The biggest headline to start this week has to be the news of the Chinese regulators concluding its cybersecurity investigations into Chinese ride-hailing giant, Didi Chuxing. New users can now sign up on Didi’s app after a year long ban which removed Didi’s apps from domestic app stores.
China is finally ending the regulatory crackdown
This is a latest of many positive steps in recent months which indicates that the Chinese government wants to improve economic growth amidst its covid zero policy and the government plans to improve economic growth with the support from the tech giants.
Here we take a look at the big Chinese tech companies listed by way of ADRs on US stock exchanges that have also faced regulatory actions and have since rebounded from lows, which were mostly recorded in March 2022.
Some of the names were also previously mentioned in my Chinese deep value plays article with the potential to become multi baggers.
10 Big China stocks that have rebounded since the China Tech regulations ended
| Company | Ticker | Market Cap (US$’m) | Share price vs all time low | Share price vs all time high |
| Alibaba Group Holding Ltd | NYSE:BABA | 264 | 35% | -68% |
| JD.com Inc | NASDAQ:JD | 90 | 45% | -36% |
| NetEase Inc | NASDAQ:NTES | 69 | 51% | -12% |
| Pinduoduo Inc. | NASDAQ:PDD | 68 | 231% | -72% |
| Baidu Inc | NASDAQ:BIDU | 51 | 45% | -57% |
| NIO Inc | NYSE:NIO | 29 | 64% | -69% |
| Li Auto Inc | NASDAQ:LI | 24 | 72% | -19% |
| Xpeng Inc. | NYSE:XPEV | 21 | 40% | -65% |
| KE Holdings Inc | NYSE:BEKE | 18 | 200% | -79% |
| Lufax Holding Ltd | NYSE:LU | 15 | 55% | -68% |
1. Alibaba Group Holding Ltd (NYSE:BABA)
Alibaba was hit by record fines and severe regulatory actions across its core businesses with Ant financial being forced to restructure and recapitalise. Its e-commerce and digital media entertainment segments facing regulatory actions such as anti monopolistic actions and advertising and content restrictions. Alibaba’s founder, Jack Ma even “disappeared” for a couple of months before resurfacing and for most people who are not in their inner circle, it is still a mystery as to what really happened to Jack Ma.
Alibaba was also forced to remove its walled ecosystem and open up access to rival services through its apps and had to remove restrictions prohibiting vendors to transact on more than one platform.
Alibaba saw weak growth and poor operating earnings exacerbated by higher regulatory costs in the previous few quarters, before beating analyst expectations in the most recent quarter, hence demonstrating some green shoots of a turnaround
Alibaba had also pledged to donate 100 billion yuan as part of the common prosperity policy initiative.
Hence, it has only rebounded 35% from its all time low and is one of the worst hit stocks as it is still down 68% vs its all time high share price.
2. JD.com Inc (NASDAQ:JD)
While not specifically mentioned in most media reports, JD.com also had to take remedial action for its e-commerce and healthcare platform segments. Similarly to Alibaba, JD.com had to ensure that the content on its e-commerce platform was appropriate and there were no unnecessary price wars intended to kill off competition.
JD Health, JD.com’s healthcare management platform division was directly impacted by measures such as ban on online consultations for initial diagnoses. The new regulation also prohibited the practice of linking doctors’ income to the sales of drugs and medical devices. Drugstore chains were also forbidden from selling prescription medicines on the internet. Meanwhile, non-prescription medicines sold online will be scrutinised by the authorities using standards as strict as those for offline sales.
Its founder, Richard Liu also stepped down as CEO in April 2022 amidst a trend of leadership reshuffle with other Chinese tech founders stepping down from the top post into a advisory position.
As it did not have to remediate larger issues such as anti monopolistic practices, JD.Com was one of the better performers during this period with a 1Q22 revenue growth of 18% off the back of a 4Q21 revenue growth of 23%.
3. NetEase Inc (NASDAQ:NTES)
China regulators ceased video game license approvals for about eight months before resuming approvals in April 2022, slightly shorter than the previous nine month suspension in 2018. Video game license approvals in April 2022 numbered 45. In June 2022, the National Press and Public Administration, which is China’s gaming regulator, granted another 60 publishing licenses. However, on both instances, the list of licenses did not contain any games belonging to NetEase and Tencent. The number of games approved was also lower then July 2021 where 87 licenses were granted.
NetEase did not receive approvals for any of its new video games then. One of NetEase’s latest game Diablo Immortal was launched in June 2022, but this was previously approved in February 2021. While it leaves to be seen if NetEase would receive a video game license approval next round, one can at least take comfort that Diablo Immortal was finally launched amidst many delays.
4. Pinduoduo Inc. (NASDAQ:PDD)
Similarly, Pinduoduo operates in the e-commerce arena and had to dedicate some resources in ensuring that the company conforms to the new regulations. Although it was spared from the worst regulations, it still had to realign its focus, making more long term investments into digital agriculture initiatives and R&D as part of the common prosperity policy in China.
