Didi shares indicated down 20% on Chinese regulatory crackdown

Didi shares indicated down 20% on Chinese regulatory crackdown

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Didi was a successful Chinese IPO in the US last week but the celebration has evaporated as water on a hot summer day with Chinese regulators cracking down on the ride-hailing company over concerns of how it handles private user data. The move is part of a series of actions from the Chinese government in reining back the power of its large technology sector but also protect consumers and spur more competition. These regulatory actions against several of the largest Chinese technology companies have caused investors to sell out and our China Consumer & Technology basket is now the second-worst performing theme basket this year.


Didi Global, the Chinese version of Uber, was the second biggest Chinese IPO following Alibaba and even IPO’ed on the day of the 100-year anniversary of the CCP, but the celebration from last week has quickly faded. It turns out that China’s regulatory agency for cybersecurity asked Didi to postpone its IPO over national security concerns three months ago, but that Didi pursued the IPO anyway. One of the concerns was that Didi would be forced in an US IPO to reveal vendors and other critical information that could expose the company and its half billion users, mostly Chinese citizens, according to Bloomberg news. Chinese regulators have also ordered Didi's app to be removed from app stores in China. Investors are not liking this news sending shares down 20% in pre-market trading below its recent IPO price.

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Source: Saxo Group

The regulatory crackdown of Didi follows a series of Chinese regulatory actions taken against Alibaba, Tencent, Meituan, and Baidu, which in the end also postponed the highly anticipated IPO of Ant Group (the payments arm of Alibaba) in the very last minute. While successful companies are a national pride for China it also comes with security concerns over competition, consumer protection (both in terms of fair prices and privacy data handling), and market power. The wider concern is that China’s new trajectory on regulating the technology sector will impact longer term profitability. Investors have sold out of Chinese technology stocks with our China Consumer & Technology basket down 3.2% for the month extending the declines from the past months. The China Consumer & Technology basket is now together with Gaming the only two themes that are down for the year.

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While news sentiment and regulation are not tailwinds for Chinese technology companies, the valuation and growth prospects of these companies should over time pull investors back into the fold. In two separate research notes, here and here, we described back in May that the largest Chinese technology companies are becoming very attractive on valuation relative to their US peers and that investors will eventually see that valuations justify the regulatory risks. Our China Consumer & Technology is shown below and as we have said before, if investors want to minimize regulatory risks in China that should be looking at the consumer-oriented companies instead like Anta Sports, the Chinese version of Nike, as these companies are less driven by consumer data and technology and more about distribution and brands.

NameIndustryMarket Cap (USD mn.)Sales growth (%)EPS growth (%)Diff to PT (%)5yr return
Tencent Holdings LtdGaming & social media690,61427.424.136.7221.2
Alibaba Group Holding LtdE-commerce590,34640.78.735.0174.4
Kweichow Moutai Co LtdBeverages391,0619.910.318.4577.6
MeituanE-commerce228,03742.0NA28.6NA
Pinduoduo IncE-commerce149,392133.752.039.8NA
Kuaishou TechnologySocial media91,51550.2NA82.8NA
JD.com IncE-commerce118,84133.3112.934.7270.6
China Tourism Group Duty Free Corp LtdDuty free goods85,00247.4290.233.21,195.7
Midea Group Co LtdHousehold appliances74,78318.417.848.2217.8
Foshan Haitian Flavouring & Food Co LtdFood seasoning manufacturer76,60919.223.120.9516.7
Xiaomi CorpSmartphone manufacturer83,64728.9-4.029.5NA
Hangzhou Hikvision Digital Technology Co Ltd **Video surveillance87,52519.112.311.2316.9
Baidu IncOnline search & advertising69,5546.530.956.220.4
NetEase IncGaming76,02924.6-17.418.9223.7
BYD Co LtdCar manufacturer (EV & ICE)100,44251.9376.82.5393.6
KE Holdings IncHousing transaction platform55,79486.9NA55.9NA
NIO IncCar manufacturer (EV)82,581202.337.920.5NA
Gree Electric Appliances Inc of ZhuhaiAir conditioners46,6211.57.049.7NA
Nongfu Spring Co LtdBeverages56,402-4.87.519.8NA
WuXi AppTec Co LtdDrug manufacturing technology66,17437.759.013.6NA
ANTA Sports Products LtdSports apparel61,7484.7-1.61.01,192.3
JD Health International IncOnline healthcare platform42,72378.8NA37.8NA
Haier Smart Home Co LtdHousehold appliances34,5474.5134.853.7NA
Foxconn Industrial Internet Co LtdNetworking equipment37,57710.27.044.6NA
Will Semiconductor Co Ltd ShanghaiSemiconductors & image sensory43,19050.1228.414.7NA
Semiconductor Manufacturing International Corp **Semiconductor foundry34,17419.3144.017.4252.4
Luxshare Precision Industry Co LtdConnectivity manufacturer49,39838.634.713.1666.9
SAIC Motor Corp LtdCar manufacturer (EV & ICE)38,03510.242.215.831.0
Haidilao International Holding LtdRestaurant chain29,0717.8-91.433.9NA
BOE Technology Group Co LtdDisplay panels manufacturer32,72140.4793.5NA115.5
Tencent Music Entertainment GroupMusic streaming25,60917.92.653.9NA
Shenzhou International Group Holdings LtdTextile manufacturing36,1941.60.18.6427.6
XPeng IncCar manufacturer (EV)36,997216.9NA12.9NA
Sunny Optical Technology Group Co LtdOptical instruments32,7650.419.40.7820.5
Yum China Holdings IncRestaurant chain27,88110.220.59.2NA
Trip.com Group LtdOnline travel agency22,623-45.1NA30.1-11.4
Focus Media Information Technology Co LtdOffline advertising solutions19,06820.0238.964.7-7.5
ZTE Corp5G & telecommunication20,98018.0125.821.2125.5
Oppein Home Group IncHousehold furniture manufacturer12,68230.243.929.3NA
Topsports International Holdings LtdSports retailer9,8056.94.218.9NA
Aggregate / median3,868,75619.623.628.6252.4

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 %

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