Chinese tech stocks have been having a dreadful summer. The cause of the selling is clear: Beijing is making major power moves.
A month ago, China shocked investors by declaring that its for-profit education industry would no longer be allowed to operate. Education firms will need to transition to non-profit roles or shut down services entirely. Chinese education stocks have fallen 80% or more so far this year.
That’s not the only sector the bureaucrats are going after. The government has taken regulatory action against gaming, e-commerce, streaming media and tobacco firms among various others.
The crackdown on gaming has extended to younger players, with new rules for the under-18 population allowing only an hour a day, and only on Friday, Saturday and Sunday, for a total of three hours per week.
That’s left bargain hunters picking through the Chinese tech stocks looking for bargains. There may some out there to buy, but these seven Chinese tech stocks should be on investors’ sell lists:
- Alibaba Holdings (NYSE:BABA)
- RLX Technology (NYSE:RLX)
- Lufax Holding (NYSE:LU)
- Trip.com (NASDAQ:TCOM)
- Full Truck Alliance (NYSE:YMM)
- 51job (NASDAQ:JOBS)
- Agora (NASDAQ:API)
Chinese Tech Stocks to Sell: Alibaba Holdings (BABA)
Alibaba is arguably the most well-known and controversial U.S.-listed Chinese stock. The firm has a huge e-commerce business and it’s also a leader in cloud computing. It’s not hard to make the case that Alibaba should emerge as one of the world’s single-most powerful and successful corporations.
However, the company has had numerous skeptics. The handling of its Alipay spin-off was controversial. Short sellers have questioned Alibaba’s infamously dense annual report and accounting practices.
There’s big drama with founder Jack Ma. Ma has supposedly made several public appearances since last fall. However, as a Forbes columnist astutely noted, there’s a great deal of uncertainty about any of these occasions. Long story short, Ma has not been a prominent public figure since last year, when he criticized the Chinese government.
Finally, in recent days, a rape accusation by an employee has focused attention on what former employees have described as ‘work culture that is humiliating and toxic,’ according to The New York Times.
Alibaba’s long-awaited Ant Financial initial public offering (IPO) was canceled. It’s unclear what’s going on with key figures at Alibaba. Regulators keep targeting the big Chinese tech companies such as Tencent (OTCMKTS:TCEHY) and Alibaba. And perhaps Alibaba will have to make a huge “social contribution” just as Tencent just did.
To be sure, BABA stock could certainly rally from here, but there are much less polarizing options to play a Chinese stock recovery.
RLX Technology (RLX)
RLX Technology is the technology and brand leader in the Chinese vaping industry. The company launched its initial public offering (IPO) with high hopes just a few months ago. Shares started trading north of $25 per share.
While RLX stock has lost most of its value, even more downside risk remains. That’s because the Chinese government took a direct shot at the company. Recently, the government officials suggested that they will regulate e-vapor products “in reference” to its existing regulations for cigarettes.
Analysts are hopeful that RLX will find a path forward despite the government’s crackdown. Unfortunately, RLX stock went public at such a massive valuation — $18.6 billion — that it remains risky even now.
RLX was marginally unprofitable last year, and still trades around 6x revenues. That’s not particularly cheap for a company in the crosshairs of a regulatory onslaught.
Chinese Tech Stocks to Sell: Lufax Holding (LU)
Lufax Holding is an online Chinese finance marketplace. It offers a variety of products in both lending and wealth management.
Long-time China observers may remember that Chinese peer-to-peer lending was a hot sector a few years ago. Then the government launched a campaign against excessive interest rates and deceptive lending practices. Several Chinese lenders listed in New York saw their shares collapse.
LU stock appears to be backed by a significantly more diversified and resilient business model than those predecessors. Still, this is a sector that often comes under regulatory fire in any economic system, let alone a more centrally controlled one.
Also, it’s worth noting that Lufax’s top rivals include Ant Group and Tencent. Even those two firms haven’t been immune from the Chinese government crackdown. It’s not real reassuring to own a smaller rival in a controversial industry when even the leaders are taking heat.
