Bargain hunters of Chinese stocks face setbacks

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Investors looking for deals among Chinese internet stocks have been reminded of the short-term dangers.

Shares of companies such as

Tencent Holdings,

Alibaba Group,

and NetEase are falling again as Beijing’s regulatory attack continues. A potential worsening of tensions between the US and China adds to the downward pressure.

According to reports, Chinese authorities are pushing ahead with plans to break Ant Group’s Alipay business, a move Beijing noted earlier this year. They also took steps to eliminate them the so-called Monday walled gardens of Internet giants like Alibaba and Tencent, with the Ministry of Industry and Information Technology asking companies to stop blocking links to other services. Barriers around places hinder competition from rivals.

This comes after authorities convened video game companies last week to discuss enforcing new restrictions on online gaming among minors, shares of companies such as Tencent (700. Hong Kong) and NetEase (NTES) fell , which ended with a brief recovery from a selloff caused by the intensification of China’s regulation targeting its larger companies. KraneShares CSI China Internet (KWEB) ETF fell 2.6% to $ 50.53 on Monday.

Few expect regulatory pressure to be reduced soon. This will keep a cloud on Chinese stocks. The frost between the US and China makes things worse.

President Joe Biden and Chinese Xi Jinping made a call last week to try to avoid conflicts and break a stalemate between countries that began during the 2018-2019 trade war. But as the administration continues to review its Chinese policy, the United States is considering an investigation into Chinese subsidies that could strain relations, according to The Wall Street Journal.

Another potential source of friction is that China bought about 40% less goods last year than was established in the first phase of 2019. American trade agreement, according to Chad Bown estimates at the Peterson Institute. It stands at about 30% of this year’s commitments.

At a webinar with clients last week, Arthur Budaghya, BCA’s chief emerging market strategist, stressed that “neither shareholders nor management know what the business model will be in three years’ time for platform companies Chinese such as Alibaba, Tencent and Meituan (3690. Hong Kong). This, he said, is a reason for their actions to fall far beyond what they already had. Shares of KraneShares China’s CSI Internet Index have fallen 32% so far this year.

Budaghya is unsure of how far it will go, but says Xi’s policies aimed at “common prosperity” (addressing growing inequality and focusing on benefits for society rather than profitability) ) will probably go further over the next year, rather than relax. Budaghya has been telling customers to use any rally as an opportunity to lighten their holdings from internet giants.

Thomas Gatley of Gavekal Research warned customers on Monday that while shares of Chinese internet platforms are trading about 20 times behind earnings per share, compared to 30 times in 2019-2020, the cheapest it could be cheaper. The business environment is changing and it is unclear what part of corporate profit management will be earmarked for charitable donations, or how authorities will enforce a wave of new data security legislation that could “pose a significant threat for Internet platforms business models, ”he wrote.

In fact, Alibaba recently pledged $ 15.5 billion to promote social equality, while Pinduoduo (PDD) gave all its quarterly profit to rural development initiatives.

There is still a breakthrough in terms of regulation that there would be more rules on data privacy and artificial intelligence. Another issue is how the Chinese authorities will handle the financial problems of the real estate manufacturer Evergrande.

While markets seem relatively unperturbed by the company’s financial distress, a collapse would be “the biggest test the Chinese financial system has faced in years,” wrote the Asian economist chief of Capital Economics , Mark Williams. He expects the central bank to intervene if it looks like Evergrande’s problems could put other companies and potentially the economy at risk.

The likely result is a kind of restructuring focused on home buyers, which may leave little to creditors. “Evergrande is private and is the poster for over-leverage in a sector where policymakers want to instill more discipline, ”Williams wrote.

Beijing’s efforts this year to instill more discipline have not been well received by markets. This could mean that business hunting is still a tricky proposition.

Write to Reshma Kapadia at [email protected]