Moves this month by China's regulators to abruptly block e-payments and internet finance giant Ant Group's record $35 billion initial public offering, while tightening oversight of e-commerce firms, are adding a considerable element of uncertainty for investors heavily exposed to the mainland's high-flying technology firms.
Despite the near-term risks, investors continue to see long-term opportunity in owning platform companies such as Alibaba Group Holdings Ltd., Tencent Group Holding Ltd., JD.com Inc., Meituan and — if and when it takes a second bite of the IPO apple — Ant Group.
A spokesman for Hangzhou-based Ant Group declined to comment on the firm's listing plans. With regulators clamping down on online lending, a business that accounted for roughly two-fifths of Ant's first half revenues, analysts say the company's online wealth management and asset management business — at less than a sixth of its revenues — would assume a higher profile should Ant come to market again anytime soon.
For now, Ant's IPO fireworks "haven't helped overall sentiment" but "we still have a fairly positive view on these new economy stocks going forward" and any sell-off could prove a good opportunity to pick up their shares, said Ken Wong, a Hong Kong-based Asian equity portfolio specialist with Eastspring Investments (Singapore) Ltd.
The prospect of a shorter regulatory leash helped pare back solid year-to-date gains by firms such as Ant affiliate Alibaba Group Holding Ltd. and Tencent Group Holding Ltd., although heady progress on the coronavirus vaccine front — which could end the lockdowns that levitated online stocks this year — has been a contributing factor as well.
At the close of Hong Kong trading Friday, Alibaba’s shares remained up 22% year-to-date despite an 18% retreat from a record intraday high of HK$309.40 reached in late October. Tencent shares, meanwhile, were down 7.1% from their intraday record high of HK$633 on Nov. 9 but still up 57% year-to-date.
Investors predict those behemoths aren't in danger of losing their status as key portfolio holdings.
"Things are pretty fluid" but it's a good bet the new rules "aren't going to fundamentally change the nature of the industry, (and we) don't expect to see a change in market leadership," said Chris Chen, a Hong Kong-based senior investment director, Asia-Pacific, with American Century Investments. Alibaba accounts for a little more than 3% of American Century's $27.1 billion 100-stock global growth equity strategy and 4.5% of its $1.2 billion 30-stock concentrated version.
Still, "if you're talking about valuation," regulatory tightening — however reasonable — could prove a "headwind" for these companies, Mr. Chen said. With valuations for those online platform companies rising so far this year, growth equity-focused American Century has added cyclical exposures in recent months such as HEICO Corp., a Hollywood, Fla.-based maker of aircraft parts, he said.
Analysts say challenges now could be particularly acute for Ant and Alibaba — which became lightning rods when Jack Ma, Ant chairman and Alibaba founder, bluntly took China's regulators to task for what he described as outdated thinking in a keynote address at an investment forum ahead of Ant's scheduled IPO.
In the runup to its planned Nov. 5 listing in Shanghai and Hong Kong, Ant worked hard to play up the central role its technology played in the company's fast-growing e-finance businesses — providing credit, wealth management and insurance offerings to underbanked consumers and small businesses.
For example, in June the company changed its name to Ant Group from Ant Financial, while in its 752-page Hong Kong prospectus, released in October, Ant Executive Chairman Eric Jing's letter to potential investors began with the assertion that "Ant Group is not a financial institution."
But when Mr. Ma said in his October keynote speech that China's incumbent banks had a "pawnshop" mentality, in contrast to a firm like Ant leveraging big data to make loans to an army of consumers with little credit history, regulators pushed back.
The authorities "intended to send a message" to Mr. Ma, and the upshot looks to be stiffer regulatory constraints for the CreditTech online lending business that accounts for roughly 40% of Ant Group revenues, as well as for the "big data" engine that drives the firm's e-finance businesses, said Victor Galliano, a London-based independent industry analyst covering emerging market financial firms, in a Nov. 4 report. Mr. Galliano publishes on independent investment research network Smartkarma.
The draft rules Chinese regulators put out for comment this month — one set for online lenders and a broader set looking to extend anti-monopoly rules to China's e-commerce firms — included a proposal to require online lenders such as Ant, with a 2.1 trillion yuan ($320 billion) CreditTech lending business, to contribute at least 30% of the loans they underwrite.