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  1. Home
  2. / Investing
  3. / Technology

Why the Selloff in Chinese Tech Stocks on Antitrust Fears Might Be Overdone

Changing the business practices that have been criticized by Chinese antitrust regulators might not carry a massive financial hit, and past selloffs on regulation fears proved to be buying opportunities.
By ERIC JHONSA
Nov 11, 2020 | 02:06 PM EST
Stocks quotes in this article: BABA, BIDU, NTES, JD

Alibaba (BABA) , Tencent and many other Chinese tech stocks have come under pressure recently thanks to fresh regulatory concerns, particularly for companies seen as having monopoly positions.

But it's worth remembering that this isn't the first time we've seen such selloffs among Chinese tech names, and that the prior declines often wound up being short-lived.

On Nov. 3, Chinese tech stocks slumped after online payments and financial services giant Ant Group, which Alibaba owns a roughly 33% stake in, called off its planned Hong Kong and Shanghai IPOs. The decision came after Ant controlling shareholder/Alibaba co-founder Jack Ma and senior Ant execs were summoned to a meeting by four different Chinese regulators.

Many Chinese tech names rebounded later in the week, but a fresh selloff occurred on Monday due to concerns about a draft antitrust guideline released by Beijing that aims to end perceived misdeeds by Internet monopolies.

Notably, the guideline criticizes practices which, if changed, could slightly impact the bottom lines of some major Chinese internet platforms, but perhaps not massively so. These practices include selling items at different prices to different customers, selling items below cost (to act as loss leaders) and preventing merchants from selling on rival platforms.

Since Friday's close, Alibaba's stock has dropped 10%, Tencent's stock has dropped 8% and JD.com's (JD) stock has dropped 11%. Over in Hong Kong, food delivery leader Meituan's stock has dropped 16%.

The antitrust guideline has overshadowed yet another strong Singles Day shopping event for the likes of Alibaba and JD. Counting an earlier-than-usual start to sales this year, Alibaba is reporting a Singles Day gross merchandise volume of RMB498.2 billion ($75.1 billion).

The guideline does act as a refresh reminder of the regulatory uncertainty that Chinese tech companies have to contend with. This uncertainty, together with concerns about potential accounting issues and the variable interest entity (VIE) structure that these companies use to list their shares on foreign exchanges, has much to do with the substantial valuation discounts Chinese tech companies generally trade at relative to American peers with similar growth profiles.

At the same time, it's worth keeping in mind that some of the prior selloffs in well-known Chinese tech companies due to regulatory fears wound up being buying opportunities.

In the spring of 2016, for example, Baidu (BIDU) sold off following a government crackdown on medical ads shown on its search pages. However, shares eventually recovered their losses and surged to new highs in 2017 (Baidu's stock has admittedly had a rougher time since then, but that's due to business issues unrelated to the medical ad crackdown).

And in the second half of 2018, game publishers such as Tencent and NetEase (NTES) tumbled after Beijing halted approvals for game monetization licenses, citing concerns about the impact of games on children. But approvals gradually restarted, and Tencent and NetEase are now trading well above their 2018 highs.

Time will tell whether or not history repeats for the Chinese tech stocks hit hard these week by antitrust concerns. But there are certainly some parallels.

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TAGS: Investing | Technology | China

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