China is cracking down on Ant which is majority owned by BABA. This is an extremely fast development as it was only 2 month before that it was undergoing the world’s largest IPO.
The real target of the crackdown however is Jack Ma and it looks like the firing squad is already turning its sights onto Alibaba it self.
The crackdown by China highlight the uncertain regulatory environment the Chinese tech companies operates in and again highlights the risks of owning the Chinese tech ADR listed on the US exchanges. Everything can go well for a period until the government turns their sight onto you and then there is nothing you can do about it but take it.
The episode is highly reminiscent of the Putin vs Khodorksovsky experienced in Russia where eventually all of the oligarchs power rest at the pleasure of the state. After there is a reason why China is still considered an emerging market!
As result of this we expect the sell off in the BABA stock to migrate to other Chinese listed ADRs and major tech companies as the market reevaluate the risk and reward of owning these companies.
AliBaba has responded by announcing a $6b buyback but given the opaque accounting treatment, does it even have access to $6b of real liquidity without comprising the performance of the business? This is similar to what Softbank did during the depth of the Covid sell off but Softbank owned liquid stocks while Alibaba mostly owns interest in privately held companies. It will take them much longer to realize funds to fund the buyback without comprising the “balance sheet”.
6 Major listed Chinese Tech Companies Also at Risk
Here are the 6 major Chinese tech ADR which plays by the same rules as BABA. We just focused on large cap listed ADR’s rather small cap stocks as the government is likely to go after the big boys to teach everyone a lesson to stay in their lane and out of government’s way.
While the companies below are still in favor with Beijing for now, ultimately they do not control their own fate but will act in accordance to what is best for China. This means the interest of the shareholders while never paramount with Chinese ADRs will take a further backseat for now which again shows these stocks are only for trading and not held as long term investments.
- Bidu
- Tencent
- JD.com
- SOGOU
- Sohu