The biggest internet companies in China have seen their shares plummet to the lowest levels within at least three years since the government’s crackdown that wiped out hundreds of billions of dollars of market value. However, this may not be the right time to search for bargains as more headwinds are in the near future.
The government remains just as determined to reduce the power of giants in the marketplace including billionaire Jack Ma’s Alibaba to billionaire Pony Ma’s Tencent, dashing hopes that regulatory excess would be taken away after a year-long campaign. The problems with the policies are slower economic growth and a harder battles for consumer dollars and causing a drop in growth already already weak.
“There are still downsides,” says Shawn Yang, a Shenzhen-based managing director at research firm Blue Lotus Capital Advisors. “I’d wait and see.”
Alibaba is among the companies that is most susceptible to the ongoing risks. The company is currently trading at a forward price-to-earnings ratio of just 15.9 times for its 2022 fiscal year ending this March, in contrast to an average of 31.3 times from 2017 to 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 market share in China’s massive market for e-commerce, prompting billionaire investor Charlie Mungerto find a bargain however the latest earnings report from the company offer good reasons for caution.
Alibaba is struggling with China’s less spending on retail and a fierce competition from competitors such as ByteDance, which is luring customers away from live-streamed shopping shows. And after swallowing an record $2.8 billion anti-monopoly penalty in April, the company can no longer prevent brands and merchants from moving to other sites and demand that they sell exclusively through its platforms.
Alibaba’s revenues climbed just 10% year-over year to $38 billion in the December quarter, making the most slow growth ever since the company went public in 2014. Net income declined as much as 74 percent up to $3.2 billion, largely due to the imparting of goodwill as well as the decrease of value of its portfolio of investments. With those out, net earnings would have dropped 25% 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, which is scheduled to release its fourth quarter results near the end of March is also experiencing its fair share of problems. Regulators haven’t given approval to for any games since July of last year which is a long-running delay following 2018, when the country put off gaming approvals for almost 10 months to try to tighten its control over content in games and their play. Cui Chenyu an analyst from Shanghai at Omdia Research, a research firm Omdia claims that the currently suspended games could be a result of authorities’ desire to protect minors and change the way they play which could lead to addiction. It is not clear whether or when licensing changes will soon be granted There is also possibility that the suspension could last until the end of the year.
The current uncertainty has increased market volatility. Tencent dropped more than 5% on Monday, following an anonymous post hinted at an additional round of enforcements against the company. This prompted its head of public relations Zhang Jun to issue an usually aggressive response to deny the rumor. The company trades with a forward P/E ratio of 24 times, which is down from a five-year P/E average of 38.4 times.
It is not clear how long the regulatory clampdown will last. Last week, authorities issued new guidelines that asked food delivery firms to cut the amount they charge restaurants. leading the market leader in Hong Kong, Meituan to sink 15% and lose $26 billion of market value the day of the announcement.
Brock Silvers, a Hong Kong-based chief investment officer of Kaiyuan Capital, cited regulatory threats and claimed that his allocation to Chinese tech stocks is now zero. Ample Finance’s Wong said he had reduced 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.”
