Tag Archives: DIDI

3 More Reasons Not to Invest in Chinese Stocks Right Now

Chinese stocks, many of them cherished by U.S. investors, have had a terrible year. The sector indicator, the iShares China Large-Cap ETF (NYSEMKT:FXI), is down 11% year to date, far underperforming the S&P 500’s 20% gain for the year. Notable fund managers such as ARK Invest’s Cathie Wood have been aggressively reducing exposure in Chinese stocks as of late, leading to sectorwide cheap valuation.

But investors who buy into Chinese stocks now aren’t getting bargains. Instead, they are purchasing potentially damaged goods that could be detrimental to the health of their wallets. A couple of weeks ago, I went into detail about two big reasons to stay away from Chinese stocks. Since that report, new developments have added even more justification for being cautious.

Let’s look at three more reasons Chinese stocks are deep in the no-go zone.

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Image source: Getty Images.

1. Investor-unfriendly regulations are affecting performance

Just four decades ago, China was mainly an agrarian economy with little technological activity. Even though it caught up with the rest of the world on tech at a sharp pace, China developed a series of worrisome societal problems as it did so, and those issues required regulatory attention.

For example, a recent government survey found that heavy video game use has become widespread among 62.5% of the young adult population, with notable incidences of addiction. In one addiction example, 83% of parents in the survey cited Tencent’s (OTC:TCEHY) multiplayer arena game Honor of Kings (HoK) as a prime cause of their addiction. Last year, the game surpassed 100 million daily active users.

At the beginning of August, the state media of the central government published an article labeling video games as “mental opium” and “electronic narcotics” while directly linking the harmful effects of addiction to, in particular, HoK. In response, Tencent said it would enforce regulations for underage players — including banning in-game purchases and banning children the age of 12 or younger from playing altogether. An estimated 23.3% of HoK players are younger than 18, and Tencent currently holds the biggest market share in the Chinese video game industry. So there’s a lot for the company to lose from the new rules.

Then there is the case of DiDi Global(NYSE:DIDI), which holds a monopoly in China’s rideshare space. The app had been extremely popular, but rampant price-fixing and data-privacy concerns caused the central government to suspend its new user registrations last month. While the issues mentioned are concerning enough on their own, there is an even more damaging, seldom discussed detail in this case.

A highly controversial topic is the classification of its drivers as gig workers, which saves the company billions of yuan each year in worker benefits. In late July, the central government called for food delivery platforms, specifically Meituan(OTC:MPNGF), to pay pension benefits for more than 4.75 million of its gig delivery workers. The move could cost the company an additional 5.1 billion yuan ($787 million) per year in expenses, which is more than its entire net income for 2020. It’s almost certain that the same regulatory action is coming for DiDi. which would have catastrophic consequences on its stock price.

2. Government is involved in “private” operations

Another hit on Chinese stocks is the growing role of Chinese companies in global espionage. Over 70% of privately owned enterprises in China have delegates from the ruling Communist Party involved in management, so their operations are inevitably intertwined with politics.

Take the case of Huawei. The Pakistani government contracted the company to help develop Pakistan’s government infrastructure, including the storage of national security data. But news broke on Aug. 14 that Huawei stole trade secrets and some of this sensitive data by duping a U.S. software company operating in the country that had gathered the information for the Pakistani government.

The issue is by no means exclusive to Huawei. On Aug. 10, members of Britain’s Parliament called for the banning of the DiDi Global app in the country, citing a law that could compel DiDi to hand over user data to Chinese intelligence agencies. It’s a similar situation with TikTok, which is controlled by its Chinese parent ByteDance and has access to data from tens of millions of users in the U.S.

3. Outright frauds and scandals are prevalent

The sudden and steep rise of many Chinese companies has caused their work culture to degrade substantially from their humble beginnings. Chinese “corporate luncheons,” where junior employees must drink exorbitant amounts of alcohol out of respect for senior executives, have frequently ended on a dark note.

Back in 2018, Liu QiangDong, the founder of JD.com (NASDAQ:JD), was arrested in Minnesota on allegations of rape after going home with a university student after a dinner party. The case was ultimately dropped as it could not be proved beyond a reasonable doubt. Three years later, the practice is once again entering the public spotlight. In August, employees of both Alibaba (NYSE:BABA) and DiDi Global came forward with sexual assault and rape allegations after corporate luncheons.

