The recent roller coaster in Chinese stocks has not been for the faint of heart.
Chinese ride-hailing giant DiDi Global Inc. (NYSE:DIDI) has seen its stock price crash from a high of $18.01 per share in its debut in June 2021 to less than $6.75 today.
Why? Because it announced it would commence delisting from the NYSE, and make plans to list in Hong Kong instead. The announcement stems from a report that regulators in China want Didi to delist because of concerns about leakage of sensitive data.
The announcement also comes less than 24 hours after the SEC finalized rules that would allow it to delist foreign stocks for failing to meet U.S. audit requirements.
The news sent shockwaves through many Chinese tech stocks listed on American exchanges. Shares of Alibaba Group Holding Limited (NYSE:BABA) (already down significantly since Ant Group's IPO was suspended late last year) collapsed to a low of $108.70 per share — a level not seen since the spring of 2017.
Similarly, shares in Pinduoduo Inc. (NYSE:PDD) hit $51.91 per share — a price last touched in spring 2020. Shares of Tencent Holdings Limited (OTC:TCEHY) and Baidu Inc. (NASDAQ:BIDU) have both crashed down as well.
Interestingly however, JD.com (NASDAQ:JD) has bucked the trend and seems to have been the only stock that has remained relatively unscathed… so far.
Without a doubt, fears are now running sky-high as investors abandon these Chinese tech giants in droves.
But does this mean that it may be time to buy in?
It’s never a good bet to go against the Chinese government. The crackdown on the tech industry has been fast and ferocious. And so far, the light at the end of the tunnel is yet to be seen.
"The latest regulatory tightening cycle is unprecedented in terms of duration, intensity, scope, and velocity," analysts from Goldman Sachs wrote in a recent research report.
And according to CNN, “The campaign has wiped out more than $1 trillion worldwide from the market value of Chinese companies. It has sent chills through the wider economy and stoked fears about the prospects of future innovation and growth in China.”
However, investors may finally have some clarity as to how far this crackdown will go.
President Xi Jinping recently gave a speech at the tenth meeting of the Central Finance and Economic Commission on August 17, 2021 which laid out the government’s plan to promote common prosperity within the country.
It wants to reduce income inequality, build a strong middle-class, promote entrepreneurship, and wipe out corruption and illegal activities —essentially creating a more inclusive socialist system where everyone participates and everyone benefits — instead of just a select few.
So, what does this mean for Chinese tech stocks?
And more specifically, what does this mean for BABA?
While there will likely be more pain ahead in the short to medium term, the fundamental question to ask is if the underlying businesses are at risk. If so, then investors should avoid Chinese stocks like the plague.
But if not, then this may be an opportune time to acquire some incredible assets for ultra-cheap prices.
The first thing to consider is delisting concerns.
As you’ve undoubtedly witnessed, delisting concerns have created major volatility across the board. Even on the Hong Kong Stock Exchange, where some stocks are dual listed, the volatility has been extraordinary.
But assuming the worst and that all Chinese companies delist from US exchanges, they will likely relist in Hong Kong, which would still be accessible by foreign investors.
Furthermore, shares of BABA American Depositary Shares (ADSs) are fully fungible (able to be exchanged for something equal) and can be converted to Hong Kong shares under the ticker symbol 9988 at any time. Delisting may give rise to some class action lawsuits but it shouldn’t really have an effect on actual business operations.
The second thing to consider is the strength of the underlying business.
BABA is currently going through growing pains as it doubles down on lower margin businesses for future growth. Regulators are also clamping down on Ant Financial’s business model, which will force the company to restructure its business (Alibaba owns 33% of the company).
Combined together, these issues negatively affected BABA’s 2Q results ended September 30, 2021. The company recorded revenue growth of 29% year-over-year but also saw net income drop 87% during the same time.
In fact, if it wasn’t for an $2.4 million decrease in share-based compensation expense related to Ant Group share-based awards granted to their employees, BABA would’ve reported a loss for the quarter.
However, the company continues to grow revenues and its annual active consumers across the Alibaba Ecosystem reached approximately 1.24 billion, with a quarterly net increase of 62 million consumers.
For a more long-term view, the company is on track to achieve their longer-term target of serving two billion consumers globally.
The third thing to consider is the net effect of increased government scrutiny on BABA’s business.
So far, regulators slapped the company with a $2.8 billion fine after a probe determined that it had abused its market position for years. Alibaba also pledged to commit 100 billion yuan ($15.5 billion) to help finance mainland China's push for “common prosperity” over the next few years.
The company also agreed to open up its walled garden—adding rival Tencent Holdings Limited (OTC: TCEHY)'s WeChat payment system in some of its apps, including the Ele.me food delivery app and Damai online ticketing platform.
China's Ministry of Industry and Information Technology premised its mandate on the need to improve user experience, protect the rights of users, and maintain market order.
However, while these clampdowns on Alibaba’s business have made a dent in its operations and reduced its profitability, they are temporary. Over the medium to long term, the BABA machine will likely overcome its struggles and continue to chug along well into the future.
Understandably, investors are fearful about the future of US-listed Chinese stocks and some are deciding that they’re not worth the risk.
However, a stock like Alibaba may be worth a second glance if you believe that China’s government crackdown is temporary…
And that these measures are meant to strengthen – not weaken – the market…
And that the company’s investments in future businesses will likely pay off big.
Furthermore, delisting concerns shouldn’t be as worrisome since BABA’s ADSs are (remember) fully fungible and can be converted to HK shares at any time.
For these reasons, investors should not be swayed by the negative news, do their own due diligence, and focus on whether a company like Alibaba will be a bigger, stronger, more powerful company in five or ten years.
Taking a long-term view and odds are you may just see a very bullish answer.