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

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Our China Consumer & Technology basket is bouncing back in August but underneath the average performance some companies such as Kuaishou Technology, which IPO'ed back in February in the largest global IPO since Uber, is down 15% today causing other technology stocks to decline in China. We update our view on Chinese technology companies and also touch on the consumer segment which we believe is the next growth frontier for Chinese equities.


As we wrote on Monday our China Consumer & Technology basket was the worst performing in July amid the government’s crackdown on its for-profit education industry and wider technology sector. While the basket has bounced back in the first week of August there is still internal bleeding going up with the most notable being Kuaishou Technology, a content community and social platform, down 15% today in Hong Kong trading taking the decline from the closing high to whopping 79%.

Source: Saxo Group

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 10th 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.

NameIndustryMarket Cap (USD mn.)Sales growth (%)EPS growth (%)Diff to PT (%)5yr return
Alibaba Group Holding LtdE-commerce545,56640.24.536.9137.3
Tencent Holdings LtdGaming & social media541,90327.424.167.0140.9
Kweichow Moutai Co LtdBeverages330,34310.511.133.4492.5
MeituanE-commerce166,44242.0NA71.4NA
BYD Co LtdCar manufacturer (EV & ICE)120,53151.9376.8-0.8463.2
Pinduoduo IncE-commerce111,894133.752.082.1NA
JD.com IncE-commerce111,31233.3112.938.9226.8
Hangzhou Hikvision Digital Technology Co LtdVideo surveillance87,33526.117.123.1292.8
Xiaomi CorpSmartphone manufacturer84,83228.9-4.028.5NA
China Tourism Group Duty Free Corp LtdDuty free goods77,06247.4290.239.91,087.4
Foshan Haitian Flavouring & Food Co LtdFood seasoning manufacturer76,51519.223.129.6524.6
Midea Group Co LtdHousehold appliances76,28518.417.843.5182.9
NIO IncCar manufacturer (EV)73,881202.337.943.5NA
WuXi AppTec Co LtdDrug manufacturing technology72,72637.759.09.6NA
NetEase IncGaming62,41524.6-17.443.5148.4
ANTA Sports Products LtdSports apparel61,5964.7-1.612.3936.8
Nongfu Spring Co LtdBeverages60,737-4.87.510.4NA
Baidu IncOnline search & advertising57,9286.530.980.6-2.1
Kuaishou TechnologySocial media47,66250.2NA185.5NA
Luxshare Precision Industry Co LtdConnectivity manufacturer45,11538.634.723.4637.1
Gree Electric Appliances Inc of ZhuhaiAir conditioners44,8051.57.051.1178.9
Will Semiconductor Co Ltd ShanghaiSemiconductors & image sensory43,16650.1228.419.8NA
Semiconductor Manufacturing International CorpSemiconductor foundry41,55528.9124.9-7.6329.2
XPeng IncCar manufacturer (EV)37,295216.9NA18.0NA
Haier Smart Home Co LtdHousehold appliances37,2214.5134.836.7NA
Foxconn Industrial Internet Co LtdNetworking equipment36,43910.27.048.6NA
Sunny Optical Technology Group Co LtdOptical instruments35,1750.419.4-2.7685.9
Shenzhou International Group Holdings LtdTextile manufacturing34,8891.60.111.3382.5
SAIC Motor Corp LtdCar manufacturer (EV & ICE)34,44910.242.231.05.7
JD Health International IncOnline healthcare platform30,95478.8NA94.7NA
BOE Technology Group Co LtdDisplay panels manufacturer30,86640.4793.5NA109.6
ZTE Corp5G & telecommunication27,15518.0125.83.9180.3
Yum China Holdings IncRestaurant chain26,30020.142.116.4NA
KE Holdings IncHousing transaction platform24,90286.9NA234.2NA
Haidilao International Holding LtdRestaurant chain19,6197.8-91.462.0NA
Tencent Music Entertainment GroupMusic streaming17,89017.92.698.8NA
Focus Media Information Technology Co LtdOffline advertising solutions16,92520.0238.992.0-11.5
Trip.com Group LtdOnline travel agency15,414-45.1NA83.8-43.8
Oppein Home Group IncHousehold furniture manufacturer13,48330.243.923.1NA
Topsports International Holdings LtdSports retailer9,2666.94.226.2NA
Aggregate / median3,389,84425.427.536.7204.9

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 %

Source: Saxo Group
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