As risk becomes the most critical consideration for global investors in China's stock market, the slump across China's internet industry is likely to continue in the near term until there are other factors supporting valuations.
"Investors who used to shout every day for core assets now don't have to compete anymore, and the ground is full of bargains." A snowball user who lost money by investing in Internet companies expressed his helplessness.
As of the close of trading on March 15, the Hang Seng Technology Index fell 8.1%; the Hang Seng Index fell 5.72%, falling below the 19,000 mark, setting a six-year low. So far in 2022, hong Kong's stock market has evaporated more than $460 billion.
The sell-off for Internet companies also continued, with Alibaba-SW (9988.HK) down 11.93% to HK$71.25, Meituan-W (3690.HK) down 5.86% at HK$106, and Tencent Holdings (0070. HK) fell 10.19% to hk$298, while JD Group-SW (9618.HK) fell 10.06% to close at HK$161.9.
Wind data shows that as of March 15 this year, Alibaba's stock price in the Hong Kong stock market has fallen by 40.08%; JD.com has fallen by 40.91%; Tencent Holdings has fallen by 32.79%; and Meituan has fallen by 52.97%.
The trigger for the sharp decline in Chinese stocks this time is the list of "pre-delisted" Chinese stocks recently released by the Us Securities and Exchange Commission (SEC). The five Chinese companies are: BeiGene (BGNE), Yum China (YUMC), Zaiding Pharmaceutical (ZLAB), ShengMei Semiconductor (ACMR), and Huang Pharma (HCM).
According to the legislation passed in the United States in 2020, if a foreign company listed in the United States fails to allow the US regulator to review the audit papers for three consecutive years, it may suffer delisting, which means that the earliest delisting time will also be in 2024.
Analysts said the five companies were first named because they had just filed their annual results with the SEC. As companies continue to release their annual reports, it is expected that more U.S. and Chinese stocks will follow suit and be dragged into the list of delisting risks.
In the context of a tightening external environment, capable and qualified Chinese stock companies have begun to return to Hong Kong for listing, and Alibaba, JD.com, etc. are among them. The full return of Chinese stocks to Hong Kong for listing is an inevitable choice.
But barron's Chinese edition argues that the situation facing Chinese stocks is unprecedentedly complex. From the current point of view, it is difficult for Hong Kong stocks to become a safe haven for Chinese stocks. After the SEC released the list, Chinese stocks that were not on the pre-delisted list and were already listed in Hong Kong for the second time saw a bigger decline than the named companies.
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Bearing the return of Chinese stocks, the liquidity of the Hong Kong Stock Exchange is worrying
Since Hong Kong began to create favorable conditions for the return of Chinese stocks in 2018, the secondary listing of Chinese stocks in Hong Kong has continued in recent years. At present, 28 of the US-listed Chinese-listed companies are listed on Hong Kong stocks at the same time.
However, when Chinese stocks are fully returning, whether the Hong Kong stock market can bear the valuation and liquidity of Chinese stocks has aroused market concerns.
In a report earlier this year, Bank of America Securities noted that while southbound capital flows, more mainland companies listings and stamp duty cuts are favourable, they will reduce transaction costs in the Hong Kong stock market and help improve the relatively low liquidity of the Hong Kong stock market. "But investors remain skeptical that Hong Kong's liquidity will be sufficient to support additional market capitalization after the ADR handover, and the possibility of a full-blown return is rapidly climbing."
Wind data shows that since 2022, the average daily turnover of the Main Board of Hong Kong stocks has been HK$129.312 billion (equivalent to US$16.52 billion), compared with HK$166.7 billion in 2021, which is related to the poor performance of the Hong Kong stock market in the environment of internal and external troubles.
This figure is far less than the daily trading volume of the NASDAQ exchange, a single exchange in the United States. Between March 7 and 11, the daily trading volume of the Nasdaq exchange exceeded US$280 billion, nearly 17 times the trading volume of the Hong Kong market.
Bank of America Securities sees hong Kong liquidity as worrying, particularly as more ADRs are converted into Hong Kong equities, while inflows have not increased.
Goldman Sachs estimated in a recent report that if all Chinese companies already listed in Hong Kong and the United States turn to Hong Kong, the average daily turnover of the Hong Kong market may increase by about $2.6 billion. The IPO could add another $1.4 billion.
