GUANGZHOU, China – Chinese technology stocks saw a huge rally on Tuesday as investors got a little more clarity on the regulatory outlook and bought some of the names that have been beaten in recent months.
A positive result from the Chinese tech giants also contributed to the optimistic mood.
In pre-trading hours, US-listed JD.com and Alibaba stocks rose 8.2% and 4.9%, respectively. Baidu’s shares rose 3.9%.
Chinese tech stocks also performed strongly in Tuesday’s Hong Kong market session. The Hang Seng Tech Index, which tracks the 30 largest technology companies listed in Hong Kong, closed 7%, outperforming the broader index, which was up 2.5%.
At close of trade, Tencent’s shares were up 8.8%, food delivery giant Meituan was up around 13.5%, while Alibaba’s Hong Kong-listed share was up 9.5%.
Ecommerce giant JD.com closed nearly 15% higher after its earnings beat market expectations in the second quarter. Cathie Woods Ark Investment Management also acquired 164,889 of JD.com’s American Depository Receipts (ADRs) on Monday.
Last week, the tech-heavy Hang Seng index slid into bear market area, losing more than 20% from its mid-February high. Since then, the benchmark has recovered slightly but is still 18% below its February level. Meanwhile, China’s tech giants have lost billions of dollars in value.
The sell-off was fueled by China’s stricter regulatory regime. New laws were introduced at a rapid pace, followed by fines and investigations by the Chinese authorities.
Some investors may take advantage of the sharp decline in stock prices and see the sell-off as a buying opportunity.
“Our overall view is that we’d rather look for value. In Asia, after the recent slump, the markets are not as foamy as they are in the US … (because of) the HK / China problems, and this is where we would probably be looking,” ” said Lorraine Tan, Morningstar’s director of equity research for Asia.
At the beginning of this year, the regulatory authorities introduced antimonopoly rules that target so-called platform companies. This month regulators released a draft rule to stop unfair competition in the internet sector. On Friday, China passed an important data protection law – the so-called Personal Information Protection Law (PIPL) – which will come into effect in November after two other important data directives.
The multitude of regulations could have brought clarity to the market in the short term, while the pace of new laws could slow down.
“The capital market is likely to believe that the release of the PIPL … completes three times China’s data governance regime, allowing Chinese regulators to finally take a break in 2021 from undiminished tech industry legislation that has done little in the past decade was regulated. ” said Winston Ma, associate professor of law at New York University School of Law.
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The latest earnings reports from Chinese tech companies were also broadly positive. Tencent’s net income for the second quarter beat estimates, while Baidu’s revenue for the quarter surpassed analysts’ expectations.
Regulation has been the hot topic on several calls for winning. Tencent’s management warned last week that further regulation was likely for the internet industry, but said it was “confident” that the company can comply. On Tuesday, Lei Xu, CEO of JD’s core retail business, said the company had conducted an internal “review” and “rectification” process to ensure compliance and did not see any major business impact.
“We believe the broad framework for internet regulation is largely set. We believe the rifts of names like Alibaba and Tencent are still wide-spread and their free cash flow will still be relatively attractive,” said Morningstar’s Tan .
With many major technology gains released and major laws passed, an analyst expects investors to look to the next year.
“Investors should get much better insight into subsector trends and business prospects during the earnings season,” Jefferies stock analyst Thomas Chong wrote in a statement released on Monday.
“In fact, a number of key issues have already been addressed. With the drastic decline in sector ratings over the past few months … and the passage of the Data Protection Act last Friday, we expect a renewed focus on sector issues if expectations continue, with the story being rolled back in 2022 The next waypoint is, and not the fourth quarter outlook. “
