Want to Invest in China? Read First
What about Performance?
Most Chinese tech companies listed in the US or Hong Kong experienced disastrous panic selling, driving prices to record lows. The Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, recorded its biggest drop since November 2008. Analysts called the decline “scary” even in this extremely volatile market. The index fell 7.2% on March 14, 2022 and another 6.6% drop on March 15, 2022. After a strong performance in 2020, most of China’s overseas-listed technology companies have seen a steady decline over the past year.
The changes in market capitalization from February 2021 to March 2022 were huge for China’s 11 largest and most well-known tech companies, with the market capitalization of Alibaba reduced by 66%, Tencent by 50% and PDD, the e-commerce platform commerce on the rise, by 82%. % Several notable names fell by double-digit percentages: JD.com by 7.14%, Hello Group by 5.74%, Baozun by 10.43%, iQIYI by 16.74% and Zhihu by 16.14%. . The MSCI China index has seen its valuation more than halved since 1 February. 2021 peak. The indicator is trading at about 9 times its 12-month future earnings estimates, compared to a five-year average of 12.6
JP Morgan Chase recently downgraded several Chinese tech stocks, starting with JD.com, China’s largest direct retailer, from overweight to underweight and cut its price target from $100 to $35. This has been harmonious and has arisen in response to declining valuations in the sector, as well as a more difficult macroeconomic environment.
Negative factors
Reasons for the drop in Chinese tech stocks the recent decline in Chinese tech stocks has been such that investment banks such as JP Morgan Chase and Goldman Sachs are now rating Alibaba, Tencent and Meituan as “uninvestable” for the next 6–12 months. Risks related to Russia, the internal spread of Covid-19 and strong market regulation are apparently the main factors that caused this market decline.
First, amid geopolitical tensions between Russia and Ukraine, the United States and other European nations would impose sanctions on China, further bolstering the economy at a vulnerable time. Second, China shut down its tech manufacturing hub in Shenzhen for more than a few weeks to combat the domestic spread of the Covid-19 virus. While this may not have a direct relationship to stock performance, it does raise supply chain and geopolitical concerns that push manufacturing away from China and could weigh on the Chinese economy. Finally, a number of recent regulatory developments are making traders wary of investing in Chinese stocks. Tencent Holdings Ltd., owner of super app WeChat and one of China’s biggest tech firms, faced a large fine for breaking China’s anti-money laundering rules, causing Chinese shares to plunge more than 10%. A decline in Chinese tech stocks slipped after the US securities regulator downplayed the prospect of an imminent deal to keep local companies listed on the US stock exchange.
Second, The Securities and Exchange Commission has identified several Chinese companies at risk of delisting in the United States as part of a campaign against foreign companies that have refused to open their books for scrutiny by security regulators. The SEC recently added Baidu Inc. to its list for banning audit disclosures. Despite all these reasons, some analysts believe that Chinese tech stocks are no longer profitable. Investors are hungry for profitability and it has become much more difficult for these companies to show green results as they are constantly under pressure from regulations, the slowdown of the domestic economy and other political factors. In addition, the macro economy has weakened, especially domestic consumption, and since these companies operate in mainland China, the lack of consumer demand is constantly hurting them.
Measures to revive the Chinese market
Stock prices in Hong Kong and China showed a significant rebound in performance after China’s State Council promised to revive financial markets by easing some regulations on tech companies, providing support to real estate developers and generally boosting the whole economy. Following this announcement, China’s benchmark CSI 300 index gained 4.3%, Hong Kong’s Hang Seng index rose 9.1% and the Hang Seng China Enterprises index rose 12%. 5% in March 2022. It also boosted the share prices of China’s two largest technology companies, Alibaba Group Holdings and Tencent Holdings, by more than 20%.
We are seeing clear structural changes in China’s industrial policies and regulatory stance, particularly in the technology sector. In the short term, it may have caused problems in the form of slower growth or rising costs, but it helped create long-term benefits such as a healthier competitive environment, higher ESG standards and ultimately more sustainable growth. Investors also received an optimistic signal when the Chinese vice premier held a meeting to stabilize the capital market and called for more coordination and restraint in regulatory tightening measures, which immediately led to a rally in these stocks. Big brother “Beijing” tried to calm the panicked stock market with this meeting and urged other government agencies to coordinate with financial regulators before announcing measures that could disrupt the market.
What about Pre-IPO?
Currently, Beijing is stepping up its watch over the deluge of Chinese stocks into the US, which are mostly technology companies. The State Council also announced that overseas listing rules for domestic companies will become even stricter and tighten restrictions on cross-border data flows and security. The crackdown on technology is a common trend, and market analysts believe it could not only threaten pending IPOs, but could also put pressure on China’s popular ADR market. Chinese regulators are considering a rule change that would allow them to prevent a domestic company from listing in the United States, even if the stock-selling unit is set up outside of China. The move could be a major blow to Chinese companies that have clamored to list in New York in recent years. There may be fewer new and slower listings in the US due to government crackdown. Investors may need to think again before betting on Chinese tech startups, as some new regulations have been imposed on mainland companies looking to go public in the United States. listing path on public markets, which could result in lower valuations. Apart from these technical complexities, the new regulations could mean that similar IPOs in the future will probably have to go to Hong Kong. Faced with the potential for lower returns or an inability to exit investments within a foreseeable timeframe, many investors in China are holding back new bets. China’s IPOs in the US were headed for a record year in 2021 until Chinese ride-sharing company Didi’s late June listing on the New York Stock Exchange caught Beijing’s attention. Within days, China’s cybersecurity regulator ordered Didi to suspend new user registrations and remove her app from app stores. The move revealed the enormity of the compliance risk for Chinese companies domestically and marked the beginning of an overhaul of the overseas IPO process.
What does it mean for IPOs in China? The path to an initial public offering in the Chinese market looks uncertain. Chinese companies targeting the US should expect tighter regulations on both sides and a greater degree of scrutiny over the market. Furthermore, it could also lead to a possible drop in the company’s valuation and weaken investor confidence, making it more difficult for such companies to raise funds in the US. According to the Hong Kong Stock Exchange website, more than 140 companies have filed for Hong Kong IPO Kong. This alone leads us to conclude that the Hong Kong market could be an alternative for IPOs for Chinese companies and could be better suited to investor sentiment. While the markets have been brought under scrutiny, it may not be the perfect platform for companies to go public at this time in the economy.
Who is Victor Koch?
Mr. Koch — serial entrepreneur, wall street worker and late-stage investor specializing in secondary shares.
Previously: Twilio, Xiaomi, iQiyi, PinDuoDuo, Tilray, Livongo, Agora, Bandwidth, Kuaishou Technology, DataRobot, Robinhood, Chime, TransferWise, Oatly, Hims, Wise, Stripe, Kopi Kenangan, Toss, Coursera.
Currently: Enflame, Intercom, Horizon Robotics, FaDaDa, Wise, Epic Games, Hai Robotics, Automattic, Fiture, TigerG, and other
Contact — here, If you are a startup building in this space — email or DM me to be included in this article.
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