Slapped with a half-billion-dollar fine for harming its customers, shares in Chinese food-delivery app Meituan (HK:3690) (MPNGF) ... soared on Monday, lifting the entire Hong Kong market.
Meituan shares ended the day up 8.4% here in Hong Kong, driving gains in the Hang Seng Index. The Hong Kong benchmark posted the strongest showing in Asia on Monday, up 2.0% on a day most Asian markets are advancing.
After the close on Friday, the monopolies watchdog leveled a fine of C¥3.4 billion (US$535 million) against Meituan. This is the first chance for investors to respond.
It's a similar story to Alibaba Group Holding (BABA) , as I explained back in April, when its stock opened up 8.5% and closed with a 6.1% gain after the e-commerce company took a record C¥18.2 billion (US$2.8 billion) fine from Chinese regulators.
The fines aren't quite as bad as they could have been. That's the clear conclusion in the markets. Maybe the regulatory squeeze on those companies will ease.
Meituan's fine amounts to 3% of its total domestic revenue in 2020. Per the order, the company must also cease its current anticompetitive practices, and return C¥1.3 billion (US$200 million) in deposits that it has on hand as collateral for exclusive partnership deals with merchants.
At issue is the "Pick One from Two" practice of many of Chinese e-tailers to require merchants to sign deals in which they pledge to only sell their goods on that site. Regulators want to eliminate such pacts. Separately, the Chinese authorities are also forcing app producers to stop ring-fencing their apps, where in the past they have blocked customers from seeing or clicking through to links or content from competitors.
The antitrust State Administration for Market Regulation is expected to fine virtually all Chinese Big Tech companies for such behavior. In the early days of e-commerce in China, Beijing was happy to let online companies expand at will. Now, with a crackdown on a wide variety of business behaviors, the Chinese Communist Party wants to wrest control back from tech companies and billionaire tycoons.
The US$535 million Meituan fine is lower than the US$706 million penalty that Nomura analysts had anticipated. The fine equates to 4% of Meituan's net cash of US$13.1 billion. As such, it's a "manageable one-off expense" in analyst speak, "I'll pay that out of my back pocket right now" in real-life terms.
Not only does the fine lift a regulatory overhang from above Meituan's stock, but it also suggests that the monopolies watchdog will ensure any fines it lays down are financially manageable for other tech companies.
Alibaba's shares rose 7.9% today, but are still 26.3% down for the year so far, and only 54.7% of their value this time last year. That descent has nothing to do with the company's fundamentals, and everything to do with China's tech crackdown.
The Hang Seng Tech Index advanced 3.2% on Monday. Only the online pharmacy-and-clinic JD Health (HK:6618) (JDHIF) (up 8.4%) performed better than Meituan and Alibaba, with other significant gains from Web browser Baidu (HK:9888) (BIDU) (up 6.4%), cloud-computing provider Weimob (HK:2013) (up 6.2%), and e-commerce site JD.com itself (HK:9618) (JD) (up 5.2%).
Meituan's share of food delivery in China has risen to 69% in 2020, up from 62% in 2018. As such, any change in its practices is unlikely to significantly shift the competitive landscape, Nomura China Internet analysts Jialong Shi and Thomas Shen believe.
The regulatory pressure may ease for Chinese tech companies in general heading into the end of the year. Shi and Shen say the likelihood of "unexpected bombshell regulations" is being defused.
Meituan is now free to get back to business without a regulatory sword hanging over its head. Its main challenges will be maintaining its market leadership at a time competitors are willing to burn cash to win business, particularly in group buying and grocery delivery. Meituan is also expanding into new business lines such as bookings for hotels and travel.
The Chinese monopolies watchdog launched an investigation into Meituan's potential abuse of its dominant market position in April. That's the same month Chinese regulators called 13 dominant Chinese Big Tech companies in to tell them to cut out anticompetitive behavior. The 13 constitute a Who's Who of Chinese tech, and Meituan's shares fell 3.6% that day, as I outlined back then.
Meituan has been abusing its dominance since 2018, the watchdog says it discovered, in announcing its findings.
Regulators have also ordered Meituan to revise its rules on commissions, change how its algorithms work, and improve the situation for small- and medium-size food businesses on its platforms. The regulator says it will conduct an inspection and compile a compliance report to make sure that's happening.
While China has taken a series of actions against private industry that appear distinctly anti-business of late, ratcheting up Marxist-Leninist ideals, its regulatory actions against Big Tech are in line with if not ahead of the kinds of changes that regulators in the West are trying to impose. Big Tech the world over has gravitated into the hands of a handful of companies, their dominance ensuring they get to set the standard operating procedure, with few rules in place.
At the same time, this is partly a problem that's the making of the Chinese government. It has created an environment where a small number of Chinese companies are responsible for virtually all the e-commerce in the country. Beijing has barred overseas competition from virtually all non-Chinese tech companies, partly to benefit Chinese industry, partly in a bid to ensure data and censorship stay under state control.
This has normally ensured that one or two first movers dominate any particular online industry. There's a greater dependence on getting government approvals to do business in China's command-style, top-down governance. Regulators have been reticent in granting licenses to startups, exacerbating the lack of competition in apps and online sites.
