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CHINA’S technology stocks dropped recently amid investor concerns over Beijing’s new regulatory plans for the sector.
The Hang Seng Tech Index, our benchmark for China Tech, fell to near 2020 lows dragged by selling in stocks like Meituan, Alibaba Group Holding Ltd and Tencent Holdings Ltd.
While 2022 to-date has been tough for Chinese tech stocks, their fundamentals remain strong as the Covid-19 pandemic-driven adoption of technology has accelerated.
We also remain positive on China Tech on signs of easing of regulatory pressures and further digitalisation driven by technological advancement, which the government is committed to.
To recap, a series of regulatory crackdowns have been imposed by the Chinese government on big tech companies, which sent shudders across the stock market.
It all began in late 2020 with the cancellation of Ant Group’s IPO and regulations heightened throughout 2021.
The government has stated multiple times before that the intention behind the regulatory crackdown is not to stifle the growth of tech companies, but rather to safeguard consumer interests and ensure sustainable growth of the sector.
The recent China Tech drawdown has shocked investors and caused fear in the market that a new series of tech-based regulatory crackdown is coming.
However, other than Meituan’s (which was fined for antitrust rule in August 2021), the rest are just rumours at this juncture.
We, however, remain positive on China Tech in 2022 as we think the Chinese government is unlikely to institute aggressive regulatory crackdown like in 2021, as its policy stance is to focus on growth in addition to social responsibility.
We believe 2021 was the “introduction” phase of the new policy, while this year (and the next few years) could be the “execution” phase.
Thus, it is unlikely the government will introduce any new regulation this year as this would be too frequent.
In such a year, Chinese policymakers tend to prefer social and economic stability, and would likely want to demonstrate significant achievements to China’s citizens.
Thus, it would make perfect sense for the ruling party to wrap up regulatory crackdowns and display how it has benefitted citizens, for example the easing of the financial burden of education costs which accounted for as much as 25% of urban household income earlier or the implementation of the minimum wage requirement for China’s 200 million gig-economy workers.
With most rectifications done and investigations coming to a close, and 2022 being an important political year, regulatory pressures should ease.
2022 is a politically-sensitive year as Beijing will likely prioritise “social responsibility” at the upcoming National People’s Congress meeting, while the US will have its midterm elections.
Hence, we expect the downside risk on heightened US-China tension is minimal.
Fundamentally, China Internet giants remain solid with a good growth outlook.
The fears of delisting of US-listed Chinese stocks are overblown as the China Securities Regulation Commission has reinforced support for US listings after stating that Chinese companies should be free to choose where to list as long as they abide by the laws of both jurisdictions.
Even in the case of delisting, companies still have plenty of options such as relisting on China’s Shanghai Stock Exchange STAR Market and the Hong Kong Stock Exchange (HKEx).
The delisting news will, however, continue to dull investor sentiment and valuations as investors lower the multiple they would be willing to pay.
In addition, delisted companies will have to provide an exit option for shareholders, such as buying back shares at an agreed upon price.
For dual-listings, they can elect to convert their ADRs into HKEx-listed shares.
Using a fair price-earnings ratio of 30X on 2024 earnings, we estimate an attractive upside potential of close to 91.3% for the China Tech sector, as of Feb 23.
Given the steep selloff in Chinese tech stocks, we think valuations are now too cheap to be ignored. Investors who are positive on the longterm growth prospects of this sector may use this opportunity to add to their positions.
We believe fundamentals will lead earnings and become the main driver in the future valuation, and we are bullish on China’s outlook given its accommodative monetary policy and expectation of easing in regulatory headwinds for the sector.
The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.