The general consensus among investors and economists has been that China’s economy has a stronger chance to rebound quickly out of the pandemic than most countries. Yet there are several reasons to believe that Chinese stocks may not face an easy path forward in U.S. markets.
Fears that Chinese equities will face delisting from U.S. exchanges have reemerged in recent weeks. Rhetoric will continue to influence Chinese stocks across the board.
But the downward pressure isn’t solely external by any means. At home, Beijing is looking to rein in tech giants, so stricter regulations loom.
Further, recent macroeconomic factors serve as a more fundamental reason that Chinese stocks could fall. China reported higher-than-anticipated rises in prices, leading markets to react negatively to inflation fears.
All of these concerns set the scene in which these Chinese equities look sell-worthy.
- Alibaba (NYSE:BABA)
- Pinduoduo (NASDAQ:PDD)
- Xpeng (NYSE:XPEV)
- Tencent (OTCMKTS:TCEHY)
- Baidu (NASDAQ:BIDU)
- Luckin Coffee (OTCMKTS:LKNCY)
- JD.com (NASDAQ:JD)
Chinese Stocks: Alibaba (BABA)
Alibaba has been facing pressure on several fronts for some time now. Late last year the Chinese Communist party began a crackdown on Alibaba’s financial affiliate, Ant Group. The company extended that pressure to Alibaba, which was not long ago the ecommerce darling of the country and party.
The CCP alleges that Alibaba engaged in anti-competitive behavior that gave it unfair advantages. One such example relates to its business practices. Alibaba gave merchants on its platform an ultimatum in an effort to quash the rise of a certain competitor. Alibaba forced merchants who were selling on its platform and JD.com to choose one or the other. As a result, Alibaba was facing increased scrutiny by the Chinese government and a potential fine in excess of $975 million based on previous estimates.
On April 10, the actual fine that was levied came to $2.8 billion, 4% of the company’s annual domestic sales.
Renewed stock exchange delisting threats are also serving to pull BABA stock down as well. American exchanges including the New York Stock Exchange and the Nasdaq may delist Chinese stocks from their respective platforms should Chinese companies continue to refuse audits by the U.S. Public Company Oversight Accounting Board.
All in all, Alibaba currently has too many headwinds exerting downward price pressure. Investors should tread carefully.
Pinduoduo is a Chinese company with an ecommerce app that has managed to overtake Alibaba in popularity in very short order. The company reported 788.4 million users at 2020’s end, surpassing Alibaba’s 779 million.
Although the companies boast similar user bases, their revenues are vastly different. Pinduoduo recorded $9.1 billion in 2020 revenues: Alibaba, $72 billion. The difference is attributable to Pinduoduo’s discount business model. Pinduoduo users are given two prices for an item. The discount price is available to those who form teams of two or more buyers for that item. It’s a very cool business and business model, but not one one that is necessarily conducive to mass profitability.
Here’s why I think PDD stock should face downward price pressure now. There’s the obvious shockwave effect that the $2.8 billion fine on Alibaba will exert on Chinese ecommerce. Markets will question if scrutiny is simply going to extend to other major Chinese ecommerce players, warranted or not. That won’t help Pinduoduo.
And I also believe that due to that potential pressure, investors may start to question whether PDD stock’s price relative to its sales makes sense. The company’s growth by user base has been very quick, yet that premium can’t last forever in an increasingly regulated domestic market.
Chinese electric vehicles (EVs) aren’t having a great year. That’s true of EVs globally as the number of competitors increases and 2020’s enthusiasm wanes. Nio has been the dominant name in Chinese EVs, but there are other names quickly carving out their own following. Namely, that’s Xpeng (NYSE:XPEV). And Xpeng, along with other factors, should push NIO stock down in the near-term.
Nio seems to break sales records month after month, and quarter after quarter almost as a rule. Its growth has been astounding. The company and stock truly has a phenomenal 2020. I ultimately believe NIO stock is a long term buy, but right now I think its price will fall.
Nio is in a pitched battle with Xpeng for EV delivery dominance in China. Nio has been the steadier of the two companies in delivering vehicles in 2021. The company delivered 7,225 vehicles in January, 5,578 in February, and 7,257 in March.
