An ongoing regulatory crackdown on Chinese technology stocks has captured headlines around the world, with Chinese stocks listed in the US, China, and Hong Kong tanking recently thanks to concerns over personal data protection and cybersecurity. Tallying the losses amongst the technology giants alone, the group of Tencent, Alibaba, Meituan, JD.com, and four others had exceeded $800B so far.
Let’s get our investment analylst’s view on what does the future hold for these technology stocks.
Chinese tech companies have halted plans to list in the US stock market
Just two days after Didi Chuxing’s massive $4.4B IPO on the New York Stock Exchange on the 30th of June, Chinese regulators dropped the not-entirely-unexpected bombshell that they were to pull the ride-hailing giant’s app from Chinese app stores. Didi had gone ahead with the IPO without the blessing of the Cyberspace Administration of China (CAC), kicking off a wider crisis that had seen broad sell-offs in Chinese technology stocks.
Many larger, already-listed Chinese companies suffered collateral damage and saw their stocks tank. LinkDoc Technology Ltd, a startup backed by the Alibaba Group, decided to shelf their much-anticipated plans to go public.
Overall, early estimates by Bloomberg places the number of potentially delayed or cancelled listings at around 70, a significant disruption worth billions of dollars.
Our analyst’s opinion: Large Chinese tech companies with positions in companies with delayed or cancelled IPO plans are likely to see near-term pullbacks while alternatives are found.
Some Chinese tech companies are looking to list either on the mainland, or in Hong Kong
Chinese regulators have recently introduced a new law where technology companies with over 1 million registered users must submit themselves for a cybersecurity review before listing overseas, a move that is undoubtedly likely to dampen overseas listing sentiment. Already, many companies have shelved their original plans to list on foreign exchanges.
In the near-term, this has raised speculation that many companies will seek to list at alternate sites instead, with the HKEX being an immediate and viable alternative. Since Didi’s troubles began, the HKEX has risen sharply, and is trading around +11% above its prior levels.
Our analyst’s opinion: Things may just be beginning for the HKEX. Look out for further integration of larger Chinese companies listing in Hong Kong instead of elsewhere, largely thanks to rising concerns over data security. This means that Beijing is unlikely to loosen the reins on technology companies listing overseas, in the face of increasingly acrimonious Sino-US relations.
Tech companies using consumer data are at risk – but some more than others
Businesses depending on the use of personal data as a key plank of their business model may be in the midst of having their future outlook revised downwards. For the best part of the past two weeks, technology companies have largely dragged Chinese indices down, with large names such as Alibaba Group, Meituan and JD.com weighing heavily on the Hong Kong stock market, thanks to fears over data protection crackdowns. Alibaba remains -4% below “pre-Didi” levels, while Meituan and JD.com are still trading -9% and -3% lower.
Since then however, many of these companies have rushed to avoid Didi’s fate, placing them as potentially safer bets for investors. For instance, Meituan recently re-launched a once-retired app (Meituan Dache) to become more compliant with regulators’ wishes. The re-launched app interestingly has an obvious focus on user privacy, stating clearly that the app would not transfer user data to unauthorised parties and for unauthorised purposes.
Looking ahead, China’s Data Security Law is due to kick in come September, possibly further constraining specific revenue streams and business models. Lawmakers are also hammering out details for a further Personal Information Protection Law, due to be announced later on.
However, it is highly likely that the monetisation and usage of data for marketing purposes will be an increasingly difficult business model, and may necessitate a downward revision in the valuation models of several technology companies.
Our analyst’s opinion: Chinese technology companies may have been caught off-guard recently, but do not expect them to remain uncompliant with data security laws moving forward. Thus, the bad news may have already been fully priced in.
In summary: Chinese technology stocks remain volatile, but upside risks are improving
The CAC is now the agency to watch. The 10-year old agency has been effectively catapulted overnight from a low-priority agency, to wielding the ability to veto the listings (and future prospects) of massive Chinese technology companies.
The bottom for Chinese tech stocks may not be in yet, but it is certainly near. Technology companies have been on their absolute best behaviour in the past few months, eager to avoid further unnecessary regulatory scrutiny, and signs are emerging that regulators may be ready to play nice.
Most recently, Tencent received regulatory approval for the purchase of search engine Sogou, sparking a mini-rally in the HKG50, and a +3.9% rise for Tencent’s stock. With large amounts of negative news already priced into Chinese stocks, Tencent’s latest example shows that risks are starting to become skewed to the upside, with further positive news likely to trigger bullish sentiment and buying activity.
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