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Author: TradeVSA   |   Latest post: Mon, 1 Nov 2021, 10:55 AM

 

Chinese Internet Stock (HKSE) Crackdown – Is it an opportunity for investors?

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Introduction

In China's tech sector, there has been a lot of regulation. The Chinese tech market has entered a bear market, with most of the most popular stocks, such as Tencent and Alibaba, dropping more than 40% from their all-time highs. What happened to China's tech sector? Is it an opportunity for investor? Today, we'll try to talk about it and figure it out.

 

Timeline of Chinese Stock Crackdown

Source : https://multimedia.scmp.com/infographics/china-internet-2021/?gclid=Cj0KCQjwkbuKBhDRARIsAALysV4boKF_jypdh6DsDRM-q83jj6KnmphgkF2MG7q8BqG_L9iaJrCPqDUaAumaEALw_wcB

China has been imposing new laws for its tech companies, such as fining Alibaba for anti-monopolistic practises, prohibiting Chinese After School Education stocks from profiting, and prohibiting children under the age of 18 from becoming addicted to gaming. The crackdown on tech industry has been no sign of ending. If we look at Tencent Q2 Earning Call Transcript 2021, they do warn investors that more regulation will be coming out of China and investor should not expect China to end its crackdown soon.

 


Source : Tencent Q2 2021 Earning Call Transcript

 

The big sell-off in Chinese tech actually began when the government announced a ban on after-school education stocks such as TAL, GSX, and EDU. This is because investors do not expect China's crackdown to change a company's fundamentals indefinitely at first. Following China's decision to prohibit Chinese After School Education stocks from profiting, investors, particularly in the West, were alarmed, fearing that Chinese big tech would be the next target. They are afraid that the China CCP could just walk into Alibaba company one day and change its fundamentals forever for example like breaking their business apart, so many investors are panicking and dumping Chinese stocks, even though their valuation is low.

 

Why is this Happening?

  1. Anticompetitive happened in the industry

The lack of regulation in the technology industry is the first reason China is cracking down on its tech firms. In the industry, there have been numerous example of anticompetitive behaviour. Alibaba, for example, was fined a record $2.8 billion for an abusive seller practise known as "Choose one from two." If a merchant chooses to sell on T-Mall, they are unable to list on other Alibaba rival platforms, which has harmed other e-commerce businesses such as JD. JD has been facing unfair competition from Alibaba for so long as many merchants in T-Mall who want to list in JD is unable to do so. Thus, JD is actually benefited from the anticompetitive crackdown on the industry and the company is actually welcoming it to prevent the other technology giant like Alibaba monopoly the market.


Source : JD Earning Call Transcript Q2 2021

 

Besides, there also company like Tencent Music Entertainment(TME)  who are ordered by China's antitrust authorities to end its exclusive music licensing deals with global record labels.  TME has maintained its competitive advantage by forming alliances with the world's largest music companies. Tencent Music, Sony Music Entertainment, and Warner Music Group who sold their exclusive right of their catalogues to Tencent Music Entertainment. Then TME will sub-licensed the music exclusive right to other music streaming competitors and charging them an expensive. Competing platforms like NetEase Music have to "pay two to three times the reasonable cost" for content under such arrangements.

 

 Why this is Important?

Anti-competitive behaviour is harmful to everyone, particularly consumers. When an industry is lacking of competition and one company dominate, that company can charge consumers exorbitant prices for its goods and services because consumers have no other option but to buy from that company. Furthermore, anti-competitive behaviour is also killing the industry innovation. Because there is no competition to motivate them, companies that dominate and monopolise an industry have little incentive to innovate and offer better products or services. The consumers are the ones who suffer the most in the end. As a result, it is critical for government to implement rule to prevent anti-competition in order to have a long-term healthy trend in the industry and the country economy.

 

  1. Data Security Law

When it came to data protection, China had previously lagged behind the EU and the US. However, in recent months, China has stepped up its efforts to protect personal and sensitive data from falling into the hands of third parties. For example, Didi was investigated by the Chinese Cybersecurity Administration (CAC) in July 2021, and the company was ordered to suspend new user registration pending further approval. Didi was targeted by the CAC in an aggressive and uncompromising manner as they are concerned about the national security that Didi data might post to China. Didi's 550 million users in over 400 Chinese cities create detailed, dynamic location data in real time using their real names. Meanwhile, Didi's IPO in the United States also would bring in even more foreign investors. The data generated by Didi are considered critically valuable assets with potentially significant national security concerns if accessed or controlled by other country.

Furthermore, China drafted a new law to protect personal data in order to prevent Big Tech from misusing it to gain competitive advantages and harm consumers. China believes that Big Tech should not be allowed to misuse consumer data, and that a balance must be struck between privacy protection and data for legitimate business purposes. The regulation also clarifies that an individual has the right to refuse data collection from the internet giant. Consumer also has the right to know, copy, correct, and delete his or her personal information stored online. Moreover, China also explicitly bans apps from profiling users under the age of 18.

 

Why this is Important?

