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| A man walks past Alibaba's building in Beijing in this file photo. Reuters-Yonhap |
Uncertainty lingers over internet stocks amid regulatory stance
By Kim Bo-eun
HONG KONG ― China's internet stocks had been popular among global investors up until 2020, when the companies had been achieving rapid growth. But 2021 was tough for platform giants' stocks, as authorities' strengthened crackdowns put them on a downward trajectory.
The Nasdaq Golden Dragon China Index is down year-on-year by nearly 60 percent as of Feb. 15. The fall of stocks including Tencent and Alibaba was contrary to the movements of U.S. tech stocks, such as Alphabet, Apple and Netflix, which rose to new highs in the same period.
While uncertainty continues to linger over China's internet stocks, analysts offer brighter projections for China's semiconductor and green energy sectors this year.
"Growth will be better in tech industries that China wants to develop, such as semiconductor equipment and wind and solar technologies," Herald van der Linde, the head of equity strategy for Asia-Pacific at HSBC Holdings, said via email.
Gabriela Santos, global market strategist at JP Morgan Asset Management, also referred to the option of investing "in alignment with Beijing's strategic policy objectives."
"These objectives include semiconductor self-sufficiency, carbon neutrality and greater industrial automation. Not only are companies in these areas likely to stay out of the regulatory crosshairs, they could actively benefit from government subsidies and tax breaks," she said in a recent report.
China has been stepping up efforts to secure competitiveness in semiconductors, in which it lags behind Korea, Taiwan and the U.S. Its economy is also focusing increasingly on green energy as a new driver of growth, as it shifts toward renewables from existing, predominant coal-fired power generation. Investment strategists refer to opportunities in enterprise software while China's companies accelerate digitalization.
"We do see good potential for domestic companies within the EV supply chain, where China is emerging as a global leader in battery cell manufacturing," Santos added, "also, enterprise software, which is very underpenetrated relative to the U.S., and where the government wants to displace Western companies like SAP and Oracle."
Morningstar senior equity analyst Ivan Su shared a more positive outlook for internet and game company stocks. "We expect the National Press and Publication Administration to resume approvals of gaming licenses, while internet companies gradually adapt to other regulations," he said in an email.
Investment banks have also presented a broader positive outlook for China's stocks.
HSBC has forwarded an overweight rating for China's stocks on the back of factors including low valuations and a decent growth outlook.
Santos said, "Historically, Chinese equities have rebounded fast and strong after an over 30 percent correction like last year, up 28 percent 26 months after a trough on average, from 2011 to 2021. This would turn Chinese equities from a big drag to a big boost in portfolios."
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| Entrance to the Cyberspace Administration of China in Beijing, the authority in charge of regulating internet firms Reuters-Yonhap |
Future of China's platform companies
China's tech regulations range from antitrust to data security and algorithm use. These come amid a series of crackdowns that led to local ride-hailing platform Didi Chuxing stating last year that it would delist from the New York Stock Exchange months after its IPO. The government's regulatory stance is seen as an attempt to diminish the dominance of big tech companies and is expected to continue for the time being. Restrictions on algorithm use could force the firms to revise their business models, but the details have yet to be laid out.
"China's tech companies, and in particular internet businesses, are going through a period of dealing with more competition and regulations. This will slow their growth rates down," van der Linde said.
But there are also more favorable views of the business environment for platform companies this year. "Going into 2022, we expect a stabilizing, or perhaps even improving, regulatory environment," Su said.
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