Pinduoduo had pledged to donate a total of 10 billion yuan towards the development of China’s agricultural sector and rural area developments.
5. Baidu Inc (NASDAQ:BIDU)
Baidu is now more commonly associated with its AI and quantum computing capabilities such as the Baidu AI Cloud and Apollo Go Robotaxi, its autonomous ride-hailing service which achieved level 4 vehicle autonomy which means that the taxi can perform all driving tasks automatically under specific circumstances within a geographical area which helped to mitigate against its impact from the regulatory crackdowns.
However, Baidu still has its eponymous search engine and iQiyi which relies on advertising as a source of revenue. These segments were affected by the regulatory crackdown. It also has a small video games development unit which it laid off at least 100 workers in December 2021.
6. NIO Inc (NYSE:NIO)
7. Li Auto (NASDAQ:LI)
8. Xpeng Inc (NYSE:XPEV)
The Chinese electric vehicle segment was one of the few segments that were largely sheltered from any direct effects of the regulatory crackdown. However its share price was not spared as many electric vehicle companies such as NIO, Li Auto and Xpeng were in the development stage, not profitable, had elevated debt levels and required large investments to fund its capital expenditure requirements such as R&D and new factories.
As many of these electric vehicle companies were mainly funded by tech companies, there were concerns that funding would dry up and lead to some of these companies collapsing or losing ground in their market competitiveness when compared to western electric vehicle companies like Tesla who had strong balance sheet with minimal debt.
As these EV companies sold cars overseas and were also listed overseas, they had to ensure that they conformed to more stringent data security rules.
In addition, some market watchers believe that the EV market in China is too fragmented and that a consolidation is eventually on the cards. Besides well known Chinese EV companies such as NIO, Li and Xpeng, the traditional automakers such as Great Wall Motor, BYD Motor, Geely and SAIC Motor have all produced EVs. In addition, Tesla is fast gaining market share as a crowd favourite.
Fortunately, as the electric vehicle segment was deemed an area of strategic growth by the Chinese government, with goals such as for EVs to account for 20% of vehicles sold in China by 2025 and for eventual carbon neutrality in China.
9. KE Holdings Inc (NYSE:BEKE)
KE Holdings was directly affected by the tech regulatory crackdown as the regulators investigated the company over concerns such as data security on its platform as well as the way it allowed advertising activities on its platform.
Not long after, KE Holdings was affected by the credit crisis affecting the real estate industry which caused residential transaction volumes to plunge over concerns that property valuations were elevated and that many real estate developers who were facing potential bankruptcy may not be able to complete construction of new homes.
Its founder, Zuo Hui also unfortunately passed away in May 2021 just as the various crises in China started to take shape.
In December 2021, well-known short seller Muddy Waters who has exposed accounting problems and frauds at several Chinese companies also took aim at KE Holdings, questioning the value of the company’s transaction volumes, store count and agent count, as well as the company’s reported revenue. Muddy Water also made allegations, comparing KE Holdings to Luckin Coffee, a company who admitted to intentionally materially overstating its revenue.
These shocking events piling up meant that KE Holdings was one of the worst hit company as it fell approximately 90% at its lowest before seeing share price doubling from the bottom as overall sentiments improved.
10. Lufax Holdings Ltd (NYSE:LU)
Lufax who is backed by Ping An actually started recalibrating its business model much earlier as regulators were concerned for many years that the financial technology platforms could be a potential source of instability for the financial ecosystem.
Although the regulations were of no surprise to Lufax, it still had to revamp its business model as it ditched P2P lending due to significant concerns of financial risks. Lufax also had to lower its annual percentage rates on loans to a maximum of 24% per annum so as to keep interests at a reasonable level. It also had to raise its share of capital of loans that it syndicated and ensure that it is fully compliant with the way it bundles services and cross selling of products to its customers.
Hence, Lufax’s revenue growth in 2020 slowed to 9% after 2 blockbuster years in which 72% from 2017 to 2019. It was able to bring growth back on track in 2021 with a 19% revenue growth rate as it was one of the first few companies who was able to fully align its business operationally with regulatory requirements and transitioned to a more sustainable business model which provided for more balanced risk sharing between the various stakeholders.
The sun is shining now but another storm may be in the distance..
While it does look like the worst is over for now, one will do well to remember that China may impose similar regulatory actions again in a few years as this is not the first and certainly not the last.
In addition, with China and US relations on the rocks in recent times, there is an uncertainty on whether China’s compromise on the US SEC’s audit requirements will suffice for the US. Should both countries not be able to come to a resolution, many of these Chinese tech companies who are on the list of firms facing delisting may see their share price impacted as investors rationalise their holdings.
However, over the long term, these Chinese companies have grown and for investors who have the risk tolerance for tech companies, picking tech companies who have a long sustainable growth runway may prove to be rewarding.
If you’re not sure how to pick the best China companies for your portfolio, Alvin will be sharing his 3Cs China investing framework at an upcoming webinar.
