The biggest internet companies in China have seen their stock prices fall to their lowest levels within the last three years following an unconstitutional crackdown by the government wiped out hundreds of billions of dollars of market value. However, it’s not the right time to search for bargains, as there are more headwinds likely to be coming soon.
The government is determined to limit the influence of giants on markets that range 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. The problems with the policies are the slowing economy and a more difficult battle for consumers’ wallets which is affecting already slow growth.
“There are still downsides,” says Shawn Yang, a Shenzhen-based managing director of research firm Blue Lotus Capital Advisors. “I’d wait and see.”
Alibaba is, perhaps, the most vulnerable to risk of the future. Alibaba is currently trading at a forward P/E ratio of only 15.9 times for the fiscal year that ends in March, in contrast to an average P/E of 31.3 times between 2017 and the present, according to Ming Lu, an analyst at Aequitas Research, which publishes its research through the an online platform for research called Smartkarma. It’s possible that the stock is priced at a bargain due to the company’s dominant position in China’s huge online marketplace, which has led the billionaire investors Charlie Mungerto find an opportunity to buy however, the latest results of the company’s earnings provide a reason to be cautious.
Alibaba is struggling with China’s lower retail spending and a fierce competition from competitors like ByteDance that is drawing customers away with live-streamed shopping shows. After absorbing an unprecedented $2.8 billion fine for antimonopoly in April, Alibaba can not stop brands and merchants from moving elsewhere and requiring them to sell only through its platforms.
Alibaba’s revenue grew only 10% over the year to $38 billion during the quarter ending in December, making the slowest growth in the history of the company since it was listed in 2014. Net income dropped as high as 74 percent up to $3.2 billion. Largely due to the transfer of goodwill and the loss of value of its investment portfolio. If you exclude these, net income would have fallen 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 Kong listed Tencent, which is schedule to release its fourth quarter results. At the end of March is also experiencing its fair own share of issues. Regulators haven’t endorsed the creation of new games since July of last year. Which is a long-running suspension following the year in which the country stopped gaming approvals for nearly 10 months. In order to tighten its control over content as well as game-play. Cui Chenyu is a Shanghai-based analyst with Omdia, a research company Omdia claims that the suspension could be due. To authorities’ need to safeguard minors from gaming and to improve game play which could result in addiction. It is not clear whether or when the new permits will actually issue and there is a possibility. That the suspension may last until the end of the year.
The uncertainty that continues to surround the company has only increased market volatility. Tencent dropped more than 5% on Monday after an anonymous blog post suggested another round of retaliation against the company. This prompted the company’s public relations chief Zhang Jun to issue an usual savage statement to dispel the rumor. The company currently trades with a forward P/E rate of 24x. Which is down from a five-year average that was 38.4 times.
It is not clear what the duration of the clampdown will last. This week, authorities released new guidelines requiring food delivery companies to reduce the amount they charge restaurants. This which caused Hong Kong-listed industry giant Meituan to drop-15% and lose $26 billion of market value on same day.
Brock Silvers, a Hong Kong-based chief investment officer of Kaiyuan Capital. Cited regulatory risks and stated that his allocation to Chinese tech stocks is now zero. Ample Finance’s Wong stated that he has cut back on the amount of investments in tech-related stocks.
“In the past, they were a cornerstone of my portfolio,” Wong declares. “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.”
