Why Chinese Tech Stock Selling on Antitrust Fears Could Be Overblown

Alibaba (BABA), Tencent and many other Chinese tech stocks have come under pressure recently due to new regulatory concerns, especially for companies seen as having monopoly positions.

But it’s worth remembering that this isn’t the first time we’ve seen such sales among Chinese tech names, and previous declines have often been short-lived.

On November 3, Chinese tech stocks fell after online payments and financial services giant Ant Group, in which Alibaba has a roughly 33% stake, called off its Hong Kong and Shanghai IPOs. The move came after controlling Ant shareholder / Alibaba co-founder Jack Ma and senior Ant executives were called to a meeting by four different Chinese regulators.

Many Chinese tech names rebounded later in the week, but another sale took place on Monday amid concerns over a draft antitrust directive released by Beijing that aims to end the wrongdoing perceived by internet monopolies.

Notably, the directive criticizes practices which, if changed, might have a slight impact on the results of some major Chinese internet platforms, but perhaps not overwhelmingly. These practices include selling items at different prices to different customers, selling items at prices below their cost (to act as loss leaders), and preventing merchants from selling on competing platforms. .

Since Friday’s close, Alibaba’s stock has fallen 10%, Tencent’s stock has fallen 8%, and JD.com (JD) stock has fallen 11%. In Hong Kong, the share of food delivery leader Meituan fell 16%.

The antitrust directive overshadowed another strong Singles Day shopping event for Alibaba and JD. With sales to start earlier than usual this year, Alibaba reports a gross merchandise volume of 498.2 billion RMB ($ 75.1 billion) for Singles Day.

The directive serves as an updated reminder of the regulatory uncertainty facing Chinese tech companies. This uncertainty, along with concerns about potential accounting issues and the variable interest entity structure (VIE) that these companies use to list their stocks on foreign stock exchanges, has a lot to do with the substantial valuation discounts that companies face. Chinese technology generally trades against their US counterparts. with similar growth profiles.

At the same time, it should be borne in mind that some of the previous sales to well-known Chinese tech companies due to regulatory fears ended up being buying opportunities.

In the spring of 2016, for example, Baidu (BIDU) sold out following a government crackdown on medical advertisements on its research pages. However, stocks eventually recouped their losses and hit new highs in 2017 (Baidu stock has admittedly had a more difficult time since, but this is due to business issues unrelated to the crackdown on medical advertising).

And in the second half of 2018, game publishers such as Tencent and NetEase (NTES) fell after Beijing halted game monetization license approvals, citing concerns about the impact of games on children. But approvals have gradually picked up, and Tencent and NetEase are now trading well above their 2018 highs.

Time will tell whether or not history repeats itself for Chinese tech stocks hit hard this week by antitrust concerns. But there are certainly parallels.