China tech stocks may recover as most regulatory risks priced in
Offshore-listed Chinese technology stocks are likely to recover gradually with less volatility despite ongoing regulatory uncertainty, analysts say.
Some of the biggest tech stocks in China, including Tencent Holdings Ltd., Alibaba Group Holding Ltd., Baidu Inc., NetEase Inc. and Meituan, have tumbled in Hong Kong and the U.S. since their February highs, amid Washington’s threats to delist Chinese companies, a record $2.8 billion antitrust fine on Alibaba and an unwinding of massive bets following the collapse of Archegos Capital.
“The shares of Alibaba, Tencent, Baidu and the other big Chinese tech stocks are not likely to fall further, as the regulatory risks have now been priced in,” Justin Tang, head of Asian research at United First Partners, told S&P Global Market Intelligence, adding that regulators will continue to release more information and clarify antitrust practices.
In the latest wave of clampdown on China’s internet players, the State Administration for Market Regulation, the State Taxation Administration and the Cyberspace Administration of China have asked 34 internet companies to self-evaluate their own practices to ensure they are not violating the Anti-Monopoly Law.
Alibaba was also recently fined $2.8 billion by antitrust regulators in China. Following the fine, the e-commerce company’s executives said it would rectify its problems and step up efforts to retain its merchants. Alibaba’s Hong Kong-listed shares rose as much as 9% in morning trade two days after the fine, after losing almost a third of its value since Beijing’s series of investigations into the company from last November.
For Tencent, gaming regulations, rather than antitrust, will impact its stock the most, given its main source of revenue is its gaming business, said Tam Tsz Wang, TMT equity research analyst at DBS Vickers Securities.
“We saw how the batch of gaming regulations in China two years ago impacted Tencent and how the company recovered. Now that has been priced in too, it all depends on whether China will release any more rules or bans that impact the gaming sector,” Tam said.
The company’s market capitalization fell from a record high of $573 billion to $394.9 billion in April 2018 following a crackdown on the gaming sector in China, citing games’ addictive nature and threat to children. Chinese authorities had withheld the approval of several gaming titles including Tencent’s mega-hit “PlayerUnknown’s Battlegrounds” and “Honor of Kings.”
Even so, Tam said Baidu’s stock is the “relatively safe” bet among the Chinese internet stocks partly because it has fewer regulatory concerns.
“The company operates the largest search engine in China and has not behaved in a way that violates antitrust laws to grab market share,” he said.
Baidu’s electric vehicle announcements in the first quarter have also helped bolster the company’s stock, Tam added. On the Feb. 18 earnings call, CEO Robin Li outlined a three-year plan to manufacture intelligent electric vehicles in partnership with Zhejiang Geely Automobile Co. Ltd.
Baidu said it is the first Chinese company to receive driverless licenses both in California and China.
Analysts also said the recent sell-off triggered by the fall of Archegos Capital was a “one-off” and will not likely impact the tech stocks in the future.
“The Archegos incident only spotlights unhealthy practices and is unlikely to happen again,” United First Partners’ Tang said.
Chinese stocks listed in the U.S. took a dive after a series of margin calls by the family office of Tiger Asia Management founder Bill Hwang. The fund was forced by its lenders to sell more than $20 billion in shares, including Baidu and Tencent Music Entertainment Group.
