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.

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