Should I buy Chinese Stocks?

JC Project Freedom China Crackdown
Image by Jan Vašek from Pixabay

Chinese technology stocks took a beating recently due to China’s regulators target those companies listed in the United States. Firstly in November 2020, China suspended Ant Group’s listing on Shanghai Stock Exchange which was reportedly valued at USD 200 billion.

Weeks before ride-hailing company Didi went for listing, China’s cybersecurity watchdog suggested that they delay its initial public offering. Didi pushed through its IPO under the pressure of investors but faced severe punishment from the Chinese Communist Party. China ordered Tencent to give up exclusive rights to music licensing rights where Tencent owns close to 80% of the rights in China.

In the latest, China’s rule to put private tuition into the non-profit cause the share price to dive more than 80-90% for most of the listed tutoring companies.

Source: Google TAL Share price
Source: Google EDU share price

The super app Meituan took a beating after the regulators ordered them to treat the riders as employees and a minimum wage system needs to be in place.

Source – Google Meituan share price

So is this an opportunity or the start of more heartaches?

China Crackdown

I think CCP is just regulating its businesses and do not allow them to become too monopolistic to enjoy the extraordinary profit. This will encourage entrepreneurship and not a winner takes all society. Meanwhile, CCP will not kill all these golden geese as they create a lot of jobs for society. Meituan has many drivers. Tencent has many engineers working for the company. You get the idea. CCP just wants to set the tone and make sure everything is in place.

Investment Opportunity

I believe this is an opportunity to start buying in batches. The regulation of the technology industry in China will take 6 months and this is just the start. I cannot tell how the industry will be revamped at the end of this but there will be more regulations and rules in place. It means long term wise, it will be beneficial for companies who survive these regulations. They will become stronger and more transparent for investors. Hence, you need a long-term perspective to buy Chinese companies.

I have options on HK JD.com 9618.HK and HK BABA 9988.HK. I bought 300 shares of 9618.HK at around HKD 250. My previous 9618.HK average price is around HKD 330/share. I hope that I can get my BABA shares to be assigned through 2 sell put options that are at HKD 180/share.

Source – Tradingview.com on JD

Volatility

During the month of July, there was a lot of volatility in the stock market and it is through all these ordeals, we train ourselves to be numb to all the noises. We need to evaluate what is the likelihood the business will go bust, what is the likelihood the business will improve its profit margin or suffer in terms of its profit margin? Will this regulation affect the company? Is it temporary or permanent? Is there any repercussion? Is there any ripple effect? Maybe a 10% drop on a daily basis will cause you to sell in fear like Cathie Wood.

Once you satisfy that the business you are buying is a solid one, then you will be confident to buy more of the business. When you do not have familiarity with the business, you will not dare to buy more when the share price drops. You cannot have borrowed conviction. You need to build the conviction through your own research. If you don’t have time like me, it is better that you buy the index.

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