China’s biggest internet companies have seen their shares tumbling to the lowest levels in at least three years after the government’s crackdown that wiped out hundreds of billions of dollars in market value, but it may still not be the best time to look for bargains, as there are more headwinds in the near future.
The government is determined to reduce the market influence of giants such as billionaire Jack Ma’s Alibaba to billionaire Pony Ma’s Tencent with a flurry of hope that regulatory overhang would finally be lifted after a long campaign. The problems with the policies are an economic slowdown and a tougher fight for consumer wallets and causing a drop in growth already already weak.
“There are still downsides,” says Shawn Yang, a Shenzhen-based managing director at the research firm Blue Lotus Capital Advisors. “I’d wait and see.”
Alibaba is among the companies that is most susceptible to the ongoing risks. It is trading at a forward price-to-earnings ratio of only 15.9 times for its 2022 fiscal year which ends this March, compared with an average of 31.3 times between 2017 and date, according Ming Lu, an analyst at Aequitas Research who publishes via research platform Smartkarma. It’s possible that the stock is priced at a bargain due to the company’s dominant position in China’s huge market for online shopping, prompting billionaire investor Charlie Mungerto identify a bargain, but the latest results of the company’s earnings offer good reasons for caution.
Alibaba is grappling with China’s less spending on retail and a fierce competition from competitors like ByteDance that are enticed shoppers away by streaming live shopping shows. and after paying an record $2.8 billion fine for antimonopoly last April, the company is not stop brands and merchants from transferring to other platforms and demand that they sell only on its platforms.
Alibaba’s revenue grew just 10% year-over-year to $38 billion in the December quarter, which makes the lowest growth rate on record since the company went public in 2014. Net income dropped as high as 74 percent from $3.2 billion, partly due to goodwill impartment and decrease of value of its investment portfolio. If you exclude these, net income would have fallen by 25 percent to $7 billion.
“Alibaba’s problem is that, first of all, e-commerce is a very competitive area,” says Alex Wong, director of asset management at Hong Kong-based Ample Finance Group. “And regulations are being targeted; it may not be that aggressive when competing with those smaller companies.”
Hong Kong-listed Tencent Tencent, a Hong Kong-listed company, is set to announce fourth-quarter results near the end of March It also faces its fair troubles. Regulators haven’t endorsed all new gaming since the end of July, marking another long freeze after 2018, when the country stopped gaming approvals over a period of 10 months as it sought to strengthen control over content as well as game-play. Cui Chenyu an analyst from Shanghai at Omdia Research, a research firm Omdia, says the stoppage could be linked to authorities’ need to safeguard minors from gaming and to improve game play that could lead to addiction. It’s unclear when or if licences for new players will ever be handed out, and there is possibility that the suspension may extend until the close of the year.
The uncertainty surrounding the market has created more market turmoil. Tencent dropped more than 5% last Monday, when an anonymous tweet hinted at another round of crackdowns targeting Tencent, which led its head of public relations Zhang Jun to issue an normally aggressive response to deny the rumor. The company currently trades with a forward P/E rate of 24x, which is down from a five-year mean which was 38.4 times.
It’s unclear how long the crackdown will last. In the last week, authorities announced new guidelines asking food-delivery companies to reduce the amount they charge restaurants. This leading the market leader in Hong Kong, Meituan to drop 15% and drop $26 billion in market value that day.
Brock Silvers, a Hong Kong-based chief investment officer at Kaiyuan Capital, cited regulatory risks and said his allocation to Chinese tech stocks is now zero. Ample Finance’s Wong claimed he had cut his investment in tech-related companies.
“In the past, they were a cornerstone of my portfolio,” Wong says. “But they are not a so significant part right now, and I will wait for a change in the macro environment to add a lot.”