The decline in valuation also provides a rare opportunity to acquire some fast-growing Internet companies at very attractive prices.
Since its peak in February, the total market value of Chinese technology giants has evaporated by US$823 billion, and Beijing’s intensified crackdown on the industry is exacerbating investors’ concerns that the sell-off is far from over.
The authorities issued a comprehensive warning to China’s largest company on Tuesday, vowing to strengthen the supervision of data security and overseas listing a few days after Didi Global’s controversial decision to list in the United States, which has brought further improvements to China’s largest technology company Selling pressures include Tencent Holdings Co., Ltd., Alibaba Group Holdings Co., Ltd., JD.com, Baidu and Meituan.
Paul Pong, managing director of Pegasus Fund Managers Ltd, said: “The selling will continue in the third quarter.” He said that he sold two-thirds of technology stocks in May, including Tencent and Alibaba. “The authorities’ measures will continue to be introduced.”
The Hang Seng Technology Index fell as much as 1.9% on Wednesday, and its members, including many of China’s largest technology companies, are expected to fall for the sixth consecutive day. Tencent and Meituan dropped as much as 3.7%, making it one of the stocks with the biggest decline in the Hang Seng Index. Alibaba fell 2.1%.
China issued a comprehensive warning on Tuesday, after Chinese Internet regulators began a security review of Didi last week and asked the app store to delete it. The move shocked investors and industry executives, and hit the Hong Kong stocks of peers such as Tencent, one of Didi’s biggest supporters.
Investors worry that with the collapse of Ant Group’s large IPO and subsequent antitrust investigations on Alibaba and Meituan, the latest security-based investigation has opened up new fronts for President Xi Jinping’s broader actions against Chinese Internet giants. Last weekend, China took action against two other companies that also recently went public in New York, Full Truck Alliance Co. and Kanzhun Ltd.
Justin Tang, head of Asian research at United First Partners in Singapore, said that investors may adopt a “sell first, talk later” approach to limit policy risks in their investment portfolios. Jian Shi Cortesi, fund manager of GAM Investment Management in Zurich, wrote in an email that stock prices may be driven by recent mood swings rather than the company’s fundamentals.
To be sure, valuations may start to become attractive. Tencent, Alibaba, and Baidu are among the first and largest Chinese technology companies to enter the public market, with an average expected P/E ratio of 22 times in the next 12 months. According to data compiled by Bloomberg, this is compared to the 10-year average of 26.
“If the market sentiment becomes extremely pessimistic, and we see the Hang Seng Technology Index falling by 20% from here, this may be a rare opportunity to acquire some fast-growing Chinese Internet companies at very attractive prices,” GAM said. Jian said.
The Hang Seng Technology Index is down 31% from its February high. Mainland Chinese investors, which accounted for about one-third of Tencent’s stock trading volume this year, turned into net sellers in June.
“Although the long-term future of China’s technology still exists, it will be a warning to investors in the short term,” said United First Tang.