Chinese companies increase shareholder returns, KALL captures

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Chinese stocks have been battered over the past year between regulatory fears, worries about China’s zero-tolerance policy against COVID-19, the recent escalation in the potential delisting of Chinese companies from US stock exchanges and the vast geopolitical tensions linked to Russia’s invasion of Ukraine. Despite investor sentiment reflected in current deep valuations, Chinese companies continue to believe their fundamentals are strong and are doubling down with buyouts and one-time dividend payments for shareholders, reports the Wall Street Journal.

Last week, JD.com announced that it would pay a one-time cash dividend to all shareholders holding US certificates of deposit and Hong Kong-listed shares, totaling $2 billion. This dividend payment follows its current buyback program which totals $3 billion. Alibaba also recently pledged to make bigger buybacks, increasing the program by $10 billion in March to a total of $25 billion.

It’s a growing trend as Chinese companies look to reflect confidence in their businesses despite stock prices. Many other companies have announced takeovers or extensions of existing plans, including automaker BYD Co., fast-food giant Yum China Holdings Inc., Bilibili Inc., Weibo Corp., and more.

Image source: The Wall Street Journal

The current price-to-earnings ratio at the end of April for the MSCI China Index is around 67% of the MSCI ACWI World Broad Index; buyouts tend to be more popular and attractive to shareholders when valuations fall. The MSCI China is down 40% in dollar equivalents over the past 12 months and includes stocks listed in mainland China, Hong Kong and the United States

Regulators in China are currently encouraging takeovers and asking some of the major shareholders of listed companies to increase their shares to help stabilize prices. According to Rory Green, chief China economist at TS Lombard, spending money on buyouts is a pretty safe bet for companies that reflects their cooperation in achieving government goals.

Buyouts remain a newer option for Chinese companies, with the opening of regulations in 2018 allowing more companies to offer this incentive to shareholders. Redemptions remain relatively low compared to the United States but are increasing; 128 companies had repurchased about $2.6 billion in shares as of May 5, more than doubling year-over-year.

KALL invests in Chinese companies engaged in takeovers

For investors looking for broad diversification across China and wanting exposure to companies that are engaging in buyouts, the KraneShares MSCI All China Index ETF (KALL) is a good option.

KALL invests in companies that buy back shares, such as JD.com, Alibaba, BYD Co., Yum China, Bilibili, Weibo and Tencent Holdings. Although Tencent has not announced any buyouts in the future, its open mandate allows the company to buy back up to 10% of its shares, and so far this year it has bought back $800 million.

The fund tracks the MSCI China All Shares Index, a benchmark of companies based and headquartered in China, as well as listed in mainland China, Hong Kong and the United States.

KALL is broadly diversified across the Chinese economy and includes a 22.96% allocation to Financials, 21.5% to Consumer Discretionary, 11.25% to Communication Services, 9.51% to Consumer Staples and to other sector allocations such as healthcare, information technology, industrials, etc. as of March 31, 2022.

KALL’s top holdings include tech giant and hardware maker Tencent at 5.54%; e-commerce and internet giant Alibaba Group at 6.35%; and partially publicly traded and partially state-owned Chinese alcohol producer Kweichow Moutai at 2.97%.

KALL has an expense ratio of 0.49% with fee waivers expiring August 1, 2022.

For more news, insights and strategy, visit the China Insights Channel.

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