Why Tencent, Pinduoduo and Trip.com rocked today
Shares of Tencent Holdings (OTC: TCEHY), Pinduo-duo (NASDAQ:PDD)and Trip.com (NASDAQ: TCOM) were in free fall today, down 10%, 20.5% and 13.5%, respectively, at the end of the session.
There was a trifecta of bad news today regarding Chinese equities. Firstly the the wall street journal reported that Tencent faced a potential fine, in another chapter of China’s year-long regulatory crackdown on its tech sector.
Second, China is experiencing an outbreak of Omicron, and as a result, the government is locking down several key cities, including the technology center in Shenhzen.
Finally, investors may worry about China’s ties to Russia, as geopolitical tensions call into question not only the health of China’s economy, but also the status of US-listed stocks such as Pinduoduo and Trip. .com.
According to the WSJ who spoke to people familiar with the matter, China’s central bank discovered during an inspection late last year that WeChat Pay, which is the fintech arm of Tencent, had regulatory loopholes. of “know your customer” compliance, and also found that WeChat Pay enabled the transfer of funds for illegal purposes such as gambling.
This is somewhat surprising, as until now Tencent had avoided most regulatory repression and was known as a corporate citizen, while regulators relied more on its competitors. Ali Baba (NYSE: BABA) for violations. According to the report, Tencent could be fined hundreds of millions of yuan – although that wouldn’t be too much of a game-changer for a company as big as Tencent, as one US dollar equals around 6.4 yuan.
Yet it compounds other problems. Over the weekend, it was reported that Russia had asked China for military aid and assistance in its war against Ukraine. Although China has denied this and nothing has been confirmed, it seems people are freaking out that Chinese companies could be sanctioned. Last week, the Securities and Exchange Commission began reporting Chinese companies for non-compliance with the recently passed Foreign Corporate Liability Act, or HFCAA. The law gives Chinese companies three years to open their books to US regulators or risk being delisted.
Although Tencent does not list stocks on US exchanges, Pinduoduo and Trip.com list their stocks on the Nasdaq. US investors can therefore sell these shares, regardless of their price.
Additionally, Chinese online travel agent Trip.com may be feeling the pinch of new lockdowns in the country. Chinese vaccines are not as effective as the mRNA vaccines we have here in the United States, and they are pursuing a “zero COVID” posture. Therefore, the recent omicron breakout has the potential to further lock down the country, which could affect Chinese travel.
And Pinduoduo could also feel the fallout from Tencent’s potential fine. Tencent has a teenage stake in Pinduoduo, and regulators have been known to crack down on excessive fees in markets or predatory pricing as part of the regulatory crackdown. Additionally, any weakness in the Chinese economy could affect all stocks dependent on economic growth, including e-commerce players like Pinduoduo.
Warren Buffett once said, “Be greedy when others are scared,” and there’s certainly a lot of fear in Chinese stocks right now. Many are down significantly and are also trading at very low prices compared to their US counterparts. The Golden Dragon Index, which tracks U.S. Chinese certificates of deposit, fell more than 10% on Thursday and Friday, the lowest it has seen in its 22-year history. On Monday, it was still down 13%!
While this may seem like a golden opportunity for value investors, the risk remains high. The potential delisting of stocks traded on US exchanges could lead to more selling, so if you’re interested in diving, you should probably try buying Chinese stocks on the Hong Kong Stock Exchange, if your broker allows it.
Yet, with the slowing Chinese economy, the ongoing tech regulation campaign, and China still maintaining a close relationship with Russia, the potential for sanctions and new regulations remains high. This could be a buying opportunity, but only for high-risk investors.
All three companies report earnings next week, giving investors more color on the matter.
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