China Tech – Bottom ahoy!

The state sees some sense at last.

• The readmittance of Didi (and two others) to the Chinese transport market is the first tangible evidence that the regulatory crackdown that has crippled the Chinese technology sector is, at last, coming to an end.
• However, there are worrying signs that the Chinese government is determined to cling onto Covid-zero meaning that the economic bounce will not be nearly as big or as extended as if China were to see sense and opens up like everyone else.
• It has been more than a year since Didi was banned from adding new users as part of the Cyberspace Administration of China’s (CAC) investigation which has done untold damage to Didi’s business and long term outlook.
• Didi is a marketplace and as such, it needs critical mass to survive.
• This is why stopping it from adding new users and new drivers caused enormous problems and provided a big leg up to its competitors.
• Didi is back on the market, but it has a lot of ground to make up and I suspect that it will never be the same again.
• This combined with the fact that it will soon be unlisted again is why I am not tempted to take a position in the company.
• Furthermore, there have been rumours (since denied) that the state was also considering allowing the IPO process for Ant Group to restart in yet another sign that the regulatory environment is beginning to relax.
• This is a positive sign as the state seems to have realised that if it wants to have the capability to challenge the USA technologically, then its technology sector has to thrive.
• Putting parts of it out of business and creating an environment of fear and uncertainty is obviously not the way to do it and it is this that I think that the Chinese state is acting on.
• The regulators have been talking about getting the technology sector back to business for months, but this is the first time this talk has been followed up with tangible action.
• However, I do not expect a full recovery until Covid-zero becomes a thing of the past.
• The problem that China faces is that a thriving economy and Covid-zero are mutually exclusive and, at the moment, the CCP can’t back away from Covid-zero without losing face.
• This is something that my colleague, Alastair Newton of Alavan Independent, thinks the CCP cannot afford and so the prospect of Covid-zero disappearing in Q3 22 may have been premature on my part.
• Furthermore, the mass testing kiosks and booths springing up all over Chinese cities look eerily permanent and so this policy may persist for far longer than my initial estimate.
• This is really bad news for the Chinese economy and for the Chinese technology sector as lockdowns and mass testing will delay the economic recovery indefinitely.
• Hence, while the worst is clearly over for the Chinese technology sector, I have no idea when the economy is going to recover which will enable it to make a full recovery.
• Consequently, I suspect that the best way to look at Chinese Technology is to look at the sectors that fare best when everyone is locked down in their apartment blocks.
• This will be food delivery, e-commerce, home fitness and streaming services.
• Fortunately for me, my battered position in Alibaba fits this bill quite well and so should fare better than others which require an economic recovery before they can see a proper bounce.
• There is value in the Chinese technology sector, but it requires a lot of fundamental leg work as well as high-risk tolerance as the last 18 months have clearly demonstrated.
• I am comfortable sitting on Alibaba.