Is The Worst Over For China’s Internet Giants?

The largest Chinese internet companies have seen their shares tumbling to levels they haven’t seen in at least three years after a government-led crackdown wiped out hundreds millions of dollars in market value. But this may not be the best time to look for bargains as more headwinds are imminent.

The government remains just as determined to limit the influence of giants’ companies on the market from billionaire Jack Ma’s Alibaba to billionaire Pony Ma’s Tencent, dashing hopes that the regulatory burden would be removed after a year-long campaign. In addition to the problems with policy, there is an economic slowdown and a more difficult battle for consumers’ wallets and causing a drop in growth already already weak.

“There are still downsides,” says Shawn Yang, a Shenzhen-based managing director of research firm Blue Lotus Capital Advisors. “I’d wait and see.”

Alibaba is, perhaps, the most vulnerable to ongoing risks. It is trading at a forward price-to-earnings ratio of only 15.9 times for the 2022 fiscal year , which will close this March, compared with an average of 31.3 times from 2017 to date, according Ming Lu, an analyst for Aequitas Research. He publishes his research on the an online platform for research called Smartkarma. The stock might seem expensive because of the company’s current dominant position in China’s huge market for e-commerce, prompting the billionaire investors Charlie Mungerto spot a bargain but the latest results of the company’s earnings have good reasons to be cautious.

Alibaba is struggling with China’s less spending on retail and a fierce competition from competitors such as ByteDance that is drawing customers away with live-streamed shopping shows. and after paying an unprecedented $2.8 billion fine for antimonopoly in April, the company can no longer prevent brands and merchants from moving elsewhere and ask them to sell exclusively on its platforms.

Alibaba’s revenue increased by just 10% year-over year to $38 billion during the quarter ending in December, making the slowest growth ever since the company was listed in 2014. Net income declined as much as 74% up to $3.2 billion, in part due to the imparting of goodwill as well as the decrease of the value of its investments. Excluding those, net income would have fallen by 25% to $7 billion.

“Alibaba’s problem is that, first of all, e-commerce is a very competitive area,” says Alex Wong, director of asset management at Hong Kong-based Ample Finance Group. “And regulations are being targeted; it may not be that aggressive when competing with those smaller companies.”

Hong Kong-listed Tencent The Hong Kong-listed Tencent, scheduled to release its fourth quarter results in March, at the very end it also has its number of challenges. Regulators haven’t given approval to all new gaming since the end of July in a second suspension following the year in which the country stopped gaming approvals over a period of 10 months in order to tighten its control over content in games and their play. Cui Chenyu who is a Shanghai-based analyst for the research firm Omdia and Omdia, believes that the current halt may relate to authorities’ need to safeguard children and improve the game that could result in addiction. It is not clear what timeframe or date new licenses will be given out, and there is an idea that the ban may last until the end of the year.

The uncertainty that continues to surround the company has only increased market volatility. Tencent dropped more than 5% last Monday, after an anonymous comment suggested another round of retaliation against the company. The post prompted its public relations head Zhang Jun to issue an usual savage response to debunk the idea. The company now trades with a forward price-to-earnings rate of 24x. This is down from a five-year P/E average that was 38.4 times.

It’s unclear how long the regulatory enforcement will last. The authorities last week issued new guidelines requiring food delivery companies to reduce the amount they charge restaurants. This leading Hong Kong-listed industry leader Meituan to fall 15% and lose $26 billion of market value that day.

Brock Silvers, a Hong Kong-based chief investment officer of Kaiyuan Capital, cited regulatory risks and stated that his allocation to Chinese tech stocks is zero now. Ample Finance’s Wong admitted that he’s cut down on investment in tech-related companies.

“In the past, they were a cornerstone of my portfolio,” Wong declares. “But they are not a so significant part right now, and I will wait for a change in the macro environment to add a lot.”