Is The Worst Over For China’s Internet Giants?
China’s biggest internet companies have seen their stock prices fall to the lowest levels within at least three years since the government’s crackdown that wiped out hundreds millions of dollars in market value. But this may not be the best time to look for bargains because more headwinds are well on the horizon.
The government is determined to reduce the influence of giants on markets from billionaire Jack Ma’s Alibaba to billionaire Pony Ma’s Tencent and shatters hopes that the regulatory burden would be wiped out following a year-long campaign. To make matters worse, the company faces the slowing economy and a tougher fight for consumer wallets that are stifling already weak growth.
“There are still downsides,” says Shawn Yang, a Shenzhen-based director of research at Blue Lotus Capital Advisors. “I’d wait and see.”
Alibaba is perhaps the most exposed to the risk of the future. It is trading at a forward price-to-earnings ratio of just 15.9 times for its 2022 fiscal year which ends this March, in contrast to an average P/E of 31.3 times between 2017 and date, according to Ming Lu, an analyst at Aequitas Research. He publishes his research on the research platform Smartkarma. The stock could appear to be priced low given the company’s still dominant market share in China’s massive e-commerce market, prompting the billionaire investors Charlie Mungerto identify the stock as a bargain but the latest results of the company’s earnings provide a reason to be cautious.
Alibaba is struggling with China’s lower retail spending as well as the fierce competition from competitors like ByteDance which is trying to lure customers away from live-streamed shopping shows. And after swallowing a record $2.8 billion anti-monopoly penalty in April, Alibaba is able to no longer stop brands or merchants from transferring to other platforms and requiring them to sell only on its platforms.
Alibaba’s revenue grew just 10% year-over-year to $38 billion during the quarter ending in December, making the most slow growth ever since the company went public in 2014. The net income declined by as much as 74% from $3.2 billion, in part due to the goodwill transfer and the decline of value of its investment portfolio. If you exclude these, net income could have dropped 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 Hong Kong listed Tencent The Hong Kong-listed Tencent, scheduled to release its fourth quarter results near the end of March, also has its troubles. Regulators haven’t given approval to for any games since July of last year and this is the second long-term suspension following the year in which the country suspended gaming approvals over a period of 10 months as it sought to increase control over games in games and their play. Cui Chenyu is a Shanghai-based analyst with Omdia Research, a research firm Omdia claims that the currently suspended games could be a result of authorities’ desire to safeguard children and improve the game that could result in addiction. It remains unclear the date or time when new licenses will be granted There is also an idea that the ban may last until the end of this year.
The uncertainty that continues to surround the company has only added to market jitters. Tencent dropped more than 5% last Monday, after an anonymous tweet hinted at another round of retaliation against Tencent, which led the company’s public relations chief Zhang Jun to issue an typically aggressive response to debunk the idea. The company currently trades at a forward P/E ratio of 24 times, which is down from a five-year average that was 38.4 times.
It remains unclear how long the regulatory crackdown will continue for. Last week, authorities issued new guidelines requiring food delivery companies to reduce the amount they charge restaurants. This the result was for Hong Kong-listed industry leader Meituan to fall 15% and shed $26 billion of market value on the same day.
Brock Silvers, a Hong Hong Kong-based chief of investment at Kaiyuan Capital, cited regulatory risks and said his allocation to China’s tech stocks is now zero. Ample Finance’s Wong stated that he has cut back on investments in tech-related stocks.
“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.”