There’s some evidence that the 1% tax on share buybacks implemented by way of the Inflation Reduction Act dampened repurchase activity in the U.S. last year. Investors looking for corners of the market that are still homes to robust buyback activity might want to consider China.
Specifically, the KraneShares CSI China Internet ETF (KWEB) has become an epicenter of large-scale share repurchases – a potentially encouraging sign. The exchange traded fund is one of the bright spots in the long-struggling China ETF category. Year-to-date, KWEB is up 6.33% while the MSCI China Index is higher by just 5%.
It’s often said that buybacks indicate that management teams believe their companies’ shares are undervalued. On that note, KWEB member firms are putting their money where their proverbial mouths are, gobbling up their own shares at record paces while putting floors under share prices that languished over the past several years.
KWEB Big Names Unveil Big Buybacks
Two examples of the sizable repurchase activity recently executed by KWEB member firms come courtesy of the ETF’s top two holdings – Tencent (TCEHY) and Alibaba (BABA). Those two stocks combine for 19% of the fund’s roster. That’s meaningful because in the first quarter, Alibaba spent $4.8 billion buying back its own stock.
Last year, Tencent allocated $6.3 billion to share repurchases and it’s expected that company could double that amount this year. Earlier this year, Alibaba told investors it’s adding $25 billion to a previously announced buyback program that’s slated to run through 2027.
“Overall, companies listed in Hong Kong spent 126 billion Hong Kong dollars ($16.1 billion) buying back shares in 2023, the highest on record, according to Chinese financial data provider Choice. Tencent alone accounted for about 40% of total share buybacks in the Hong Kong market,” reported Lauren He for CNN.
Tencent and Alibaba are arguably the KWEB holdings with which U.S. investors are most familiar. Still, market participants should not gloss over increasing buyback activity among other Chinese internet firms. These include others held by KWEB.
Meituan, Kuaishou and Xiaomi are also among the Chinese internet companies that are accelerating repurchases of their own shares. Meituan is KWEB’s third-largest component, commanding a weight of 8.67%. Kuaishou accounts for 3.76% of the fund’s portfolio.
Importantly, Beijing is asking Shanghai- and Hong Kong-listed firms to repurchase their shares to stabilize Chinese equity markets, meaning KWEB companies are appeasing the government – something that is usually a positive when it comes to investing in that country.
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