A return to normal or the new normal: Where now for the Chinese tech giants?

There are always a lot of points to consider when it comes to valuations and how investors view shares. From a short-term perspective, there are the obvious questions about the state of the economy, a company’s operating performance and so forth. From a longer-term view, one has to consider the total market opportunity, the strengths and weaknesses of management teams and so on. For the likes of the BAT (Baidu, Alibaba and Tencent) stocks, as well as the plethora of other Chinese tech names though, there is also another major factor: Namely how in or out of favour the sector remains with the Government,  

2023 has seen cautious optimism for the sector after the regulatory crackdowns that started in 2020. Official comments from the authorities about the need for a healthy tech sector, as well as hopes of an economic recovery, have improved hopes that the worst is now over. Baidu shares are up over 30% year-to-date, and while Alibaba and Tencent have lagged (mainly due to specific concerns), moves such as the regulatory restart of the approval of video games were seen as signs that the Tech sector was moving back into favour or, at least, not out of favour. It's a view echoed by analysts and investors who see things are heading back to the more ‘normal’ times pre-2020.

However, is that the case? 

At the risk of appearing cynical, one point to consider when we hear these positive comments is the desire of many participants to wish it so. Fund managers who have seen their portfolios damaged by the restrictions placed on the Chinese tech sector, or analysts who have buy recommendations on the stocks (and the general bias of analysts is to have buy recommendations) will be keen to present a positive picture. The risk is that it reflects conscious or unconscious bias. It is also not a view to which I subscribe. 

For me, people need to go back to why the tech sector came under scrutiny in the first place. The main underlying reason - if not the only one - was the view that the tech companies were becoming too powerful and / or not starting to ignore the system of checks and balances. As a reminder, it was Jack Ma’s criticism of China’s regulatory authorities over the IPO of Alibaba’s $37 billion Ant subsidiary that started the crackdown. It was clear at the time, and even more so with hindsight, that the comments overstepped the mark as far as the authorities were concerned 

Those political and regulatory concerns over the tech companies are likely to remain and may have increased. Therefore, it is unlikely that the authorities have changed their stance with regards to the need to keep the companies in check. In fact, the move by the Government to take ‘Golden Shares’ - or 'special management shares’ as they are termed in China - in Alibaba and Tencent, which will give the authorities special rights over business decisions, is a clear sign the Chinese authorities do not intend to let the companies have free rein. The recent announcements regarding the Government’s views on how companies should not go off-piste with regards to AI is another example. 

For the companies involved, this will have long-lasting implications from a valuation standpoint. The main drivers of valuations, particularly in tech, are the expectations around future growth. If expectations of future growth rates are reduced - either because of regulatory risk and / or because, more subtly, areas of potential opportunity are left unexplored because of perceived risks around attracting political and / or regulatory attention etc - valuations will be reduced. Add into the mix political and regulatory risk, including the ‘Golden Shares’, and it can be seen there may be high barriers to a return to the days of heady expectations for these names.

We may be in the new normal, not the old one.  

*Note: This is not investment advice.   

Ian Whittaker is an author, speaker, and founder and managing director of Liberty Sky Advisors.