Chinese technology stocks have sold off massively in this past year, and Bloomberg is reporting that more than US$823B of value has been wiped since its peak in February this year.
KWEB – the KraneShares CSI China Internet ETF which tracks a portfolio of publicly traded China-based companies whose primary business is in the Internet and Internet-related sectors has fallen close to 40% from its peak.
A series of blows
What’s fueling this sell-off is a confluence of factors which started from Ant Group’s abrupt suspension of its IPO, which was supposed to be one of the largest IPOs the world would have seen, before being shut down by the Chinese government citing regulatory issues.
Following that incident, the Chinese government launched an anti-trust probe into Alibaba and fined it US$2.8B, while Alibaba began its restructuring process to act more like a bank than a technology firm.
More recently, the Chinese government started clamping down on data control and privacy and targeted technology firms like Didi Chuxing, calling for its removal from app stores and to stop new user registrations citing China’s Cybersecurity Law – although this has not yet stopped the company from operating daily and existing users can still use the app.
The news came just days after Didi launched a US$4.4B initial public offering to go public in the US on the New York Stock Exchange over its domestic markets, possibly sharing sensitive data of Chinese users to US regulators as part of disclosure agreements.
Didi lost one-third of its market valuation over the past few trading days.
Just earlier last week, China’s market regulator issued 22 fines of US$77K each – the maximum allowable under its anti-trust laws for merger deal transgressions – to its biggest technology firms, including Alibaba, Tencent, and Didi Chuxing for a series of irregularities related to merger deals over the past decade.
Further government controls?
I think we can expect to see tighter controls on Chinese technology companies, which started during the trade war where it started to restrict technology exports to the US after Chinese companies like Bytedance, Tencent and Huawei fell into US regulatory crosshairs.
Technology remains a key differentiator in the modern economy, and one could expect the regulatory environment to shift towards a more conservative stance after a decade of open innovation in many frontiers from artificial intelligence to payments.
The biggest risk for investing in Chinese technology companies like Tencent, Meituan, JD and Bytedance remains government risk.
Government risk in Chinese technology cannot be understated, we know that the Chinese government can make sweeping mandates to implement reforms or curtail risks.
While Chinese companies might look relatively affordable right now in terms of valuations, further de-risking of portfolios in the coming weeks might continue to put pressure on prices and cap any likelihood of a strong recovery.
Long-term fundamentals remain solid
Despite this near-term sell-off, over the long-term, technology companies continue to exhibit strong growth potential and pricing power which will lead to further growth in earnings.
My opinion is that Chinese technology companies won’t stop innovating and evolving as they strive to compete with the US and European companies. This means digging deep into their pockets to find new avenues of growth as the middle class emerges.
Those that manage to follow the law, survive and get on the good side of the law will reap rewards over the long term and overall the investment thesis for Chinese technology companies still looks attractive if you can stomach short-term pain for long-term gain.