A Stunned Wall Street Responds To China’s Droconian Didi Crackdown

Yesterday, when discussing China’s startling move to block Didi Chuxing from app stores, just days after the ride-hailing giant’s U.S. IPO, we said that the retaliatory move by Beijing will add to regulatory uncertainty surrounding Chinese internet companies as well as weigh on valuations and share sales. Overnight, most of Wall Street analysts agreed with this downbeat take, while traders sold first without waiting to ask question as the stock of Didi’s top shareholder SoftBank, tumbled 5.4% to its lowest level since Dec. 2020 in Tokyo. The angst spread to shares of most Chinese tech companies, which slid in Hong Kong as Tencent slumped 3.6% to erase this year’s advance, while food delivery giant Meituan – whose CEO was also targeted in May by authorities – dropped 5.6%.

Furthermore, as the SCMP reported overnight, China also expanded its latest crackdown on the technology industry beyond Didi to include two other companies that recently listed in New York — Full Truck Alliance Co. and Kanzhun Ltd.

Below, courtesy of Bloomberg, are highlights of what investors and analysts are saying in response to the draconian Didi escalation:

Robeco (Joshua Crabb):

• “We have entered a new period globally where the regulatory scrutiny on tech has increased and will be ongoing for some time. The first phase has been about antitrust and some fines and the impact of that has been digested by the market”
• “The new challenges on data security and privacy and ownership/use is a bigger question as it is the monetization of this data that is the key to these companies’ earnings. If that becomes a risk, the earnings and hence stock price implications could be much more dramatic than the antitrust fines we have seen so far”

Capital Group (Andy Budden)

• “We are clearly in an era where the Chinese authorities are really quite thoughtfully considering how they want to regulate the tech industry and the internet industry and I think that just seems to me to be a completely reasonable thing to do on a rather young industry,” Budden said in a virtual briefing adding that China is the most innovative country in the world where internet meets fintech and that won’t go away any time soon

Reyl & Cie (Cedric Ozazman):

• “It’s too early to jump in now as short-term uncertainties will prevail. We might be more constructive on Chinese names when there will be a new round of supportive monetary policies”

Kairos Partners (Alberto Tocchio)

• “Despite the relatively high uncertainty, I would prefer to start to own some Chinese exposure because it has massively underperformed and it has the greatest consumer exposure in the world to the most quickly growing market”
• “The enrichment of the Chinese population will continue to accelerate the development of services and tech and that’s why there are making an effort now to further regulate the process with the idea of getting further benefits in the medium term”
• “I would therefore use the current weakness to further increase the Chinese exposure with a medium term view”

Safehouse Global Consumer Fund (Sharif Farha)

• “Until the regulator takes its foot off the gas, valuation multiples on Chinese tech large caps will continue to compress. The investment case for China is clear yet in an environment where global equities continue to perform well, many investors may just choose to reposition and move capital to other geographies”
• “While we did not participate in any of these listings, we would imagine that several funds would consider exiting. For example with Didi, imagine tomorrow we wake up and the Chinese regulator temporarily suspends not only the downloads but also the usage of Didi apps. The risks outweigh the rewards by far right now”

Hullx (James Hull)

• “The real question is whether this move changes the perspective that China’s tech companies are caught in a regulatory ‘cycle’ rather than a new normal”
• “I doubt it will change that view. Everyone I talk to on the ground here thinks it’s a new normal”

Nomura (Jim McCafferty)

• “Chinese authorities are concerned that there’s too much concentration of power among these tech companies,” McCafferty said at a virtual briefing
• “In a way, it’s not dissimilar with what we’re seeing in the U.S., where the government is talking about antitrust procedures with regards to some of the big names such as Facebook, Amazon, Apple. There’s too much concentration”
• “We can take a view that China is actually emulating what we are seeing in the West with regards to these big companies and their ability to satisfy multiple stakeholders in term of tax payments”

IG Asia (Jun Rong Yeap)

• “The latest regulatory hurdle for Didi may raise concerns that the clampdown on big tech is far from over”
• A clampdown “after its IPO may suggest that while restructuring is deemed necessary in the near term, China’s strategy may be carefully calibrated tominimise the impact on its domestic tech firms in order to still rival against the U.S.”

CMB International (Daniel So)

• China’s move highlights “the policy risks facing the sector and there has been some knee jerk reaction to that”
• “Bad news has been priced in a lot as many tech stocks have pared most or all their gains this year”
• Valuations look attractive and investors can start buying the sector’s equities on dips

Smartkarma (Travis Lundy)

• “If the company is not accepting new users, this order is overkill. This order does not, however, seem to achieve anything else”
• It is clearly designed to send a message to the wider sector that one should not do an IPO when there are so many things hanging
• “I cannot suggest being long. I expect other apps/tech conglomerates will see declines as well”

Bloomberg Intelligence (Matthew Kanterman)

• “It’s clear that there’s a regulatory overhang on China’s tech giants at the moment and that may continue to weigh on sector valuations for the large internet platforms”
• Investors need clarity about when will such regulatory reviews get concluded

DailyFX (Margaret Yang)

• “It marks a step up further to tighten regulatory measures over China’s large tech firms, and may discourage them from considering U.S. listings”