The regulatory crackdown of Didi follows a series of Chinese regulatory actions taken against Alibaba, Tencent, Meituan, and Baidu, which in the end also postponed the highly anticipated IPO of Ant Group (the payments arm of Alibaba) in the very last minute. While successful companies are a national pride for China it also comes with security concerns over competition, consumer protection (both in terms of fair prices and privacy data handling), and market power. The wider concern is that China’s new trajectory on regulating the technology sector will impact longer term profitability. Investors have sold out of Chinese technology stocks with our China Consumer & Technology basket down 3.2% for the month extending the declines from the past months. The China Consumer & Technology basket is now together with Gaming the only two themes that are down for the year.

While news sentiment and regulation are not tailwinds for Chinese technology companies, the valuation and growth prospects of these companies should over time pull investors back into the fold. In two separate research notes, here and here, we described back in May that the largest Chinese technology companies are becoming very attractive on valuation relative to their US peers and that investors will eventually see that valuations justify the regulatory risks. Our China Consumer & Technology is shown below and as we have said before, if investors want to minimize regulatory risks in China that should be looking at the consumer-oriented companies instead like Anta Sports, the Chinese version of Nike, as these companies are less driven by consumer data and technology and more about distribution and brands.

Source: Bloomberg and Saxo Group
* Sales and EPS growth is measured on 12-month trailing figures, Diff to PT is the difference between consensus price target and the current price in %