Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Didi shares indicated down 20% on Chinese regulatory crackdown
Peter Garnry
Chief Investment Strategist
Summary: Didi was a successful Chinese IPO in the US last week but the celebration has evaporated as water on a hot summer day with Chinese regulators cracking down on the ride-hailing company over concerns of how it handles private user data. The move is part of a series of actions from the Chinese government in reining back the power of its large technology sector but also protect consumers and spur more competition. These regulatory actions against several of the largest Chinese technology companies have caused investors to sell out and our China Consumer & Technology basket is now the second-worst performing theme basket this year.
Didi Global, the Chinese version of Uber, was the second biggest Chinese IPO following Alibaba and even IPO’ed on the day of the 100-year anniversary of the CCP, but the celebration from last week has quickly faded. It turns out that China’s regulatory agency for cybersecurity asked Didi to postpone its IPO over national security concerns three months ago, but that Didi pursued the IPO anyway. One of the concerns was that Didi would be forced in an US IPO to reveal vendors and other critical information that could expose the company and its half billion users, mostly Chinese citizens, according to Bloomberg news. Chinese regulators have also ordered Didi's app to be removed from app stores in China. Investors are not liking this news sending shares down 20% in pre-market trading below its recent IPO price.
The regulatory crackdown of Didi follows a series of Chinese regulatory actions taken against Alibaba, Tencent, Meituan, and Baidu, which in the end also postponed the highly anticipated IPO of Ant Group (the payments arm of Alibaba) in the very last minute. While successful companies are a national pride for China it also comes with security concerns over competition, consumer protection (both in terms of fair prices and privacy data handling), and market power. The wider concern is that China’s new trajectory on regulating the technology sector will impact longer term profitability. Investors have sold out of Chinese technology stocks with our China Consumer & Technology basket down 3.2% for the month extending the declines from the past months. The China Consumer & Technology basket is now together with Gaming the only two themes that are down for the year.
While news sentiment and regulation are not tailwinds for Chinese technology companies, the valuation and growth prospects of these companies should over time pull investors back into the fold. In two separate research notes, here and here, we described back in May that the largest Chinese technology companies are becoming very attractive on valuation relative to their US peers and that investors will eventually see that valuations justify the regulatory risks. Our China Consumer & Technology is shown below and as we have said before, if investors want to minimize regulatory risks in China that should be looking at the consumer-oriented companies instead like Anta Sports, the Chinese version of Nike, as these companies are less driven by consumer data and technology and more about distribution and brands.
| Name | Industry | Market Cap (USD mn.) | Sales growth (%) | EPS growth (%) | Diff to PT (%) | 5yr return |
| Tencent Holdings Ltd | Gaming & social media | 690,614 | 27.4 | 24.1 | 36.7 | 221.2 |
| Alibaba Group Holding Ltd | E-commerce | 590,346 | 40.7 | 8.7 | 35.0 | 174.4 |
