As China’s Richest Get Whopped, Go With Asian Stocks With a 'Plan'

Well, that didn’t last long.

Temu app founder Colin Huang saw his reign as China’s richest person last around two weeks.

An earnings miss by the company he founded, PDD Holdings PDD, is feeding into geopolitical concerns that has driven the company’s shares down 31.7% this week. As a result, Huang now sits in third place on the Forbes China rich list.

Of course, he’s not short of a penny/yuan, with a net worth of $36.2 billion (yes, in U.S. dollars) at last count. But he has fallen behind Nongfu Spring NOGFY (HK:9633) founder Zhong Shanshan (No. 1 with a net worth of $60.1 billion) and the founder of TikTok parent ByteDance, Zhang Yiming (No. 2 at $43.4 billion).

A stock selloff is also hurting Zhong at the helm of Nongfu Spring, the bottled water favored at meetings of China’s political and business elite. Shares in the company dropped a record 10.4% fall in Hong Kong trade on Wednesday.

Zhang at least leads a company that has so far remained private. But TikTok and Temu face political pressure abroad, while Nongfu Spring is experiencing its own crisis at home.

The Nongfu Spring descent leads today’s losses in both the Hong Kong benchmark, the Hang Seng Index, which fell 1.0% today, and the mainland-focused Hang Seng China Enterprises Index, down 1.3%. Nongfu has just released earnings that saw sales increase 8.4% for the first half of the year, with profits up 8.0%.

The company is contending with a public-relations battle that has seen online attacks hurt Nongfu sales. Its water products rose 19.0% in January and February, before the e-criticism began, but ultimately fell 18.3% for the first half. The death of a rival drinks maker and a boycott of Nongfu products by some 7-Eleven stores due to green-tea packaging that allegedly favors Japan have left the company fending off “a surge of online attacks and malicious defamation” against the company, and Zhong himself.

At PDD Holdings, management struck an unusually bearish note in releasing profits. The company says it will forego share buybacks or dividends in the years ahead, to focus on long-term growth. Chairman and co-CEO Chen Lei spoke of the need for “short-term sacrifices and potential decline in profitability,” comments that left analysts confused as to whether management sees trends developing in China that others don’t, or is just being supremely conservative.

Temu and unlisted rival Shein face a backlash globally, where they’ve succeeded in selling cheap goods made in China and shipped internationally, often using beneficial tax laws to escape payments. Lawmakers in Europe and the United States are both looking at how to handle the competition those apps provide to domestic retailers. Oh and of course Temu and Shein keep suing each other ….

Unusually, PDD Holdings remains listed only on Wall Street. Most Chinese companies have at least listed secondary shares in Hong Kong, with Alibaba Group Holding BABA (HK:9988) upgrading its Hong Kong shares to a primary listing, effective today. I outlined the impact for investors in my last column.

BABA is engaging in an extremely encouraging phenomenon, one that is relatively uncommon in Hong Kong but that stock pickers here are increasingly using to identify top prospects: it’s buying back its shares.

Note that PDD Holdings, which operates BABA rival e-commerce site Pinduoduo inside China, says it won’t do any such thing right now. It has won market share, initially by focusing on group buying in smaller cities and rural China, but has also sparked a price war of discounts and promotions.

Dan Rupp, the founder of Asia-focused fund manager Parkway Capital, says share buybacks would be one of if not the top stock-selection screens to run when selecting stock plays in Asia.

Surprisingly, Hong Kong companies are doing a lousy job of planning long-term. Rupp has run a search for the term “5-year plan” for companies in the Hang Seng. Of the 86 listings, a measly seven companies have such a plan. That’s despite China, to grossly generalize, loving numbers, and the Chinese Communist Party constantly touting 5-year and 10-year plans.

Contrast that with the S&P 500. Only four of those 500 companies do not have a 5-year plan. Essentially, they all do, 99.2%, versus just 8.1% of the top companies listed in Hong Kong.

Why should we care?

Rupp launched his company in January, seeking value plays in Asia. He notes that at a time of slowing growth, as is the situation in greater China, you’re better off looking for management teams who are doing a good job of driving profits and improving margins than looking for revenue growth.

As Rupp says, “Come on Hong Kong, you can do better!” He is launching into a very challenging environment for China stocks. But far from impossible.

“In a slowing-growth environment, you need management who are switched on,” he notes. “Most important is that they can improve margins, and on capital management, having a good dividend and buyback plan are very important, too.”

That makes a case for Alibaba, which bought back 2.3% of its stock in the June quarter, an indirect dividend to existing shareholders, for a total of $5.8 billion. Its approved repurchase program provides for it to spend a further $26.1 billion on its shares through March 2027.

Asian companies have tended to hoard cash, without putting it to good use. They’ve also been less likely to dish out significant regular dividends. But that’s beginning to change.

Japanese companies are being encouraged both by the swelling ranks of activist shareholders active in Tokyo and the government to focus on improving return on equity. Share buybacks and dividends are both encouraged for companies looking to improve their corporate governance.

Hong Kong hews to a mantra of “small government, big markets,” but is also seeing an increasing number of buybacks.

JD.com JD (HK:9618), Alibaba’s long-standing e-commerce rival, on Tuesday announced a $5 billion stock repurchase plan, effective as of September. It intends to repurchase up to that amount over the course of the next three years.

So there’s an “if” rather than a “when” to that buyback. The plans are only positive if companies actually go ahead with the stock repurchase, rather than announcing grand plans that never come to fruition.

Sportswear maker Anta Sports Products ANPDY (HK:2020) also says as of its earnings released Tuesday that it will spend up to 10 billion in Hong Kong dollars (1.3 billion in U.S. dollars) to buy back up to 10% of its stock over the course of the next 18 months. Anta owns the maker of Wilson tennis rackets, the Finnish company Amer Sports AS, which also includes skimaker Salomon and outdoor-gear brand Arc’teryx among its marques.

Anta shares led the gainers on the mainland enterprises index in Hong Kong today, up 4.5%. JD.com shares got a 1.8% boost, although Alibaba shares fell 1.1% in sympathy with PDD. All three should be on your watchlist for profitable Hong Kong plays.

We will have to watch to see if Anta does indeed follow through. I’m confident JD and BABA will continue their repurchases. I’ll look to identify further companies in Asia making these shareholder-friendly moves, since they’re the stocks likely to thrive in a challenging economic environment.