Many of the world’s biggest and well known Chinese technology companies have a listing in Hong Kong and a dual listing in another exchange. For those listed in Hong Kong, the Hang Seng Tech Index is the bellweather index for Chinese stocks made up of 30 technology companies. Most if not all of these names should be well known and easily recognisable to readers.
We have highlighted in red the stocks that have seen a decline of at least 30% either YTD or in a 1 Year period. Note that for many of these stocks, the high was recorded in February 2021 and hence the performance since February 2021 till date is likely to be even poorer than the YTD and 1 Year performance.
How many Hang Seng Tech stocks are down 30% or more?
Why are Hang Seng Tech stocks beaten down?
The foremost reason to explain the share price declines is the well publicised regulatory crackdown that has affected Chinese stocks since November 2020. Sectors that were hit include Fintech, e-commerce, education, Ride hailing, social media and user-generated video, online Music and literature, Gaming, E-cigarettes and even Insurance. The US also played its part, blacklisting, or sanctioning companies that they believe have ties to the Chinese Military. Of all these sectors mentioned, the technology companies are involved in many of them.
The Russia-Ukraine war has also dampened sentiments on emerging market investment and specifically in China as many investors view China to be a strong Russian ally.
There are also other reasons since such as financial underperformance and slowing growth as many companies were affected directly by certain regulatory measures that they had to implement. Issues such as supply chain constraints and inflation also played a part for some of these companies. The current rising interest rate environment aimed at curbing inflation coupled with quantitative tapering by the US Federal Reserve which intends to reduce its sizeable balance sheet is also spooking many investors, causing a deleveraging scenario.
Crackdown on internet platforms
Internet platforms include companies such as Tencent, Alibaba, Kuaishou, Meituan, JD, Bilibili and the healthcare platforms. The Chinese performed a crackdown on these companies with new guidelines preventing walled ecosystems and emphasising responsibility for managing their content and censorship. This is part of the government’s drive to create an open, clean and healthy cyberspace, free from information it deems harmful to society. Measures include allowing companies to work with all internet platforms and prohibiting contracts which forces them to be tied to only one platform.
The Chinese government is also mandating that the internet platforms control social media and user-generated content, banning minors from sending virtual gifts or tipping for livestreamers. Unsustainable price wars between the e-commerce platforms are also prohibited.
Crackdown on gaming
The Chinese government froze new game licensing from July 2021 until April 2022 and also substantially reduced hours spent by minors before finally resuming game licensing. Besides Tencent that was the most affected, Kingsoft was also hit as it also had video game development as one of its business segments.
Crackdown on healthcare platform
The three biggest healthcare platforms in China, JD Health, Ali Health and PA Good doctor are unfortunately also all part of the HSTech Index.
For the online health management platforms which we previously covered here, two measures directly impacted the industry:
1) The China’s National Health Commission released a draft regulation to set entry requirements for the internet healthcare industry. The draft poses some strict requirements, such as a ban on online consultations for initial diagnoses. It also prohibits the practice of linking doctors’ income to the sales of drugs and medical devices.
2) The China’s Food and Drug Administration announced that drugstore chains will be forbidden from selling prescription medicines on the internet. Meanwhile, non-prescription medicines sold online will be scrutinised by the authorities using standards as strict as those for offline sales.
Global supply chain woes, covid lockdowns and macroeconomic conditions
Companies such as Sunny optical, Haier Smarthomes, Li Auto, Xpeng, AAC Tech, ASM Pacific were also hit by supply chain woes arising from covid lockdowns. The weakening macroeconomic conditions also impeded consumer confidence and spending.
Sanctioned companies
SMIC and Xiaomi were two companies sanctioned by the US Treasury as the US government believe these companies had connections to the Chinese Military. While Xiaomi’s name was cleared and removed from the list of blacklisted Chinese companies eventually, SMIC is still on this list.
Stocks that raised money via IPO, bonds or dual listing were obviously not spared
Sensetime, Bilibili, Xpeng, Li Auto are some names that did either a primary or secondary listing in Hong Kong when sentiments were buoyant. For those that raised funds, while it was clearly great for the company, it obviously isn’t so good for investors who bought in at that point in time.
Many of these companies such as Meituan also issued convertible bonds with strike prices that were higher than the February 2021 highs at very low interest rates. While these bonds have a long maturity of at least 5 years or more, investors are obviously worried that should share prices remain low, many investors will choose not to convert their bonds into shares and instead choose to redeem them. If all investors redeem their bonds, these companies will have to find ways to raise funds to pay off their bondholders.
Is this the light at the end of the tunnel?
Since November 2020, Chinese regulatory authorities have been cracking down harder on domestic tech giants to end their dominance in the internet sector.
After nearly than 18 months, there seem to be some light at the end of the tunnel as the regulatory crackdown has tapered off as the Chinese Vice-Premier Liu He called on regulators to adopt a standardised, transparent and predictable approach in overseeing the nation’s internet giants. Amidst a slowing economy, Chinese President Xi Jinping has finally made a move, apparently aimed at revitalising the internet sector and propping up the Chinese economy, which is losing momentum amid the Russian invasion of Ukraine and the country’s zero-Covid policy.
One may be tempted to purchase these stocks now as it seems like the light at the of the tunnel is here. However, one has to be wary that this light may be an oncoming train. Although China stocks look extremely cheap now compared to 2021 highs, many investors have been completely and utterly spooked as these share price declines are not without reasons.
Investors would do well to consider whether the light at the end of the tunnel is hope or an oncoming train, and whether the companies are poised to turnaround or are unable to do so whether because of permanent damage since the start of the crackdown.