| Kweichow Moutai Co Ltd | Beverages | 391,061 | 9.9 | 10.3 | 18.4 | 577.6 |
| Meituan | E-commerce | 228,037 | 42.0 | NA | 28.6 | NA |
| Pinduoduo Inc | E-commerce | 149,392 | 133.7 | 52.0 | 39.8 | NA |
| Kuaishou Technology | Social media | 91,515 | 50.2 | NA | 82.8 | NA |
| JD.com Inc | E-commerce | 118,841 | 33.3 | 112.9 | 34.7 | 270.6 |
| China Tourism Group Duty Free Corp Ltd | Duty free goods | 85,002 | 47.4 | 290.2 | 33.2 | 1,195.7 |
| Midea Group Co Ltd | Household appliances | 74,783 | 18.4 | 17.8 | 48.2 | 217.8 |
| Foshan Haitian Flavouring & Food Co Ltd | Food seasoning manufacturer | 76,609 | 19.2 | 23.1 | 20.9 | 516.7 |
| Xiaomi Corp | Smartphone manufacturer | 83,647 | 28.9 | -4.0 | 29.5 | NA |
| Hangzhou Hikvision Digital Technology Co Ltd ** | Video surveillance | 87,525 | 19.1 | 12.3 | 11.2 | 316.9 |
| Baidu Inc | Online search & advertising | 69,554 | 6.5 | 30.9 | 56.2 | 20.4 |
| NetEase Inc | Gaming | 76,029 | 24.6 | -17.4 | 18.9 | 223.7 |
| BYD Co Ltd | Car manufacturer (EV & ICE) | 100,442 | 51.9 | 376.8 | 2.5 | 393.6 |
| KE Holdings Inc | Housing transaction platform | 55,794 | 86.9 | NA | 55.9 | NA |
| NIO Inc | Car manufacturer (EV) | 82,581 | 202.3 | 37.9 | 20.5 | NA |
| Gree Electric Appliances Inc of Zhuhai | Air conditioners | 46,621 | 1.5 | 7.0 | 49.7 | NA |
| Nongfu Spring Co Ltd | Beverages | 56,402 | -4.8 | 7.5 | 19.8 | NA |
| WuXi AppTec Co Ltd | Drug manufacturing technology | 66,174 | 37.7 | 59.0 | 13.6 | NA |
| ANTA Sports Products Ltd | Sports apparel | 61,748 | 4.7 | -1.6 | 1.0 | 1,192.3 |
| JD Health International Inc | Online healthcare platform | 42,723 | 78.8 | NA | 37.8 | NA |
| Haier Smart Home Co Ltd | Household appliances | 34,547 | 4.5 | 134.8 | 53.7 | NA |
| Foxconn Industrial Internet Co Ltd | Networking equipment | 37,577 | 10.2 | 7.0 | 44.6 | NA |
| Will Semiconductor Co Ltd Shanghai | Semiconductors & image sensory | 43,190 | 50.1 | 228.4 | 14.7 | NA |
| Semiconductor Manufacturing International Corp ** | Semiconductor foundry | 34,174 | 19.3 | 144.0 | 17.4 | 252.4 |
| Luxshare Precision Industry Co Ltd | Connectivity manufacturer | 49,398 | 38.6 | 34.7 | 13.1 | 666.9 |
| SAIC Motor Corp Ltd | Car manufacturer (EV & ICE) | 38,035 | 10.2 | 42.2 | 15.8 | 31.0 |
| Haidilao International Holding Ltd | Restaurant chain | 29,071 | 7.8 | -91.4 | 33.9 | NA |
| BOE Technology Group Co Ltd | Display panels manufacturer | 32,721 | 40.4 | 793.5 | NA | 115.5 |
| Tencent Music Entertainment Group | Music streaming | 25,609 | 17.9 | 2.6 | 53.9 | NA |
| Shenzhou International Group Holdings Ltd | Textile manufacturing | 36,194 | 1.6 | 0.1 | 8.6 | 427.6 |
| XPeng Inc | Car manufacturer (EV) | 36,997 | 216.9 | NA | 12.9 | NA |
| Sunny Optical Technology Group Co Ltd | Optical instruments | 32,765 | 0.4 | 19.4 | 0.7 | 820.5 |
| Yum China Holdings Inc | Restaurant chain | 27,881 | 10.2 | 20.5 | 9.2 | NA |
| Trip.com Group Ltd | Online travel agency | 22,623 | -45.1 | NA | 30.1 | -11.4 |
| Focus Media Information Technology Co Ltd | Offline advertising solutions | 19,068 | 20.0 | 238.9 | 64.7 | -7.5 |
| ZTE Corp | 5G & telecommunication | 20,980 | 18.0 | 125.8 | 21.2 | 125.5 |
| Oppein Home Group Inc | Household furniture manufacturer | 12,682 | 30.2 | 43.9 | 29.3 | NA |
| Topsports International Holdings Ltd | Sports retailer | 9,805 | 6.9 | 4.2 | 18.9 | NA |
| Aggregate / median | 3,868,756 | 19.6 | 23.6 | 28.6 | 252.4 |
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 %
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