shares at $80.80 per American Depositary Share, which will also fund future repurchases; JD also said that the issuance of convertible bonds will enable it to use low financing costs to speed up share buybacks.

Since 2020, Ali and JD have successively initiated repurchases. Ali's repurchase plan reached 40 billion US dollars, setting a new Chinese securities record; JD also announced at the beginning of the year that it would repurchase no more than 3 billion US dollars of shares over the next three years.

Behind the huge repurchase amount, huge amounts of capital are needed to support it. However, although the cash on hand, such as Ali and JD, is abundant, it is distributed across various business segments, and most of it is domestic. It is not very convenient, either in terms of the cost of using capital or from the perspective of the Group's overall capital operation. Ali, in particular, has not yet entered Hong Kong Stock Connect. Compared to Tencent's repurchase, the overall cost is higher and more complicated.

However, from this issuance of convertible bonds, we can see the confidence that JD and Ali will develop their own companies next.

Some market analysts also pointed out that Ali has sufficient cash, that issuing convertible bonds is “developing itself in a smart way,” and that Ali's overall balance ratio is far lower than Amazon's 61.8% and Apple's 79% during the same period.

In fiscal year 2024, the net cash flow from Ali's operating activities was 182,593 billion yuan, a year-on-year decrease of 9%. By the end of 2023, Ali's overall balance ratio was only 37.3%.

Shen Meng, director of Chanson Capital, believes that financing repurchases can not only increase earnings per share and increase returns to shareholders by reducing share capital, but also reduce the taxable ratio by reducing financing costs and optimize the income structure when performance is under pressure.

HSBC also pointed out in a report that it is not surprising that internet companies use the bond market to enhance shareholder returns. In the current high interest rate environment, convertible bonds provide a better financing option compared to ordinary bonds.

Also, as can be seen from Ali's repurchase plan, it made some exquisite calculations to offset the effects of debt-to-stock swaps on stock dilution.

The initial conversion rate of Ali Notes is 9.5202 American Depositary Shares for every $1,000 principal amount of notes, with a premium of about 30%.

In addition, Ali also plans to fund the $5737.5 million needed to establish a limit bullish deal. According to the announcement, the maximum price for bullish limited-limit transactions is expected to be 100% higher than the final transaction price of American Depositary Shares on the day the notes were issued and priced. It can be understood that Alibaba will buy a call option that will increase its stock by about 100%.

As a result, while using lower costs to borrow funds in US dollars, Ali uses options to hedge out potential dilutions caused by debt-for-equity swaps, and also uses options to increase leverage to save hedging costs.

Both S&P and Moody's gave an “A1” rating for the issuance of Ali's convertible bonds. Fitch also gave Ali convertible bonds an “A+” rating. This reflects the low risk nature of these notes. As of March 31, 2024, Ali's debt structure included 68.4 billion yuan in bank loans and 102.3 billion yuan in priority unsecured notes.

“The proposed bond issue will enhance Alibaba's already strong liquidity, provide greater financial flexibility, and support steady revenue growth,” said Shawn Xiong, vice president and senior analyst at Moody's.

With the issuance of convertible bonds by Ali and JD, it is expected that China Securities will usher in a new wave of convertible bonds. HSBC predicts that Meituan and Tencent are the companies most likely to issue convertible bonds, while NetEase may remain more defensive.