China Technology – The turn?

Meituan follows Alibaba and sends a signal.

• Meituan has emerged from regulatory scrutiny almost completely unscathed implying that as long as everybody toes the line and behaves, then business (with a few exceptions) will be allowed to continue pretty much as it did before.
• Meituan has been fined RMB3.4bn ($530m) which equates to 3% of its 2020 turnover for abusing its position of power over its merchants and has 15 days to demonstrate how these issues will be fixed.
• Meituan has meekly accepted its punishment saying that it accepts its censure as a warning which is I think is exactly what this is.
• Meituan shares have rallied strongly in Hong Kong along with Alibaba which also had similar treatment giving hope that for these two at least, the regulatory crackdown is over.
• Meituan’s punishment is also surprising in that its founder and CEO has emerged unscathed from an incident where he posted some poetry that could be seen as critical of the CCP.
• Compared to the fate of Jack Ma and Ant Group, this comes as a surprise and underlines my view, that despite its name, the Chinese Communist Party knows that it needs the private sector to continue growing the economy.
• The problem has essentially been that to date, the Chinese technology sector has been completely unregulated which has been largely responsible for its very rapid emergence and growth.
• However, it reached a point last year where it had become so influential in Chinese Society that it had begun to be seen as a potential challenge to the authority of the CCP.
• It was into this environment that Jack Ma blundered and he and his company, Ant Group, have paid a very heavy price.
• RFM and Alavan Independent research indicate that the regulatory framework by which Chinese companies will be regulated has now been established and this is unlikely to change (see here).
• However, this framework reveals that the impact varies enormously from one company to another meaning that each company needs to be examined in isolation.
• However, where a company has no real influence over content, public discourse, or financial services, then a much lighter touch is likely to result.
• Both Alibaba and Meituan fit into this category which is why I think that both have received pretty light treatment and that the worst is now over.
• The same cannot be said for Tencent, Baidu, or the AI companies (with the exception of ByteDance) and RFM highlights that both Baidu and Tencent remain at great risk of further regulation.
• Tencent is particularly exposed as a result of its financial services business which is the engine of its growth and now makes up 30% of turnover.
• Tencent has already been regulated when it comes to its games and social media business but its financial services business remains untouched.
• If it gets the Ant Group treatment, then the shares have much further to fall.
• However, Tencent has a lot of experience with the Chinese regulator and has historically managed to remain in its good books.
• Hence, the treatment may be less severe, but I still think it is going to be pretty bad as Tencent is still a large threat to the legacy, state-owned banks.
• This is why I continue to think that Tencent remains one of the most exposed to the regulation of all the Chinese technology companies.
• Hence, I think that any re-rating of its share price is premature as its regulatory problems seem to be only just beginning.
• My badly beaten-up Alibaba position is looking a little less beaten up now and I think that with a good set of results under its belt and regulation in the rearview mirror that a significant re-rating is on the cards.
• Alibaba remains my only position in Chinese technology.