By Sam Nussey
TOKYO (Reuters) -SoftBank Group Corp's decision to sell down its Alibaba Group Holding stake for a $34 billion gain may be aimed at bolstering its finances, but it also underlines how CEO Masayoshi Son has cooled on China tech.
Son was formerly one of the sector's biggest cheerleaders and Alibaba is his most famous bet, immensely profitable and for his fans, symbolic of his foresight and investing acumen.
Amid a sharp market downturn, however, Son will reduce his conglomerate's stake in Alibaba to 14.6% from 23.7% by settling prepaid forward contracts, although the Chinese firm remains SoftBank's largest asset.
"It seems like they're saying 'we think the outlook for China tech is pretty poor so we're going to get in front of that'," said Redex Research analyst Kirk Boodry.
A rough ride for Chinese tech companies after a regulatory crackdown that started in late 2020 has been exacerbated by tensions between Washington and Beijing.
Alibaba has been added to the U.S. Securities and Exchange Commission's delisting watchlist as a result of a dispute over auditing compliance issues for U.S.-listed Chinese firms.
Murky prospects for the Chinese economy as Beijing pursues a zero-COVID policy that has led to stringent lockdowns have also not helped. Since the regulatory crackdown, Alibaba's shares have fallen by more than two thirds to value the company at $250 billion.
"We have to watch (Chinese) government policy with caution and not be reckless," Son told shareholders in June.
Son's pullback contrasts with earlier optimism towards China tech that saw him pour $12 billion into ride-hailer Didi through the first $100 billion Vision Fund, which also made outsized investments in Uber and office space firm WeWork.
Didi angered Chinese regulators by pushing ahead with a New York initial public offering and is now traded over-the-counter after delisting.
SoftBank was forced to cut the valuation and, after a series of high profile reversals, Son reduced the size of individual investments made through a smaller second fund.
As of end-June, SoftBank had booked a $9.3 billion gross investment loss on Didi.
SoftBank's other Chinese bets include Full Truck Alliance and JD Logistics.
The conglomerate is also the top shareholder in AI firm SenseTime, which has been blacklisted by Washington over human rights concerns.
Sensetime shares fell by almost half at the expiry of a lock-up period in late June.
This week, SoftBank announced it had exited KE Holdings, which operates Chinese property platform Beike, at an average price per share of $23.89 compared to a cost price of $12.91.
The conglomerate has pledged to preserve cash and cut costs as it booked a $50 billion loss at its Vision Fund investment arm in the six months to end-June.
TikTok operator ByteDance is also an investment and has been highlighted as one of eight assets in the first Vision fund with potential upside.
The Beijing-headquartered company, which has received scrutiny in the West over its management of user data, does not currently have a timeline for its much-anticipated IPO, Reuters reported previously.
Alibaba "is the only 'representative mega-win' investment in the portfolio for now," Quiddity Advisors analyst Travis Lundy wrote in a note on Smartkarma.
Without it SoftBank is "less interesting because very little of the portfolio now reflects any sort of "special sauce" of forward-thinking investment," he wrote.
For now, however, using capital to buy SoftBank's own shares is a priority for Son. The company has announced a 400 billion yen ($3 billion) share buyback in addition to the current 1 trillion yen programme which is due to expire in November.
SoftBank shares closed up 5.6% on Friday, the first trading day after the Alibaba deal was announced late on Wednesday. The conglomerate's shares have gained 3.2% year to date.
($1 = 133.2000 yen)
(Reporting by Sam Nussey; editing by Edwina Gibbs)