$JD.com(JD.US) stock price just recovered, but yesterday the company announced the issuance of $1.75 billion in convertible preferred notes, maturing on June 1, 2029. The interest rate is 0.25%, with a conversion price at a 45.7% premium, approximately 35% above the market price.

The company stated that the funds raised will primarily be used for share buybacks, followed by expanding overseas business, improving the supply chain, and increasing working capital.

First, let’s analyze why $JD-SWR(89618.HK) might need buybacks: The company’s cash reserves appear substantial:

a. According to the annual report: As of December, cash and cash equivalents, restricted cash, short-term investments, fixed deposits, and financial products maturing within one year totaled $38.8 billion, but 63% is concentrated in mainland China ($24.5 billion, though JD’s accounts payable to merchants exceed $20 billion, meaning much of the so-called "cash" is actually pending payments to merchants); in Hong Kong, it’s $10.5 billion.

b. In last year’s financial report, the company announced a $1.2 billion dividend, which was distributed on April 29, and a $3 billion buyback program (until 2027)—$1.2 billion was spent on aggressive buybacks in Q1, and another $200 million was used from late March to mid-May when Q1 results were released.

c. Since JD has virtually no overseas operating income, this means the company has already burned through about $2.6 billion in overseas dollar reserves in four months.

d. Without selling dollar-denominated investment assets, JD is left with less than $8 billion to support future dollar expenditures.

Now, looking at the buyback effect: This round of buybacks, costing $2.6 billion, has helped JD’s stock price recover 60% from its bottom.

If JD can maintain quarterly buybacks of $800 million to $1 billion, another 35% price increase isn’t impossible.

The tricky part, however, is that JD doesn’t have much extra cash for buybacks, leading to this financing move. What’s more opportunistic is that the notes are convertible, with a negligible 0.25% interest cost.

This likely means JD’s buybacks will slow significantly if the stock price rises above $46, because repurchasing shares at $46 would be offset by the convertible notes, rendering the effort pointless.

For buybacks to be truly effective, the repurchase price needs to be much lower than $46.

The silver lining here is: While the financing may dilute equity, it suggests that as long as JD’s stock price stays between $30 and $40, buybacks will continue after the financing is completed.

After the initial dip from the financing news, JD’s stock still has buyback support to lean on.

However, once the price exceeds $40, Dolphin Research believes JD’s risk increases significantly, as further gains would rely less on buybacks and more on earnings—which is a tough ask in this cycle.