Close
FSSA-logo-colour-png.png

Specialist in Asia Pacific, China, India and South East Asia and Global Emerging Market equities.

Discover more
Close
SI-logo-black-png.png

Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.

Discover more

Chinese tech: From crackdown to reconciliation and resilience

Since 2020, China started rolling out comprehensive regulations for its internet sector, since referred to a crackdown. Among these regulations were restrictions covering anti-monopoly, restrictions relating to data security & privacy, minor & labour protection and restrictions on overseas equity raising and listings. 

Fast forward to this year, on 16 March, China’s FSDC (Financial Stability and Development Committee), chaired by China’s Vice Premier Liu He, pledged to restore market stability, and specifically for China tech, the FSDC insisted to push and complete the Fintech rectification as soon as possible.

While holding the view the market has priced in most headwinds, we see the mid-March meeting as an early sign of easing of the regulatory crackdown. We have been accumulating exposure to Chinese tech on dips, focusing on highly rated national champions with intrinsic credit profiles intact.

Despite high levels of market noise and price volatility experienced by the Chinese tech sector over much of the past two years – or perhaps because of it - balance sheets of major Chinese tech firms remained prudent.

We also believe higher rated Chinese tech firms could outperform lower rated firms already facing challenges. By combining our deep understanding of relevant markets, including credit, political and social context, the team aims to capture attractive alpha generation entry points for the Chinese tech sector.

The storm

The crackdown on the local technology sector by the Chinese government resulted in an elevated level of regulatory scrutiny for the sector, reflected in a series of headlines at the time: 

Alibaba: Suspension of Ant Group’s IPO in Nov 2020, and RMB18bn (~USD2.75bn) Antitrust fine.1 2

Meituan: RMB3.4bn (~USD530mn) Antitrust fine with various measures imposed on riders’ payout structure and insurance.3

Tencent: Restrictions on minor gamers and in-game purchases as well as ban on new apps and gaming licenses.4

As market volatility escalated, investor confidence in the tech names naturally eroded, and a more defensive stance towards names in the sector became warranted. Our team focused on identifying firms with solid industry moat, healthy cashflows, and adequate cash balances that would be able to endure near term headwinds.

While regulatory changes were expected to delay asset monetisation of tech firms and compress margins over the medium-term, we took the view that highly rated national champions would have adequate financial buffer to absorb the expected impact and deliver earnings despite the near-term headwinds. We expect the regulatory overhang to pose additional challenges for lower-rated tech firms already facing operational challenges related to their loss making segments or debt funded balance sheet expansion. 

Historically, the senior curve for Chinese tech firms traded on average ~45bps above similarly rated US tech peers. However, we saw risk premiums beginning to rise in 2021 as China’s regulatory storm started to escalate.

chinese-tech-crackdown.PNG
Source: Bloomberg and First Sentier Investors data as of 14 September 2022.

 

By March 2022, Chinese tech firms were trading at attractive risk premiums, at a significant discount compared to their US peers.

The Path Ahead

We expect Chinese domestic affairs – employment, economic recovery and zero-Covid policy – will remain front and center in the near term from a regulatory perspective, as the mid-October 20th National Party Congress fast approaches.

While there is always the possibility a surprise geopolitical shift could create new headwinds for the sector, our base-case expectation is for a period of reconciliation, recovery and growth, as the sector emerges stronger and more resilient post the crackdown.

 

1 https://www.reuters.com/business/retail-consumer/china-regulators-fine-alibaba-275-bln-anti-monopoly-violations-2021-04-10/

2 https://www.ft.com/content/c1ee03d4-f22e-4514-af46-2f8423a6842e

3 https://www.bloomberg.com/news/articles/2021-10-08/food-delivery-giant-meituan-gets-530-million-antitrust-fine

4 https://www.reuters.com/world/china/china-rolls-out-new-rules-minors-online-gaming-xinhua-2021-08-30/

Important information

The information contained within this material is generic in nature and does not contain or constitute investment or investment product advice. The information has been obtained from sources that First Sentier Investors(“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information. To the extent permitted by law, neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this material.

This material has been prepared for general information purpose. It does not purport to be comprehensive or to render special advice. The views expressed herein are the views of the writer at the time of issue and not necessarily views of FSI. Such views may change over time. This is not an offer document, and does not constitute an investment recommendation. No person should rely on the content and/or act on the basis of any matter contained in this material without obtaining specific professional advice. The information in this material may not be reproduced in whole or in part or circulated without the prior consent of FSI. This material shall only be used and/or received in accordance with the applicable laws in the relevant jurisdiction.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

In Hong Kong, this material is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this material is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors is a business name of First Sentier Investors (Hong Kong) Limited. First Sentier Investors (registration number 53236800B) is a business division of First Sentier Investors (Singapore).

First Sentier Investors (Hong Kong) Limited and First Sentier Investors (Singapore) are part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.

MUFG and its subsidiaries are not responsible for any statement or information contained in this material. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this material or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.