Trip.com (TCOM)
Trip.com is a Chinese online travel agent (OTA). You may remember Ctrip International, which was once a darling Chinese tech stock. This is the same firm. It simply rebranded as Trip.com as part of its 20th anniversary celebration.
TCOM stock hit its lowest point in many years during the pandemic, for obvious reasons. Shares were just starting to recover this year when the regulatory fears struck. With those, TCOM stock fell back to near five-year lows. Still, it’s not an obvious buy. The government’s efforts to curtail conspicuous consumption could hit the Chinese travel sector. Additionally, many people are skeptical of virus data and information out of China. If a variant of the virus takes off again in China, outside investors might be the last to know.
For investors that want to keep exposure to the Chinese travel space, there is potentially a safer alternative. TravelSky Technology (OTCMKTS:TSYHY) is a state-owned enterprise (SOE) that oversees airline ticketing, baggage services, check-in terminals and related services for all the major Chinese airlines.
Interests are more aligned between SOEs and outside shareholders, since the government itself owns a major stake. As things stand today, TravelSky is trading around 15x pre-pandemic earnings and typically grows at a double-digital annual rate.
Chinese Tech Stocks to Sell: Full Truck Alliance (YMM)
Full Truck Alliance claims to be the world’s largest digital freight platform as measured by transaction volume. The company has built a smart logistics hub that connects truckers and shippers to allow firms to move cargos of all types and weights.
This is a useful and integral service. Unfortunately, Full Truck Alliance hasn’t figured out a successful way of monetizing this platform as of yet, making YYM stock all-the-less attractive.
The company’s revenues barely grew in 2020 versus 2019, albeit the pandemic certainly affected results. Even prior to the pandemic, however, Full Truck Alliance was struggling. In 2019, the company generated $165 million of revenue and produced an operating loss of $156 million. That’s a terrible ratio.
In 2020, the company lost an astounding $554 million on $194 million of sales. The Chinese government crackdown is only the latest obstacle for a firm that was already facing grave operational issues.
51job (JOBS)
Most Chinese stocks have already fallen sharply over the past year. 51job, however, is only down a few percentage points from its 52-week highs. This makes JOBS stock vulnerable if it ends up joining the broader market sell-off.
So why hasn’t JOBS stock dropped? In short, there is an offer to take it private for $79 per share. However, in the midst of a Chinese government crackdown, investors should be careful. The government has made a particular push in the area of anti-trust.
If, for whatever reason, the 51job acquisition falls through, it could have a devastating effect on the stock price. Most Chinese internet stocks have fallen 40%, 50% or even more from their highs. JOBS stock could plunge if the $79 offer disappears due to regulatory pressure or challenging market conditions.
From the current $77 share price, the remaining reward on JOBS stock seems insufficient to justify the risk if anything goes wrong.
Chinese Tech Stocks to Sell: Agora (API)
Agora is a software company. It is particularly focused on Real-Time Engagement Platform-as-a-Service (RTE-PaaS). In English, that means that Agora helps companies with video, audio, messaging and other such communications services. The company states that it helps power more than 50 billion minutes of human communication per month.
Agora had a great story, and investors sent API stock up from $25 to $115 at one point. However, shares have lost nearly all of those gains. For one, Agora is based out of China. This is a particularly pressing issue for a firm that is handling a ton of key user data and speech.
The other matter is that Agora tied its commercial success, in large part, to a few fast-growing applications. Audio social media platform Clubhouse and Middle Eastern chat room company Yalla (NYSE:YALA) were both seen as quickly rising applications leveraging Agora’s technology. Since then, however, Twitter’s (NYSE:TWTR) Spaces has largely supplanted Clubhouse. And Yalla has been dogged by short-sellers claiming inflated user metrics.
Add it all up, and it’s not hard to see why traders are steering clear of API stock. The combination of regulatory concerns and customer weakness has been a difficult mix for Agora.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.