Legendary China bets unwind as Buffett, SoftBank, Naspers sell

• Tencent shares worth $7.6 billion are likely up for sale
• SoftBank sold off about $17 billion of its Alibaba stake

But now big-name investors who've made billions from these shares are taking money off the table, underscoring growing angst over the prospects for China's biggest companies as President Xi Jinping tightens the government's grip on the private sector and the economy falters under persistent Covid lockdowns.

In the latest development, Tencent shares worth $7.6 billion appeared in Hong Kong's clearing and settlement system, typically a precursor to offloading stock. Naspers Ltd. -- which invests via its Dutch unit Prosus NV -- is the most likely seller because it's one of the few investors that can handle such a sizable transaction and has said it will cut its Tencent stake to fund buybacks.

That comes a month after Japan's SoftBank Group Corp. said it unloaded an enormous slug of Alibaba, the e-commerce pioneer that had long been China's most valuable company. SoftBank, under pressure from botched startup bets, raised more than $17 billion through the sale of forward contracts on the stock. Warren Buffett's Berkshire Hathaway Inc. is trimming its stake in electric-vehicle maker BYD.

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

"There's a big question mark over the growth model of Chinese tech giants like Tencent and Alibaba," said Ke Yan, analyst with Singapore-based DZT Research. "The government crackdown brought significant uncertainty."

Son's wager was long considered one of the best venture capital investments of all time, with his stake zooming in value to more than $200 billion. But Alibaba and its affiliate Ant Group were primary targets for the Communist Party's crackdown, and its shares have plunged more than 70% from their peak in 2020. Son has said he will slash new investments in China because of regulatory uncertainty.

Naspers' backing of Tencent was similarly considered a legendary startup investment. In June however, Prosus, the Naspers affiliate, unveiled an "unlimited" program to sell Tencent shares to finance buybacks of its own stock. Berkshire jettisoned total shares of 3.05 million, or 1.4% of its known 225-million-share holding in BYD.

"There is a great deal of de-risking from China ahead of the party congress," Jason Hsu, chief investment officer at Rayliant Global Advisors, said referring to the Communist Party gathering that will likely give Xi a precedented-breaking third term as president. "While some are betting on China returning to an aggressive pro-growth mode, many are also betting on a structural shift toward central planning and a SOE-led economic policy focused on employment and common prosperity."

Alibaba and Tencent have both seen their businesses deteriorate markedly in the past two years. The two companies reported their first revenue declines ever in the most recent quarter. They've also been compelled to put money into government causes and cut back on investments in China's startups.

Tencent, now China's most valuable firm, is spending more judiciously 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 growth. It has been selling off assets, including some of its investments in Chinese online retailer JD.com Inc. and Singapore's Sea Ltd., while upping its stakes in global gaming companies like Ubisoft Entertainment SA.

Alibaba's net income fell 50% in the latest quarter as revenue in its core China commerce division contracted for the first time. The company let go of 9,241 employees in the three months through June, according to the company's latest filing, after cutting 4,375 in the first quarter of the year.

Layoffs by tech leaders like Alibaba, Tencent and Xiaomi Corp. have exacerbated a jobs crisis in China, pushing youth unemployment to about 20%.

Infograph: TBS

In recent quarters, SoftBank's Son has been vocal in his rising concerns about the China market. After watching the value of Alibaba plunge, he pulled back on new investments in addition to selling shares in the e-commerce giant.

"We have reduced the China dependency in our portfolio, therefore we believe we don't have to worry too much about the situation in China," he said during an earnings call in May.

Alibaba and Tencent were long among the most active financiers for China's startups, helping to propel innovation throughout the economy. However, both companies have had to pull back because of Beijing's concerns they wielded too much control over their portfolio companies. That swelled their cash holdings, with Tencent holding more than $40 billion on its balance sheet while Alibaba has more than $100 billion. 

— With assistance by Lianting Tu, and Tom Hancock

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.