Making scandals worse is the possibility of outright fraudulent activities. During an interview segment with Bloomberg on Aug. 9, acclaimed short-seller Carson Block of Muddy Waters Research said there was “fraud from top to bottom” among Chinese stocks. Scams affect foreign and Chinese investors alike. It’s part of the reason the Shanghai Compositehas yet to recover to its 2007 highs.

Fraudulent accounting involving companies like Sino-Forest and reverse-merger scams have plagued the sector for much of the past decade. Last year, Luckin Coffee (OTC:LKNC.Y) joined the list after admitting that it fabricated at least $310 million in sales during three fiscal quarters from 2019 to 2020.

Investor takeaway

For these reasons, and others previously cited, I wouldn’t touch Chinese stocks until the dust has settled and the corruption has been rooted out. I suspect it might take years for that to happen, if at all.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Why Tencent Holdings Led a Slew of Chinese Tech Stocks Lower on Thursday

What happened

Shares of Chinese mobile-game company Tencent Holdings (OTC:TCEHY) tumbled on the order of 6% today. That set the pace for peers like Alibaba Group Holding (NYSE:BABA), off 6.9%; Tencent Music Entertainment Group (NYSE:TME), down 7.3%; TAL Education Group(NYSE:TAL), off 4.2%; and DiDi Global (NYSE:DIDI), down 9.9% — just to name a few. The country’s regulators recently rekindled sweeping corporate crackdowns that first ramped up in November of last year. Now some of these companies are confirming that these limitations threaten their growth.

So what

China’s State Administration for Market Regulation is at it again, so to speak.

After months of sporadic introductions of more regulation largely aimed at the country’s biggest tech names, the government’s regulatory arm unveiled new rules on Tuesday. These new regulations will make it easier for start-ups and smaller online businesses to compete by making it more difficult for larger, more established entities like the aforementioned Tencent Holdings and Alibaba to leverage their market dominance.

The new rules forbid (among other things) concealing negative online reviews or algorithmically collecting competitors’ data relating to sales made to consumers.

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Image source: Getty Images.

Then, today, China’s governmental watchdogs indicated they were considering new rules that would protect the rights of drivers for ride-hailing companies like DiDi in addition to rules aimed at the country’s livestreaming platforms.

It’s the second time DiDi finds itself in the government’s crosshairs in just the past few weeks. Early last month, its ride-hailing app was required to be removed from app stores. Within a matter of days, regulators and police officials physically entered DiDi’s corporate offices as part of a major investigation of the company’s cybersecurity practices. DiDi shares fell nearly 9% on Thursday, extending what’s turned into a 50% rout since the company’s initial public offering completed in late June — weakness that’s been mirrored by many other consumer-facing Chinese tech stocks as a result of rising regulatory hurdles.

If Thursday’s selling has to be attributed to one particular ringleader, though, blame Tencent Holdings rather than DiDi. In conjunction with a quarterly report marked by the company’s slowest revenue growth since 2019, company president Martin Lau flatly told analysts, “In the near future, more regulations should be coming.”

Lau is certainly familiar with China’s rising regulatory hurdles. Last month, the Administration for Market Regulation deemed the company’s music licensing rights could no longer be exclusive, impacting Tencent Music as well.China’s government-run newspapers have also recently been broadly critical of the country’s video game developers, including Tencent, with one source describing them as “opium for the mind” that didn’t merit their tax breaks.

Now what

Sometimes investors have to read between the lines. This is not one of those times. Just when it seems China’s regulators have no room or reason to make its market environment more restrictive, they find a way to do just that. Take Lau at his word.

Also keep in mind, however, that Tencent is hardly the only at-risk name here, nor is DiDi. China’s government appears to be making a bigger point about its ultimate authority, and that point might have yet to be made in full.

The wave of new rules will slow down (and eventually stop altogether), allowing these once-popular names to operate as aggressively as investors want to see them operate. Until it’s clear the country’s entire tech sector is on board with these new expectations, though, no individual name within this herd of troubled stocks is safe enough for the average investor to step into.

Indeed, even more speculative investors will want to be wary of wading into most Chinese technology names. It’s tantamount to trying to catch a falling knife. It’s possible to do, but dangerous and painful if you’re timing is off. Not knowing the nature of new rules intended in the future only adds to the risk.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.