Xpeng is not far behind Nio, but its delivery numbers have shown more volatility. The company delivered 6,015 vehicles in January, 2,223 in February, and 5,102 in March. Nio somehow looks like an old EV company in comparison to Xpeng. Xpeng has had more recent success and investors may move over to it. There’s a strong bull case for buying into Chinese EV stocks right now. I don’t disagree with it, I simply think Nio can fall some more in the near term.
Tencent is a massive company that owns shares of many mobile and online gaming companies, fintech businesses, advertising businesses and others. The company has faced recent selling pressure, yet its market capitalization currently sits at around $750 billion.
There are rumors that its gaming division may be preparing a hostile takeover of various U.S. gaming companies. Gamers and investors alike worry that the company is approaching monopolistic power within games. Yet, there are other larger concerns about the company regarding its fintech division.
The CCP is cracking down on fintech companies following their meteoric rise. Beijing is clearly trying to reign in information regarding its consumer base. When Ant Group’s IPO was quashed, that was big news.
But regulations on Chinese companies that grew at breakneck pace were incipient regardless. There is serious concern in Beijing that fintech companies have introduced massive risk across China’s financial ecosystem. The fintech space was largely unregulated as these companies simply didn’t have to play by the same rules that banks do.
China has real incentive to understand the scale and scope of what is really going on with fintech and the greater Chinese financial system. But, unearthing the truth around Chinese fintech is no easy task. The downward pressure for major fintech players like Tencent will persist for some time.
Baidu is to China what Google (NASDAQ:GOOG, NASDAQ:GOOGL) is to the U.S. And China’s dominant search engine company is facing real issues. The recent fiasco in which hedge fund Archegos collapsed pulled U.S. and Chinese stocks downward quickly. Big questions remain about why the company was allowed to be as leveraged as it was given Bill Hwang’s trading past. But I digress. Baidu stock was pulled down as a sell-off hit Chinese firms as well.
Outside of those externalities, Baidu is dealing with an increasingly tough government at home. The government levied a tiny $76,457 fine against Baidu, along with 11 other companies, back in March. Each of the companies were found guilty of anti-monopolistic practices.
Regulators in China are heavily scrutinizing tech giants and Baidu will continue to garner focus as such. The fine the CCP levied against Alibaba is clearly going to make Baidu anxious. And ongoing delisting threats in the U.S. compound its worries.
Luckin Coffee (LKNCY)
Back in the summer of 2020 before Jack Ma drew the ire of the Chinese government, before regulatory scrutiny ratcheted up, and when Chinese fintech was relatively free, there was Luckin Coffee. The company built up a fake company by cooking its books and creating charges for business that never existed.
It was discovered, a fiasco ensued, and the company was in all the headlines for a few weeks. Luckin Coffee was ultimately de-listed from the Nasdaq but has staged something of a comeback.
The company filed for Chapter 15 bankruptcy and is now working to pay off fines and creditors while hoping to emerge as a champion from the ashes. The company’s revenue growth has shown promise, that much credit has to be given to Luckin Coffee. And the company now closes underperforming stores instead of concocting elaborate schemes for booking fake revenue.
But that’s what the company should have been doing all along. Only now, investors can’t give it the benefit of the doubt, and it’s bankrupt. The upside is that Luckin Coffee doesn’t have to worry about delisting fears since it’s already in the pink sheets.
Some readers might be surprised to find out that JD.com is larger than Alibaba. But JD.com posted $114.3 billion in revenue in 2020, while Alibaba posted $71.99 billion. Both companies are massive and post significant revenues. But despite those impressive numbers, both companies’ stocks are suffering.
China’s regulatory push to reign in its tech giants hasn’t spared this company either. JD has listed several of its business arms including JD health. It also had been planning to list JD digits, its fintech arm, since earlier in the year. However, it withdrew the planned IPO on April 2, amid increasing regulatory concerns.
China is clamping down on its tech sector and doesn’t look to be letting up. The government appears to be dead set on rooting out monopolistic practices in those businesses. It showed that Ant Group couldn’t simply flout banking conventions by virtue of its fintech status alone. Now, it appears the effects are resonating throughout several prominent Chinese companies.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”