CAN THE CHINESE DROP BE REVERSED IN 2022?
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CAN THE CHINESE DROP
BE REVERSED
IN 2022?2021 On April 2, the coffee company Luckin Coffee announced Many American investors were holding on to Chinese as- that an internal investigation had shown that Jian Liu, the sets in hopes of a recovery, or as prospective losses to former COO, had inflated 2019 sales by around 2.2 billion offset other taxable profits if they are sold in 2021. Howe- yuan ($310 million). According to the chain, net sales for ver, it appears that the market for Chinese stocks in the the first nine months of 2019 were 2.9 billion yuan ($413 United States has blown up, and more pain may be on the million). Six additional workers were suspended or placed way, thanks to a new US law.4 on leave because they were either participating in or knew The China Securities Regulatory Commission, or CSRC, about the fraud.1 said in mid-December that it was in negotiations with US This was an initial point for SEC’s regulation that followed, authorities about cooperating on audits of US-listed Chi- and the main reason why there was a significant drop in nese companies and that progress was being made. 5 the valuation of Chinese stocks. Even though most of them had better-than-expected results, investors panic- ked and started to sell, worrying about future possible stock delisting.2 The Securities and Exchange Commission approved mo- difications to finalize regulations to implement the Hol- ding Foreign Companies Accountable Act on Thursday, December 2. (HFCAA). After Chinese officials consistently refused requests from the Public Company Accounting Oversight Board (PCAOB), which was established in 2002 to monitor public company audits, to check the audits of Chinese corporations that list and trade in the United Sta- tes, the bill was approved in 2020.3 According to the US-China Economic and Security Review Commission, 248 Chinese businesses were listed on US markets in May 2021, with a combined market capital- ization of $2.1 trillion. That valuation has plummeted to around $1.5 trillion, a reduction of $600 billion. 1 Lucking Coffee: https://www.cnbc.com/2020/05/12/luckin-coffee-fires-ceo-coo-after-sales-fraud-investigation.html 2 Past performance is no guarantee of future results. 3 SEC: https://www.sec.gov/rules/final/2021/34-93701.pdf 4 Past performance is no guarantee of future results. 5 Regulation: https://www.reuters.com/world/china/china-securities-regulator-says-making-progress-us-audit-issues-2021-12-17/
WHAT’S NEXT?
HONG KONG
LISTING?6
Jesse Fried, a Harvard Law School professor, is doubtful Companies who want to list on the Hong Kong market
that leaders will allow the PCAOB to scrutinize China- must meet a rigorous set of criteria. A firm must, among
based auditors, using the case of Didi as an example. other requirements, have a market valuation of at least
“If they are this paranoid about sensitive info falling HK2$ billion at the time of listing and recent annual sales
into the hands of Americans because the companies of at least HK500$ million, according to a recent Morgan
are listed in the U.S., it seems unlikely China will let the Stanley analysis on the HCFAA and its ramifications.
PCAOB into the country to inspect audits. And that means To qualify, they must also have a three-year aggregate
the endgame under the HFCAA will be the forced delisting operational cash flow of HK100$ million or higher.
of these companies, even if China does not force them to
come home.”
If retail and individual investors are not prepared, the
delisting process will damage them the most, as this
column has already stated. Companies that do not have
a dual listing and do not fulfil the conditions to transfer
their shares to the Hong Kong stock exchange will be the
riskiest to possess in the future.7
6
Hong Kong listing: https://www.marketwatch.com/story/chinese-stocks-cut-600-billion-from-u-s-markets-in-2021-and-are-just-
getting-started-11640284178
7
Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current
economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks
and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-
looking statements.ALIBABA8
After hitting an annual low in December, Alibaba sha- Recently, Chinese businesses with U.S. listings have
res formed a new bottom before the end of 2021 and faced regulatory uncertainty on both sides of the
is currently trading at the same level – multi-year resis- Pacific over their New York listings, which give easy
tance zone (100-120 USD, red colour) visible on Image access to U.S. financing and stable stock market pri-
1.9 ces.
To begin with, the business, like most of the rest of the According to FactSet data, Alibaba stock has an ave-
Chinese IT industry, has run afoul of regulators as Pre- rage analyst recommendation of Buy and a target
sident Xi Jinping tightens his control on the country‘s price of $199.85, meaning an 80 per cent upside.10
economy. Regulatory concerns aside, there are still reasons to
be positive about Alibaba. After all, it‘s still one of
the most powerful technology firms in the world‘s se-
cond-largest economy, and some experts believe its
new businesses are undervalued.
