Asia Tea Time - Cup 57 ☕

This week I talk a record convertible bond issue by Alibaba, what to watch out for when getting a cash back card, and emus in Hong Kong.

Macro in Asia

Alibaba issues US$4.5 billion convertible bond to fund share buybacks

Chinese tech giant Alibaba issued US$4.5 billion worth of convertible bonds in order to fund a newly-initiated share buyback.

It’s Asia’s largest ever convertible bond sale and the world’s biggest since 2008.

Why it’s happening

• Alibaba wants to buy back up to 14.8 million of its American Depository Receipts (ADRs) – basically its US-listed shares – and so part of the proceeds will go towards this.  

• Buying back shares is (usually) done when the company’s management thinks shares are cheap. Alibaba’s top dogs clearly think this is the case.

• Issuing convertible bonds (CBs) basically allows Alibaba to borrow money at a super cheap price – it’s paying a coupon of only 0.5% on the CBs.

• Meanwhile, it gives buyers of the CBs the ability to convert them into shares. This will only happen if Alibaba’s shares rise 30% from where they were when the CBs were issued.

Why it matters

• In a time of supposedly easing scrutiny from the Chinese government, Big Tech in China is trying to get its mojo back. This CB issue is one sign of that.

• Additionally, Alibaba is taking advantage of its recent share price surge to issue CBs that are a bullish bet on further share price gains and a sign that management thinks its shares are cheap.

• Alibaba also needs the money to fight off intense competition from the likes of Pinduoduo and ByteDance, which is the owner of China’s dominant short-video app Douyin.

What’s next?

• It will be interesting to see where Alibaba puts the proceeds to use in upcoming months. While a decent portion will be used for buybacks, management also stated that it would use funds to drive its efforts in Artificial Intelligence (AI). 

Tim’s Take 

• Alibaba seems to be back in the good books with investors as its US-listed shares are up around 15% since mid-April.

• But that has been part of a broader rally in China markets as investors feel companies in the world’s second-largest economy are now just too cheap to ignore.  

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The latest CB issue by Alibaba does signal that its new management – led by Chairman Joe Tsai and CEO Eddie Wu – think along the same lines. 

The two senior management figures, along with Alibaba founder Jack Ma, started buying shares in the company themselves at the start of this year. That’s typically a sign that management views the shares as a bargain. 

Of course, they are biased in a sense that they will be looking at the company with rose-tinted glasses. For investors, the key is whether Alibaba still has the chops to fend off fierce competitors both locally and internationally.

Domestically, the Pinduoduos and ByteDances have taken a bigger share of e-commerce growth while in international markets, Temu (owned by Pinduoduo) and fashion giant Shein are dominating Alibaba’s international efforts.

More recently, Alibaba initiated its first dividend and also initiated another US$25 billion share buyback programme at the start of April.

It’s almost contradictory. Management thinks shares are cheap and are buying back yet they’re championing the innovative spirit and growth potential of Alibaba. 

Yet buying back shares on the scale that Alibaba is suggests that other uses for its capital aren’t that attractive. That could be a bad sign for investors looking for strong growth going forward.

• At the end of the day, Alibaba’s shares could continue to struggle until it demonstrates to investors that has a plan to take back market share in areas where it’s lagging, particularly versus its domestic peers.

Tim’s money tip of the week

Regular readers of this newsletter will be aware that I’m more of a “miles” guy (versus cashback) when it comes to credit card rewards.

However, some of the common complaints I hear about redeeming miles I can sympathise with. Mainly, the lack of availability when you do want to redeem tickets on Singapore Airlines can make the whole process want to pull your hair out.

Of course, redeeming early on popular routes (Singapore Airlines lets you book nearly a year in advance) and flying less popular routes before connecting – think of doing Istanbul for an eventual European destination – can help alleviate these.

But for those that don’t want to deal with all the miles intricacies, there is cashback. What do we need to know, though?

First and foremost, the rate you’re going to get on all spending is going to be limited. However, like specialised miles spending cards, you can get better rates for certain types of spending.

For example, the UOB One Credit Card can give you up to 10% cash back but that requires you to be spending at least S$2,000 per month to earn that rate. Additionally the spend needs to be at certain merchants.

On top of that, the monthly cash back is capped. The same goes for the UOB EVOL Credit Card, which has a headline rate of 8%.

Arguably, it can make total sense to have a cashback card if your spending patterns work out and you’re not someone who travels a lot (so doesn’t want miles).

Like any investment though, reading the Terms & Conditions (T&Cs) when deciding which cash back card to apply for is critical.

Story of the week

While Singapore has its otters, Hong Kong has its emus. On Saturday, an emu was on the loose in Hong Kong’s New Territories, wreaking havoc.

The large bird was apparently spotted racing cars and visiting a public housing estate. While Hong Kong is typically seen as a “concrete jungle”, the emu came from one of its many Wetland Parks.