(Bloomberg) -- More Chinese technology companies might turn to convertible bonds after Alibaba Group Holding Ltd. and JD.com Inc. raised a combined $6.5 billion through such notes. 

Alibaba last week sold $4.5 billion in debt that can be turned into equity, a record for convertibles denominated in dollars by an Asian company, with part of the proceeds to be used to buy back shares. That came just after a $2 billion sale by rival online retailer JD.com, which also plans buybacks. 

“Other Chinese Internet majors may follow suit and tap cheaper funding to replenish the cash outflow used for buybacks and overseas investment,” said Cecilia Chan, an analyst with Bloomberg Intelligence. That’s as equity valuations that are still cheap and market sentiment is turning positive on Chinese stocks, she wrote in a note. 

In November, the board of web-based shopping platform Meituan decided to repurchase shares of as much as $1 billion. Baidu Inc. unveiled a $5 billion buyback program in February 2023. The year before, Netease Inc. disclosed a buyback of a similar amount that would be valid for up to three years.  

In a high interest-rate environment, convertibles become compelling compared with regular debt, particularly for companies that need foreign currency but get most of their revenue domestically.

E-commerce giant Alibaba, for example, has its domestic businesses Taobao and Tmall as the biggest drivers of its revenue. Securing overseas funds for the buybacks presents a challenge, given China’s tight currency controls that restrict the ability to freely transfer money outside the country.

JD.com and Alibaba have high ratios of net cash to market capitalization, so were prime candidates to sell the debt. Other similarly situated firms such as Baidu may follow suit.

“Stepping up capital returns is a trend for undervalued China tech companies this year, and share buybacks are the preferred way rather than dividends,” said Vey-Sern Ling, a managing director at Union Bancaire Privee. “Convertible bonds provide a cheaper financing alternative to straight bonds.”

China’s biggest tech giants are trading far below historical peaks, following Beijing’s crackdown on the sector in 2021 that wiped out billions in market value. Both Alibaba and JD.com’s shares have plunged more than 70% from highs in 2020 and 2021. 

But shares of Chinese tech firms have been rallying since February, as the government signaled more support for the industry while cheap valuations lured investors. 

Meituan, NetEase Inc. and PDD Holdings Inc. are potential candidates to sell convertibles, according to Julia Pan, an analyst at UOB Kay Hian. 

“It is likely that other companies with share repurchase plans and dividend issuances will also turn to the bond market to enhance shareholder returns,” she said.

(Updates with share repurchases, context starting in fourth paragraph.)

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