Alibaba Group Holding Ltd., O119.32 N122.46 L112.96 C113.37 -9.86 (8.00%) USD
360.00
320.00
280.00
240.00
200.00
160.00
113.37
120.00
80.00
RSI (14,close) 33,73
80.00
60.00
40.00
2015 2016 2017 2018 2019 2020 2021 2022
Image 1. Alibaba performance, 5-year price history (source: tradingview.com)11
8
Barrons: https://www.barrons.com/articles/alibaba-stock-is-falling-the-shares-could-end-2021-at-a-year-low-51640791836
9
Past performance is no guarantee of future results.
10
Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current
economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks
and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-
looking statements.
11
Past performance is no guarantee of future results.TENCENT MUSIC
ENTERTAINMENT
Tencent Music Entertainment is a social networking The major risk for the TME shares is certainly ongoing
platform with a smart business plan. TME has an 80% Chinese government pressure. This danger is linked
market share in China and an 841 million monthly acti- to the regulatory challenges mentioned above.
ve user base. TME also has a great chance to leverage According to several commentators, China‘s music
its social music ecosystem into the metaverse, as well entertainment sector will become more competitive
as a lot of untapped potentials to monetise its present in the next few years.
business.12
The TME stock has dropped more than 77 per cent since First, new entrants strive to break into the industry,
its all-time high in March 2021. At the present selling and second, the Chinese government has stripped
price, Tencent Music looks to be severely undervalued.13 Tencent Music of its exclusive content rights.
Based on a DCF valuation, a realistic target price of
$12.15 per share is calculated, representing a 71 percent
upside potential.14 15
Tencent Music Entertaiment Group, IW, NYSE O6.20 N6.26 L5.81 C8.84 -0.55 (-8.61%) USD
110.00
100.00
90.00
80.00
71.11
60.00
50.00
40.00
30.00
20.00
71.11
RSI (14,close) 33,79
80.00
60.00
40.00
20.00
2019 May Sep 2020 May Sep 2021 May Sep 2022
Image 2. TME performance, since IPO in 2018 (source: tradingview.com)
12
Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current
economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and
other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking
statements.
13
Past performance is no guarantee of future results.
14
TME upside potential: https://seekingalpha.com/article/4481074-tencent-music-stock-misunderstood-underappreciated-
undervalued-business
15
Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current
economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and
other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking
statements.
16
Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current
economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and
other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking
statements.JD.COM
JD.com, like all of China‘s other significant online enter- The most recent collaboration is with Shopify.17 Sho-
prises, has been hampered by the government‘s strict pify announced a partnership with JD.com to make
rules during the last year. China‘s equities are being it easier for American businesses to sell consumer
hurt by more than just restrictions. goods in China.
Economic changes, supply-chain disruptions, the pan- Shopify‘s network merchants will be allowed to list
demic, decreased consumer demand, and increased items on JD.com‘s website. Distribution will be han-
raw material prices have all put a strain on the industry. dled by a Chinese e-commerce business.
Brendan Ahearn, the chief investment officer of Kra-
Strategic agreements with Shopify (SHOP), Walmart neShares, a China-focused exchange-traded fund
(WMT), and Google-owned Alphabet (GOOGL) are provider: „Markets hate uncertainty, and the imple-
among JD‘s business activities. mentation of these internet regulations has created
a surplus of that. Many institutional investors are
staying on the side-lines until there is clarity on the
regulatory end game.“
JD.com, Inc.,1W, NASDAQ O72.52 N73.49 L68.11 C71.11 -2.35 (-3.20%) USD
110.00
100.00
90.00
80.00
71.11
71.11
60.00
50.00
40.00
30.00
20.00
80.00
60.00
40.00
20.00
Feb Jul 2018 Jun 2019 Jun 2020 Jun 2021 Jun 2022
Image 3. JD.com performance, since IPO in 2018 (source: tradingview.com)18
17
JD and Shopify: https://www.investors.com/news/technology/shopify-stock-falls-despite-e-commerce-deal-with-chinas-jd-com/
18
Past performance is no guarantee of future results.CONCLUSION
Despite China‘s worst-ever relative performance As the market rebounds from a significant correction
decline vs broad emerging markets in 2021, we still and moves into a ‚hope‘ phase, when the P/E increa-
see certain residual concerns tilted toward increa- se often defeats poor underlying growth and genera-
sed volatility or additional downside in the short fu- tes robust equity gains, we expect Chinese equities
ture. This leads us to feel that the moment is not yet will have a stronger year in 2022.20
appropriate to be positive at the broad index level.19
Volatility in the markets gives us great opportunities.
The new era is ahead of us! Let’s be part of it, to- Don’t be only a spectator and start to be an active
gether! participant!
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January 2022
19
Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on
the current economic environment which is subject to change. Such statements are not guaranteeing of future performance.
They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed
or implied in any forward-looking statements.
20
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