ON Aug 17, Tencent Holdings Ltd, Alibaba Group Holding Ltd and Meituan fell -4.1%, -4.7% and -3.5% respectively, dragging Hang Seng Tech Index down -2.5% as China’s State Administration for Market Regulation (SAMR) issued draft rules seeking public opinion until Sept 15. They have not yet come into effect.
Once again, SAMR started its announcement by reiterating their objective: “In order to stop and prevent unfair online competition, encourage and support innovation, maintain fair competition in the market order, protect the legitimate rights and interests of operators and consumers, and promote the sustainable and healthy development of digital Laws”.
Our take: New proposals may not be a bad thing at all
After going through the announcement in detail, we are of the opinion that the proposed rules are fair and are in line with what the government is trying to achieve:
- Encourage moral behaviour within operators, reduce chances of scams and increase credibility of internet platforms (to help alleviate fear of scams which is keeping parts of the population off internet platforms);
- Improve credibility of the numbers released by tech companies and reduce chances of fraud (preventing cases like Luckin Coffee creating fake traffic and transactions to boost its sales and revenue before initial public offering [IPO]); and
- Promote fair competition within tech companies and reduce monopolistic practices (to preserve the country’s innovative spirit by protecting young companies, giving them a chance to develop).
In short, we opine that the new proposed rules may not be a bad thing at all for the industry, consumers and investors.
Long-term growth remains intact but expect higher volatility
In the near-term, investors should brace for further volatility as China may continue to implement reforms on its tech sector. The heightened regulatory risk should continue to weigh on investor sentiment and will likely keep share prices at depressed levels for the time being. The lack of positive news during this period also means that there may not be a catalyst for the time being.
However, we would like to reiterate our conviction in China’s tech sector. Despite the recent developments that have taken place, we remain positive on its long-term prospects.
The government has made it clear that the main purpose of the increased regulation is to safeguard consumers, and to promote healthy competition and the sustainable growth of China’s technology sector in the long run. They are not meant to stifle the growth of tech companies.
Anti-monopoly laws could be a way for China’s government to preserve the country’s innovative spirit by protecting young companies, giving them a chance to develop.
This is very similar to what the government did in the past for today’s big tech companies, during which it shielded them from the threat of foreign competition, contributing to their rapid expansion.
As China seeks to achieve technology self-sufficiency – an urgent agenda in light of rising tensions with the US – opportunities still remain in the tech sector.
The recent sell-off has left valuations more attractive than before and could serve as an attractive entry opportunity for those who are able to stomach the volatility.
In terms of fundamentals, China tech still paints an attractive long term growth story, with sales and earnings per share (EPS) expected to see double digit growth in the next few years.
In terms of valuations, Hang Seng Tech Index is now trading at around price-earnings ratio (PER) 2023 19.1X, representing an upside potential of more than +80% based on our fair price-earnings (PE) multiple of 35X (refer to Table 1). – Aug 18, 2021
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The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
Photo credit: Caixin
