China’s hottest IPO in 2021 plunges 79% from its high

Kuaishou Technology was the biggest technology since Uber raising $5.4bn in its IPO back in early February and rose in only 7 trading days from its IPO price of HKD 115 to HKD 415 catapulting the company into being one of the most valuable Chinese technology companies. The company together with ByteDance (parent company behind TikTok) are both removing an app on their platform called Zynn without further reasons explained and recently many platforms in China have been required to remove content and information. This part of a bigger move by the government which wants to control how and what content is served on various social platforms in China.

The crackdown on technology platforms in China has caused foreign investors to reduce exposure to the Chinese technology sector and in general the impact from the ongoing crackdown is uncertain at this point as Alibaba earnings call earlier this week also hinted at. Kuaishou Technology has also likely been hit by restrictions on its shares have been lifted leaving many major shareholders that been with the company for a long time to cash out. The Chinese technology crackdown that is now in its 10^th month is also zooming in on removing certain tax advantages for gaming companies as they are now wildly profitable, something that could hit Tencent profitability.

A couple of months ago we argued that the risk-reward ratio was favouring some of the large Chinese technology companies despite the crackdown as valuations were getting quite attractive. As long as we do not see material impact on growth and profitability, we will not change that view, so investors with the right risk profile could find opportunities in this segment. We have also said, and that is why our basket has both consumer and technology companies, that consumer companies in China will be more immune from regulation as their business model is not depended on user data and does not pose a challenge for the political system.

This week China announced that it will carry out policies to incentivize more people in China to do more physical exercising and be healthier. The Chinese sports manufacturer Anta Sports rose 4.7% on the news and in general we encourage investors to get exposure to the Chinese consumer industry (see our basket composition below) as it will most likely be a high growth industry with expanding valuation multiples over the coming decade.

Source: Bloomberg and Saxo Group
* Sales and EPS growth is measured on 12-month trailing figures, Diff to PT is the difference between consensus price target and the current price in %