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I am pitching JD.com (JD - Free Report) , one of China's largest digital retailers, as Zacks' 'Bear of the Day' due to the enormous and highly uncertain regulatory overhang that has caused Chinese tech to be a (nearly) uninvestable class of public equities. Despite JD's unbelievably profitable growth acceleration that consistently impresses analysts quarter after quarter, the risk surrounding Xi's recent crackdown on tech has investors running for the hills.
Analysts have been downwardly revising EPS estimates on JD over the next few years as they price in the potential regulatory blow that Xi's increasingly autocratic regime will have on this digital powerhouse moving forward. JD.com has fallen to a Zacks Rank #5 (Strong Sell), and its shares are currently a falling knife that I would want to catch.
JD.com is releasing its Q2 earnings before the bell today, and analysts are looking for record sales. JD has seen wild post-earnings price action, with an average move of 8.6% over the past 6 quarters (4 up, 2 down). This past quarter's results will likely be overlooked (outside of a highly unlikely miss). The focus will be on management's outlook and sentiment about the regulatory overhang and how it could impact its future profitability/growth.
The share's recent decline may catalyze a jump, but I will not be making any bets here.
Bear Market For Chinese Tech
Hong Kong officially entered a bear market as its innovation-powered Hang Seng Index experienced another regulation catalyzed sell-off in its Friday session (8.20). Beijing has been busy releasing a flood of value-killing regulations that have brought Chinese tech stocks to their knees.
Chinese legislators just approved one of the world's strictest data privacy laws, which would curb tech enterprises' ability to collect consumer data (a precious asset to these businesses). These new privacy laws are similar to that of the EU. The key difference is that the communist state will still be able to collect as much of its citizens' data as it wants utilizing its already comprehensive surveillance programs. This was just another dagger to the already beaten-down tech sector in the region.
The new privacy laws will be put into place on November 1st and require businesses to collect minimum data, obtain consent for sensitive information, offer easy opt-out options, and direct government approval to transfer data overseas.
The leading US traded innovators in the region: Alibaba (BABA - Free Report) , Tencent (TCEHY - Free Report) , JD.com, and Baidu (BIDU - Free Report) , are off their 52-week highs by between 40% and 61%, as investors dump Chinese tech like there is no tomorrow. There is a thick cloud of uncertainty surrounding this group of public equities. Tencent came out yesterday and announced that they expect to continue seeing a slew of new regulations over the next few months, but how much of this is already priced into these stocks?
I wouldn't be trying to catch these falling knives because we have no idea what Xi's end game is here. Whether it is to rid China of US investors, demonstrate to the private tech space who is really in charge, or maybe it is just Xi's administration attempting to match regulations used in countries abroad. The latter is doubtfully considering the 'convenient' timing of these various restrictions, but I still cling to the hope that Xi will eventually loosen his grip on tech.
Eccentric tech tycoon, Jack Ma, seems to have catalyzed this endless flow of tech-focused regulation in China.
Xi's regime impeded Ma's fintech giant Ant Group's nearly half a trillion-dollar IPO last year. It wiped out more than $100 billion of its market value with a fresh regulatory overhaul aimed at Ant Group's unique micro-lending methods. This move by Chinese officials appeared to be in retaliation to Jack Ma's (founder and owner of the business) public criticism of the republic's financial system. Jack Ma's denouncement of China's economic practices seems to have triggered this fresh wave of tech regulation in the region. Xi fears that he could lose control of the masses to ostentatious billionaires like Ma.
Another 'timely' restriction came just 2 days after DiDi , the Uber (UBER - Free Report) of China, released its shares to US investors, the Cyberspace Administration in China announced a data-security review of the company that would require them to temporarily halt user growth. DIDI shares have since lost over $50 of their value. In fact, every publicly traded Chinese tech stock has taken a sizable dip since these restrictive announcements became a systemic issue earlier this year.
The progressing Chinese communist regime seemingly headed towards capitalism is now reeling back towards what looks like a government-controlled autocratic economy.
That being said, it is not unusual for the Chinese stock market to see these 20%+ stock market sell-off in any given year. In the past decade, the Hang Seng Index has experienced an over 15% market downturn in all but 2 of those years, entered a bear market (20%+ decline) in 4 of the last 6 years. The volatility that we are seeing in the Chinese market today is not unusual, but the mounting regulatory overhang causing this bear market is definitely unique to 2021. As I said, the unusual uncertainty here is what continues to compress JD's and its cohorts' valuations.
Final Thoughts
There is nothing systemic about JD.com that I dislike, in fact, the business has a very healthy-looking balance sheet, and its accelerating profitable growth remains attractive. The geopolitical risk in the region is just too high for most US investors. The trade war between the US and China has me and many other analysts concerned that Beijing is attempting to rid its GDP growth powering tech giants of US investors by making these companies uninvestable.
If Xi's administration shows signs of backing off its crackdown on tech, I won't hesitate to buy up shares of JD and the rest of Chinese tech, but as of now, I am staying clear.