In the twenty-first century, data has become one of the most valuable assets. China is concerned that sensitive or personal data will be leaked to a third party, particularly from another country, allowing the other country to gain an advantage over China. Besides, data also can be misused by the internet giant by engaging in algorithmic price discrimination, in which a platform offers different prices to different users based on how much it believes they are willing to pay. This has become a common practice among China’s travel booking platforms, which will ultimately hurt consumers in the end.

 

 
Source : https://multimedia.scmp.com/infographics/china-internet-2021/?gclid=Cj0KCQjwkbuKBhDRARIsAALysV4boKF_jypdh6DsDRM-q83jj6KnmphgkF2MG7q8BqG_L9iaJrCPqDUaAumaEALw_wcB

 

  1. Birth Rates Declining

China is currently facing a very big threat to its economy right now. Which is the decline in the population of China due to low birth rates. For nearly 40 years, China enforced a controversial "one-child policy" – one of the strictest family planning regulations anywhere in the world. It was first relaxed in 2016 with the "two-child policy" and then, in 2020, the two-child policy was changed to a three-child policy due to widespread concerns about an ageing workforce and economic stagnation. Despite government efforts to encourage couples to have more children, China’s annual births have continued to decline as the problem of a declining population is not because of Chinese government policy but due to the high cost of raising children.

The high cost of education and housing has become a huge obstacle in China's efforts to encourage couples to have more children. This is due to the fact that housing is required for marriage and child rearing, and education is required to raise children. As a result, if the government does not assist in lowering education and housing costs, it will be difficult for Chinese couples to have more children.

Unaffordable housing prices in Singapore are well-known throughout Southeast Asia, particularly in Malaysia. Singapore's housing price to income ratio is currently 20.3, which is higher than many developed countries such as the United States and England. However, when compared to China's housing price to income ratio, Singapore housing appears to be inexpensive, as China's price to income ratio is twice that of Singapore, which is around 40+. China's housing market is currently the most expensive in the world. This is the reason why China has been curbing on China housing prices to make them more affordable but this eventually have an side effect which may cause the collapse of Evergrande .

 


Source : https://www.bloomberg.com/news/features/2020-12-20/workers-flocking-to-china-s-silicon-valley-can-t-afford-to-buy-homes

 

To curbs on high education fees, China decided to ban Chinese after school tutor stock from profiting. China took an aggressive approach on Chinese After School tutor stock spook a lot of investor. This is because China are doing whatever it takes to curb the decline in population in China, even if it means sacrificing its own country company

 

Why this is Important?

The reason why the declining population is a major problem in China is that young people are the major economic drivers in a country. Young people tend to spend more money compared to older people, and they are the ones who pay tax to the government. The government then uses some of the tax money to raise the older population who have already retired from work. If China's population continues to decline, there will be fewer young people who pay tax to the government and there will be more higher spending by the government in order to raise older people who have retired from work. The government will have less money to spend on innovation and infrastructure, which is important to drive the economy of the country. Eventually, China will experience no growth in its economy and stagnation in its GDP. In order to become the world's biggest economy, China wanted to avoid this at all cost and take action before things became worse, as such policies and support to raise the birth rate require 10 to 20 years to have an effect on the country's economy. As a result, China is currently pursuing long-term gains at the expense of short-term pain.图表

Source : https://www.bbc.com/zhongwen/simp/chinese-news-46773106

 

Is it an opportunity for investor?

China is still the second largest economy in the world. The economic force of China is something that investors should not ignore. If we as investors understand the game that China is playing, we will undoubtedly be able to profit from the China Tech crackdown disaster and make a fortune.

Low Risk Investing Theme

For low risk investing theme, t will be the category that align with the company government interest. In the China 14th Fifth Year Plan, China is emphasizing on achieving self sufficiency in semiconductor. Semiconductors I believe is the king piece on the Chinese chessboard that they have to protect no matter what happen. This is because the semiconductor is the basis of all technology. The devices and the technology we currently use all have semiconductors. When you talk about basic electronics, advanced electronics, the fourth industrial revolution, data centres, SaaS, AR, VR, AI, autonomous driving, etc.. All of them need a semiconductor to function.

 

Source : https://quointelligence.eu/2021/03/chinas-five-year-plan/

 

China is also the world biggest semiconductor consumption country. Thus, in order for China to be a dominant country, to be the number 1 country in the world, China has to dominate technology, and to dominate and have the most advanced technology, they need to have high-end semiconductors. In the 14th fifth year plan, China has planned its strategy to create a closed-loop semiconductor manufacturing ecosystem to push its semiconductor self-sufficient percentage from 40% to 70%.

If you believe China is going to do whatever it takes to become a technology independence country, if you believe China is going to do whatever it takes to develop a self-dependent semiconductor ecosystem, then I believe the best bet to play the semiconductor game is SMIC who operates the largest foundry in China.

A might be a good choice to have good exposure to semiconductor industry that listed inside HKSE or US Market ETF.

Besides, stocks that focus on green energy are also low-risk picks in my opinion, as China has been one of the world's largest countries that provides a lot of subsidies for electric vehicles. Stock like XPeng, Nio, BYD, XinYi Solar and Longi Green might be a good choice for investor who want to invest in a sector which there is a minimum chance that China's government is going to regulate.

 

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Disclaimer

This information only serves as reference information and does not constitute a buy or sell call. Conduct your own research and assessment before deciding to buy or sell any stock

 

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