China Tech’s Trillion-Dollar Stock Slump Signals Buyer Beware

(Bloomberg) — For weeks now, optimists have said China’s tech crackdown has been priced in by the stock market. A fresh round of regulatory angst has shaken that thesis to its core.

The market capitalization of shares in a gauge of China’s internet sector dropped by about $200 billion this week alone, as Beijing vowed to increase scrutiny over data collection and overseas listings. It has slumped by more than $1.1 trillion since a Feb. 17 peak, with the index down some 35%, according to calculations by Bloomberg.

China’s pivot to data-amassing titans such as Didi Global Inc. has created a fresh round of uncertainty for investors already dealing with scrutiny in areas such as fintech, anti-monopolistic practices and after-school tutoring. Besides Big Tech, stocks linked to live marketing, electric-vehicle production and the education industry also look vulnerable.

“It is impossible to determine a reasonable or acceptable discount at this stage, given the uncertainties related to the extent of regulatory tightening,” said Katherine Chan, an analyst at Union Bancaire Privée in Hong Kong. “There could be further tightening for existing investigations” and probes into new areas, she said.

READ: China Tech Rout Deepens as Beijing Targets Data, U.S. Listings

Data Deluge

Beijing’s control over data collection could affect a range of industries from food delivery, ride-hailing and online entertainment to fintech and internet marketplaces. Live marketing platforms have “become very popular” and could become another area of regulatory focus, according to Jian Shi Cortesi, a fund manager at GAM in Zurich.

Kuaishou Technology — the operator of one of China’s most popular live-streaming platforms — sank 17% this week, its worst since February.

Meanwhile, tech-savvy automakers such as Nio Inc. and XPeng Inc. are also likely on alert as the gathering and analytics of vehicle operating data — potentially a big source of profits — could fall under stricter government oversight, according to Bloomberg Intelligence.

“If data is considered a public good, then this would be much worse than is currently being discounted by share prices and the impact on earnings could be significant,” said Joshua Crabb, portfolio manager at Robeco in Hong Kong. “The discount for uncertainty now has to be higher.”

READ: China Cuts Reserve Ratio for Banks to Support Small Businesses

America Worst

China’s U.S.-listed names are under even more pressure, not least because of the ongoing threat of them being kicked off exchanges.

Beijing may also be considering the need for approvals to conduct additional share offerings in the offshore market and a Dow Jones report said China’s cybersecurity watchdog is planning to regulate Chinese companies listed in the U.S.

“Companies with U.S. listings may have been under the impression that they were in charge on this side of the pond — they’re not, the Chinese regulators are,” said Hans Albrecht, a portfolio manager at Horizons ETFs Management (Canada) Inc. “They’ve found themselves between a rock and a hard place between Chinese and U.S. regulators.”

Rare Opportunity

Still, some investors point to attractive valuations and a possible buying opportunity — should the selloff continue. China’s central bank’s move on Friday to cut the amount of cash most banks must hold in reserve in order to boost lending and support economic growth could be positive for risky assets.

“Some Chinese internet names already look attractive as they trade below their historical valuations or at a discount to their international peers,” GAM’s Cortesi said on Wednesday. A further 20% drop in the Hang Seng Tech Index from here “could be a rare opportunity to buy some fast-growing Chinese internet companies at extremely attractive prices,” she said.

The gauge, which includes dozens of Hong Kong-listed Chinese tech names, is down 32% from its mid-February peak. That lies in stark contrast to the Nasdaq 100 Index, which is trading close to record highs.

“Investors have to remember that while regulation has downside risks, the upside risks are still attractive with one of the largest markets in the world expected to grow at a healthy rate,” said Peter Garnry, a Denmark-based strategist at Saxo Bank. “At a certain point investors will come back to Chinese technology as the risk-reward ratio becomes too attractive to ignore.”

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