VSChinese stocks have sold en masse since the spring, but is it time for aggressive investors to go hunting in the Middle Kingdom?
One indication could be the recent case of Meituan (OTC: MPNGF), the largest food delivery company in China, with businesses in daily business, hotel reservations, community e-commerce, catering software, and grocery and drugstore delivery.
On October 8, China’s State Administration for Market Regulation fined Meituan $ 534 million, a penalty for abusing its dominant market share in food delivery to force restaurants to close. exclusivity agreements. Seems familiar? It is similar to the violation and the sanction imposed on Ali Baba (NYSE: BABA), who was fined $ 2.8 billion in April for doing the same with e-commerce providers.
But how did Meituan’s action react? The answer may surprise you, and it could mean something good for battered Chinese tech stocks.
Image source: Getty Images.
Rise in equities following bad news could signal a low
Meituan’s shares rose counterintuitively to the news. This could be because investors suspected a higher fine. The penalty was only 3% of Meituan’s revenue in 2020, slightly less than the 4% fine for Alibaba.
It could also be a signal that, more generally, Chinese stocks have been discounted too much for fear that could occur amid continued regulatory crackdown. Investors hate uncertainty, and when uncertainty is high, they tend to sell their stocks at worst. So when bad news comes along and it’s not the worst that could have happened, stocks can go up despite the unfortunate headlines.
This appears to be what’s happening with Meituan right now, and possibly Chinese tech stocks more generally. The top five internet platforms are up 6.5% to 13.5% this month, after a long and trying summer.
Monthly BABA (Daily) Total Yields Data by YCharts
The mere absence of bad news, combined with Meituan’s better than expected fine, could be behind this strong October performance. News surrounding Charlie Munger’s increased investment in Alibaba over the summer is likely also contributing to sentiment.
From the top of its peaks, is Meituan still a buy?
Meituan is an interesting business right now as China emerges from the pandemic and regulations open up more e-commerce businesses to competition.
In the last quarter, Meituan saw strong growth and increased margins in its food delivery business as well as in the shopping, hospitality and travel segments. Together, these two segments achieved just over 6 billion yuan (about $ 1 billion) in operating profit in the last quarter, while growing more than 90%.
However, Meituan has decided to take these profits and invest a lot of time in “new initiatives”, which encompass a host of other delivery services, distribution of food to restaurants, as well as the sharing of mopeds and bicycles. . While the new initiatives saw their revenues increase 113.6% to 12 billion yuan ($ 1.8 billion), operating losses soared to 1.5 billion yuan (233 million dollars) to 9.2 billion yuan ($ 1.4 billion). Meituan is currently developing his own community ecommerce site, which seems to put him on a collision course with the rising ecommerce star. Pinduo (NASDAQ: PDD) and other major Chinese e-commerce players.
While the new anti-monopoly rules may harm Meituan’s dominant food delivery business, it may also open up general e-commerce to Meituan’s delivery capabilities against established giants like Alibaba. As traditional e-commerce barriers break down, businesses may only be able to differentiate themselves on a narrow set of certain attributes, such as price or delivery. Meituan certainly has the experience of efficient delivery, which could give him a leg up on his rivals as he builds his new community e-commerce, insta shopping and grocery delivery platforms.
Meituan is a wealthy company with a market capitalization of $ 220 billion. Yet even after last week’s rally, the stock is still nearly 40% below its highs. This could mean that the stock is worth considering, but investors should be confident in the potential of Meituan’s various new initiatives.
Is it time to take a look at Chinese tech stocks?
As Chinese tech stocks recover despite bad news and lower-than-expected fines, this could be a sign that their stocks have bottomed out after many have lost as much as half of their value this year.
Still, it’s unclear how long the ongoing tech regulatory campaign will last, and how harsh it will be. The 20th Congress of the Communist Party will be held in a year, in October 2022. It is therefore possible that the repression will intensify next year as the Communist Party seeks to assert its domination and control over the economy. On the other hand, it may not be in the best interests of Chinese leaders to see their biggest companies lose billions in value during Congress, either. Perhaps officials have sought to inflict the pain in 2021, so a 2022 rebound looks stronger.
For investors looking for a bargain in an otherwise full-price market, Chinese internet companies might be worth a look, provided you recognize the risks of this highly uncertain regulatory environment.
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Billy Duberstein owns shares of Alibaba Group Holding. Its clients may own shares of the companies mentioned. The Motley Fool owns shares and recommends Alibaba Group Holding. The Motley Fool has a disclosure policy.
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