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Bear Of The Day: JD.com (JD)
I am pitching JD.com (JD - Free Report) , one of China's largest digital retailers, as Zacks' 'Bear of the Day' due to the enormous and highly uncertain regulatory overhang that has caused Chinese tech to be a (nearly) uninvestable class of public equities. Despite JD's unbelievably profitable growth acceleration that consistently impresses analysts quarter after quarter, the risk surrounding Xi's recent crackdown on tech has investors running for the hills.
Analysts have been downwardly revising EPS estimates on JD over the next few years as they price in the potential regulatory blow that Xi's increasingly autocratic regime will have on this digital powerhouse moving forward. JD.com has fallen to a Zacks Rank #5 (Strong Sell), and its shares are currently a falling knife that I would want to catch.
JD.com is releasing its Q2 earnings before the bell today, and analysts are looking for record sales. JD has seen wild post-earnings price action, with an average move of 8.6% over the past 6 quarters (4 up, 2 down). This past quarter's results will likely be overlooked (outside of a highly unlikely miss). The focus will be on management's outlook and sentiment about the regulatory overhang and how it could impact its future profitability/growth.
The share's recent decline may catalyze a jump, but I will not be making any bets here.
Bear Market For Chinese Tech
Hong Kong officially entered a bear market as its innovation-powered Hang Seng Index experienced another regulation catalyzed sell-off in its Friday session (8.20). Beijing has been busy releasing a flood of value-killing regulations that have brought Chinese tech stocks to their knees.
Chinese legislators just approved one of the world's strictest data privacy laws, which would curb tech enterprises' ability to collect consumer data (a precious asset to these businesses). These new privacy laws are similar to that of the EU. The key difference is that the communist state will still be able to collect as much of its citizens' data as it wants utilizing its already comprehensive surveillance programs. This was just another dagger to the already beaten-down tech sector in the region.
The new privacy laws will be put into place on November 1st and require businesses to collect minimum data, obtain consent for sensitive information, offer easy opt-out options, and direct government approval to transfer data overseas.
The leading US traded innovators in the region: Alibaba (BABA - Free Report) , Tencent (TCEHY - Free Report) , JD.com, and Baidu (BIDU - Free Report) , are off their 52-week highs by between 40% and 61%, as investors dump Chinese tech like there is no tomorrow. There is a thick cloud of uncertainty surrounding this group of public equities. Tencent came out yesterday and announced that they expect to continue seeing a slew of new regulations over the next few months, but how much of this is already priced into these stocks?
I wouldn't be trying to catch these falling knives because we have no idea what Xi's end game is here. Whether it is to rid China of US investors, demonstrate to the private tech space who is really in charge, or maybe it is just Xi's administration attempting to match regulations used in countries abroad. The latter is doubtfully considering the 'convenient' timing of these various restrictions, but I still cling to the hope that Xi will eventually loosen his grip on tech.
Eccentric tech tycoon, Jack Ma, seems to have catalyzed this endless flow of tech-focused regulation in China.
Xi's regime impeded Ma's fintech giant Ant Group's nearly half a trillion-dollar IPO last year. It wiped out more than $100 billion of its market value with a fresh regulatory overhaul aimed at Ant Group's unique micro-lending methods. This move by Chinese officials appeared to be in retaliation to Jack Ma's (founder and owner of the business) public criticism of the republic's financial system. Jack Ma's denouncement of China's economic practices seems to have triggered this fresh wave of tech regulation in the region. Xi fears that he could lose control of the masses to ostentatious billionaires like Ma.
Another 'timely' restriction came just 2 days after DiDi , the Uber (UBER - Free Report) of China, released its shares to US investors, the Cyberspace Administration in China announced a data-security review of the company that would require them to temporarily halt user growth. DIDI shares have since lost over $50 of their value. In fact, every publicly traded Chinese tech stock has taken a sizable dip since these restrictive announcements became a systemic issue earlier this year.
The progressing Chinese communist regime seemingly headed towards capitalism is now reeling back towards what looks like a government-controlled autocratic economy.
That being said, it is not unusual for the Chinese stock market to see these 20%+ stock market sell-off in any given year. In the past decade, the Hang Seng Index has experienced an over 15% market downturn in all but 2 of those years, entered a bear market (20%+ decline) in 4 of the last 6 years. The volatility that we are seeing in the Chinese market today is not unusual, but the mounting regulatory overhang causing this bear market is definitely unique to 2021. As I said, the unusual uncertainty here is what continues to compress JD's and its cohorts' valuations.
Final Thoughts
There is nothing systemic about JD.com that I dislike, in fact, the business has a very healthy-looking balance sheet, and its accelerating profitable growth remains attractive. The geopolitical risk in the region is just too high for most US investors. The trade war between the US and China has me and many other analysts concerned that Beijing is attempting to rid its GDP growth powering tech giants of US investors by making these companies uninvestable.
If Xi's administration shows signs of backing off its crackdown on tech, I won't hesitate to buy up shares of JD and the rest of Chinese tech, but as of now, I am staying clear.