SoftBank to curb China deals amid regulatory uncertainty

SoftBank Group will significantly cut back on new investments in China due to regulatory uncertainty, Chairman and CEO Masayoshi Son said on Tuesday, after a crackdown by Beijing dented the valuation of its investments.

The retreat of SoftBank marks the loss of one of the most aggressive tech investors in China and signals a correction in startup valuations there. The Japanese company has poured billions of dollars into some of the country’s biggest tech companies, including Didi Global, ByteDance and Alibaba Group Holding.

“I strongly believe that China’s AI technology and business model will continue to innovate,” Son said in a news conference. “However, in investment activities, various new regulations have begun, so I want to wait and see what kind of regulations are implemented and what kind of impact they have on the stock market.”

Son added that he is “not against the Chinese government” and that “a new order” will be built under the new rules in a year or two. “If the situation becomes clear, there is a possibility that we will actively engage in investment activities,” he said.

SoftBank poured nearly $11 billion into Chinese ride-hailing company Didi Global before it went public at the end of June. But Didi’s shares have since tumbled 33%, after a crackdown by Chinese regulators over data security spooked investors.

Additional regulatory measures have since cast broad uncertainty over listed Chinese companies and added pressure to SoftBank’s China portfolio. Shares of U.S.-listed truck hailing company Full Truck Alliance, real estate site Ke Holdings and fintech company OneConnect Financial Technology have all fallen more than 30% since July.

Despite the looming China risks, Son unveiled a series of measures to double down on the group’s bets on artificial intelligence through its Vision Fund investment vehicle. A newly established company 100%-owned by Son will become a co-investor in a subsidiary of the Vision Fund 2 that holds its non-listed companies, in a move aimed at taking the necessary risks to maximize returns. Son said he would initially take on all of the risk by paying in up to $2.6 billion, and hopes other members of the management will join him.

Son also said that SB Northstar, a SoftBank subsidiary that trades publicly listed shares, “will be downsized for the time being because the funding demand for the Vision Fund is strong.”

Part of the confidence stems from SoftBank’s efforts to diversify its portfolio. China only accounted for 11% of new investments since April. The two Vision Funds and the Latin America Fund have invested in 301 companies in total, including 43 deals that have not been completed. They account for about a third of SoftBank’s total assets, Son said, roughly equal to its near-25% stake in e-commerce group Alibaba.

“We are not in a situation where we depend on one company,” Son said. “We are taking only one risk: AI”.

SoftBank on Tuesday said net profit for the April-June quarter fell 39% from a year earlier to 761.5 billion yen ($6.9 billion), due to smaller gains from the sales of its investments and a lack of blockbuster IPOs.

The result marked the Japanese investor’s first profit decline in five quarters and is a sign of the challenges in sustaining profits from its tech portfolio, which is heavily influenced by market conditions.

SoftBank reported a record 4.99 trillion yen in net profit for the fiscal year that ended in March, which included a large, one-time profit from the sale of T-Mobile shares in the first quarter. Gains in other segments, including the Latin America Fund business, were not enough to make up for the absence of the sale.

Investment gains from SoftBank’s two Vision Funds fell 3% from the previous year. The U.S. initial public offering of Chinese ride-hailing company Didi Global on June 30 helped offset declines in the stock price of South Korea’s Coupang and other portfolio companies.

SoftBank also sold partial stakes in DoorDash, Uber, Guardant Health and Ke Holdings.

SoftBank’s investments in publicly traded stocks, which includes SB Northstar, logged a gain of 210 billion yen in the first quarter and a cumulative loss of 22 billion yen. Its stock portfolio as of June included Amazon, Paypal and TSMC.

Alibaba, SoftBank’s most valuable asset, has declined 14% since July. SoftBank has already struck a series of deals to raise cash from investors using Alibaba shares as collateral. It will settle the transactions by either handing over the shares or paying in cash.

SoftBank’s own shares have declined 13% since July, underperforming Japan’s Nikkei index as well as U.S. tech benchmark Nasdaq.

Son said that SoftBank’s stock price reflected a near 50% discount to the value of the shares it held. “We will do a buyback at some point,” he said, but added that the timing and scale of that was still under consideration.

Author: Wataru Suzuki, Nikkei Asia

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