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Tencent Hands Out $16 Billion of JD Stock in Crackdown-Led Shift

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(Bloomberg) — Tencent Holdings Ltd. plans to distribute more than $16 billion of JD.com Inc. shares as a one-time dividend, a surprise retreat from the Chinese e-commerce firm after Beijing moved to curtail the power of tech monopolies.

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The unexpected move to divest most of its stake in China’s No. 2 online retailer comes as Beijing punishes the country’s tech giants for anti-competitive behavior, including maintaining closed ecosystems that favor certain companies at the expense of others. Tencent’s handout may buy goodwill with the government, which has pushed for the dismantling of barriers and for tech firms to share the wealth. As part of the deal, Tencent President Martin Lau will exit JD’s board effective Thursday.

The payout stirred speculation that Tencent may be preparing to pare its holdings in a plethora of companies, including some of China’s biggest tech names, as it pivots to focus on overseas growth and new arenas such as the metaverse. JD is just one of several Tencent-backed firms — including Pinduoduo Inc., ride-sharing giant Didi Global Inc. and food delivery giant Meituan — that have come to dominate their respective spheres, thanks in part to the enormous traffic generated by WeChat’s billion-plus users.

Tencent surged 4.2%, while shares of JD dropped 7% as of the Thursday close in Hong Kong. Still, the sizable JD stock sale may prove to be a one-off move for Tencent, which has been struggling to reassure its shareholders after a turbulent year. A person familiar with Tencent’s management said they have evaluated its portfolio and have no intention of paring down or exiting other investments — such as Meituan and Kuaishou Technology — in the coming months. Meituan closed 1.7% lower, paring early losses, while those of Kuaishou and fellow Tencent investee Bilibili Inc. ended near their lows for the day.

“The divestment shouldn’t come as a complete surprise and could be read as a reaction to anti-monopoly investigations — it’s pretty clear that regulators don’t want to see too much ‘faction-like’ patterns in big tech,” said Chen Da, executive director at HHSC Assets (HK). “It’s likely that it will be read as the start of breaking up the huddle a bit.”

Tencent’s JD.com Dividend Result of China Crackdown: Street Wrap

Tencent plans to give out 457.3 million Class A shares in JD, representing about 86.4% of its total stake and nearly 15% of the online retailer’s total issued shares, according to a filing to the Hong Kong stock exchange. At Wednesday’s close, the shares in the proposed distribution were worth HK$127.7 billion ($16.4 billion). Tencent, which controls about 17% of JD, will hold roughly 2.3% of the e-commerce company’s shares after the handout, JD said in a separate statement.

The special dividend would rank among the largest shareholder giveaways ever by a Chinese tech company, which have long relied on rapid growth and investment to satisfy investors. Tencent’s strategy is to take stakes in companies during their development stage and to exit the investments as they become capable of financing future initiatives on their own, the internet giant said.

“The Board believes that JD.com has now reached such a status, and the Board therefore considers that it is an appropriate time to transfer” the majority of the shares to its investors, the company said.

The proposed dividend comes after Chinese tech shares have been battered by more than a year of intense regulatory scrutiny. The crackdown, which has spanned antitrust to after-school education, gaming and online content, has slowed growth at internet firms from Tencent to Meituan and fierce rival Alibaba Group Holding Ltd., forcing the companies to invest heavily in new earnings drivers.

Xi Jinping’s call to achieve “common prosperity” and level income inequality has also prompted the firms and the moguls behind them to make public pledges to philanthropic efforts. Tencent has already announced it’s setting aside $15.7 billion for social responsibility programs.

Read more: QuickTake on China’s regulatory crackdown

The most prolific investors in China’s corporate sphere, Tencent and Alibaba became the industry’s de facto kingmakers by grooming a new generation of tech leaders including Didi, China’s Uber, and Meituan. Having Tencent as its major shareholder gave JD access to the internet giant’s vast ecosystem, including the super app WeChat that the majority of Chinese consumers use for messaging, paying bills and making purchases.

The two firms will continue to maintain their “mutually beneficial business relationship, including via their ongoing strategic partnership,” Tencent said.

Competitors such as Alibaba have long complained that links to their services have been blocked, though that is slowly changing under Beijing’s pledge to drive out anticompetitive behavior in the internet arena. Tencent will soon allow WeChat groups to display links to external shopping sites such as Alibaba’s Tmall and Taobao, Bloomberg News has reported.

“Tencent has a lot of tentacles spread into a lot of different companies and a lot of those could start to be unwound if this is all being driven by the anti-monopoly crusade,” Bloomberg Intelligence senior analyst Matthew Kanterman said in a Bloomberg TV interview. “We probably will see more moves by Tencent to reduce its exposure and cross investments in these companies to appease regulators. And at the same time, they’ve been talking a lot about increasing their investments overseas.”

Other companies such as Alibaba may also have to withdraw their previous investments in some successful startup companies, said Gary Ching at Guosen Securities (HK).

(Updates share performance in fourth paragraph)

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