Shares of the KraneShares CSI China Internet ETF (KWEB) are hovering near the 13-month low they struck last week after Chinese regulators cracked down on Didi Chuxing, China’s No. 1 ride- hailing company.
Shares of Didi have plunged more than 20% from where they debuted on the New York Stock Exchange at the end of June. The Chinese government hit Didi with a one-two punch days after its IPO, first opening an investigation into the company’s data collection and security policies, and then ordering that the company’s apps be removed from China’s app stores.
While users who have already downloaded the apps can continue to use them, new users can’t sign up—a big blow to the firm, which generated over 94% of its revenues in 2020 from the Chinese market.
In the days following the crackdown on Didi, China targeted two other firms listed in the U.S.—Full Truck Alliance and Kanzhun—with similar investigations and restrictions. Regulators also announced a rule change that would require any Chinese firm with more than 1 million users to go through a security review before listing its shares overseas.
KWEB Share Price
Some analysts believe these moves are an indication that Chinese regulators are trying to discourage Chinese companies from listing in the U.S.—where they must disclose more information to investors than China’s government is comfortable with—and to instead list in China.
The tactic is having an effect. On Monday, the Wall Street Journal reported that ByteDance, the Chinese parent company of the wildly popular TikTok app and the world’s most valuable private company, has indefinitely put on hold its intentions to list overseas.
China’s regulatory crackdown on its internet firms doesn’t just apply to overseas listings either. Late last year, the government halted fintech giant Ant Group from IPO’ing on the Shanghai Stock Exchange for various reasons. The IPO could have been the largest ever; instead, Ant was forced to reorganize much of its operations, and its valuation is said to have fallen significantly as a result.
China has also hit Alibaba, Tencent, Meituan and others with fines and restrictions on antitrust grounds. These moves signal the days of unimpeded growth may be over for China’s tech giants.
Given the ongoing challenges facing China’s internet sector, it’s understandable to see the steep drop in prices for the $4.3 billion KWEB. The fund is the largest ETF tracking the space and the third-largest China ETF overall.
The aforementioned Didi isn’t in KWEB’s portfolio yet, as it’s a brand-new listing, but the ETF’s current top holdings include Tencent, Alibaba and Meituan—all companies that have been in Chinese regulators’ crosshair recently.
KWEB is down 19.5% on a year-to-date basis and down more than 40% from its all-time high set in February.
Value, Or Value Trap?
Some investors have argued that all of the regulatory uncertainty has made China’s internet stocks cheap. Shares of Alibaba and Tencent trade at 17.5x and 24x next year’s earnings estimates, respectively, compared to 52x for Amazon, 33x for Microsoft and 27x for Apple.
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Other investors caution that the relatively low earnings multiples for the Chinese tech giants are warranted given the regulatory cloud that hangs over them. In a worst-case scenario, China could close the loophole that allows Chinese companies to list overseas, severely limiting the stocks that KWEB could hold.
In any case, investors must consider how much of a discount Chinese stocks deserve in an environment in which China’s government is heavy-handedly changing the rules as it sees fit.