China vs. China – Round 2

Chinese regulators come out swinging for round 2.

• It looks as if another round of crackdowns is about to be launched upon the Chinese technology sector and it is Tencent that remains by far the most exposed this time around.
• After a period of relative calm which emboldened the bottom fishers, it looks like the Chinese state is not done with reigning in its technology sector.
• This began on Friday with a regulation that required the food delivery sector to lower its fees to the restaurants in a move that took Meituan (the market leader) down by 15%, causing another $100bn of market value to evaporate.
• Chinese regulators also demanded that state-owned banks and companies assess their financial exposure to Ant Group and its shareholders and report their findings to the regulator.
• Ant Group has already been decimated by the state (see here and here) and one can only conclude from this move that there is even worse to come.
• The crackdown on payments and internet-based financial services is particularly impactful because, in addition to bringing the private sector to heel, the slow-moving legacy state-owned banking system stands to lose out as nimble fintech start-ups grab the market.
• Hence a move against fintech is also a move to protect the lumbering banking system which is already struggling with credit problems in Chinese real estate.
• This is why I think that the hammer of regulation will continue to fall hardest on the privately-owned Fintech sector, and it is Tencent that is by far the most exposed.
• At its Q3 2021 results, Tencent reported weakening growth from its core business of social networking and gaming but strong growth from its fintech business.
• This business has grown out of its enormously successful payment service WeChat Pay in almost exactly the same way that Ant Group’s financial services grew from AliPay.
• Fintech business showed 30% YoY in Q3 2021 growth to RMB43.3bn and made up 30% of Tencent’s total turnover.
• The regulator has hammered Ant Group turning it from one of the fastest-growing and dynamic fintech companies globally, into a bank that is unable to take consumer deposits.
• This has utterly decimated the value of Ant Group and once again, there is a very real risk that Tencent’s fintech business gets similar treatment.
• I have long suspected that the severity of Ant Group’s treatment was at least in part to punish Jack Ma for having the temerity to challenge the authority of the CCP.
• This means that the state may take a lighter hand with Tencent, given it has largely settled its regulatory issues in the other parts of its business.
• However, fintech is now the engine of growth for this company which depends on such growth for its valuation meaning that even a small intervention is going to hurt the outlook significantly.
• Ant Group is unlisted and goes largely unreported in Alibaba’s books, but Fintech is a separately reported division within Tencent meaning that the consequences will be plain to see.
• Just the idea that there would be a regulatory crackdown on Tencent’s fintech business prompted an emphatic denial from Tencent’s public relations department.
• The idea that Ant Group gets eviscerated while nothing happens to Tencent which is running a very similar business is very unlikely in my opinion even with a regulatory environment that is as opaque and whimsical as China’s seems to be.
• Hence, I am pretty certain that the regulator is coming for Tencent again meaning that the short to medium-term forecasts for Tencent are probably too high.
• This is why I have no interest in owning it, despite its recent falls and am sticking with Alibaba where the spectre of regulation has already passed.
• I think Tencent can easily go much lower from here.