This increase may be just a drop in the bucket for the financing needs of Chinese stocks. There are currently 280 Chinese companies listed in the United States. On March 14, the overall market capitalization of U.S.-listed Chinese stocks was $887 billion. Alibaba alone had a turnover of $5.548 billion on the day.
In this case, if the money-making effect of Hong Kong stocks continues to be inconspicuous, there may be a situation where the new company cannot raise money and the old company's funds are diverted. "Although some Internet companies are not currently on the list of Chinese stock delisting, in the future, if these Chinese stocks seek to return to Hong Kong stocks after the US stocks are forced to delist, they will have a certain impact on the capital chain of Hong Kong stocks, and will divert a part of the funds invested in Internet companies that were originally listed on Hong Kong stocks." Yang Delong, chief economist of Qianhai Open Source, said.
This sentence can be simply understood as saying that investors will sell some of the shares of Internet companies originally listed in Hong Kong, buy new Internet companies that have retired to Hong Kong, and in the absence of incremental funds, selling will lead to a further decline in the stock price of Internet companies.
According to the Research Report of Everbright Securities, as of December 5, 2021, a total of 33 US listed Chinese stocks have met the new rules for secondary listings in Hong Kong, mainly Internet companies, and Companies such as Pinduoduo, Tencent Music, Weibo, Vipshop, Futu Holdings, iQiyi, and Fanhua Financial Holdings are among them.
As of February, 27.96% of the companies listed in Hong Kong were in the information technology industry, represented by Chinese Internet companies. But the market is currently very pessimistic about Internet companies. "In the next 2-3 years, the Internet industry will not see any prosperity, no prosperity to speak of," Yan Kaiwen, an analyst at Huaxin Securities, told Reuters. In the context of the Fed's interest rate hikes, the intensification of Sino-US confrontation, and the slowdown of China's economy, investors may not see a fundamental improvement in the liquidity of the Hong Kong market in the short term.
The hong Kong stock market accounted for the market capitalization and turnover of different industries in February
Source: wind
"Since the education track changed, foreign investors have begun to discuss how to throw Chinese stocks," said a market source.
2
Without valuation support, the decline in stock prices will continue
Against the backdrop of changes in the external environment, capable and eligible Chinese-listed companies have returned to Hong Kong to list in order to avoid the negative impact of the Foreign Companies Accountability Act. However, since 2022, companies that have been listed for the second time in Hong Kong have also fallen sharply, and chinese stocks represented by Internet companies have sold off indiscriminately.
Some of the medium-sized Internet companies that have been re-listed in Hong Kong have fallen by an average of 35% so far in 2022
Source: google.com
"Barron's Weekly" has previously pointed out that the recent performance announced by Internet companies such as JD.com and Alibaba has fallen short of market expectations, which is also a reason for the collective decline of Internet companies. With the regulation of the Internet industry and the disappearance of the Internet dividend, the Internet industry is also facing a revaluation of value.
On March 14, JPMorgan analyst Alex Yao collectively downgraded the ratings and price targets of 28 Chinese technology stocks, cutting Alibaba's Hong Kong stock target price from $180 to $65.
As of the close of U.S. stocks on March 14, Alibaba was trading at $77.76, a 16.4 percent drop from analysts' price targets.
JPMorgan believes that as risk becomes the most critical consideration for global investors in China's stock market, the decline in China's entire internet industry is likely to continue in the near term until there are other factors supporting valuations.
"Alibaba is not only a barometer of the mood of the Chinese Internet, but also a representative of China's online consumption." Alex Yao believes that from the perspective of the next 6 to 12 months, China's internet industry is "uninvestable".
At the same time, the companies that he lowered the target price also include 27 Chinese companies such as Tencent, JD.com, Bilibili, Meituan, Baidu, Kingsoft Cloud, Tencent Music, Douyu, NetEase, Ctrip, and iQiyi.
JPMorgan Chase is a hot Chinese stock target price
"Over the past 13 months, Chinese Internet company stocks have fallen more than they did during the U.S. dot-com bubble in the early 2000s." Nicholas Colas, co-founder of DataTrek Research, said in a note to clients last week that the plunge did not give investors the opportunity for a short-term rebound like the NASDAQ that year.
"No one knows when Chinese regulators' oversight of big tech companies will end, but it's certain that Chinese internet companies still have a long way to go, and may even go further downhill before they get better," he said. "
Text | Barron's Chinese edition contributor Guo Huiping
Edit | Wu Haishan
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