For any investor interested in China’s fast-growing economy, two companies have come to embody the meteoric rise of Chinese Internet stocks.
They are, of course, Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) and Tencent Holdings Ltd (SEHK: 700).
Social media and online gaming giant Tencent has been one of the best-performing Asian stocks over the past 15 years or so (since it first went public in 2004).
Meanwhile, retailing and cloud computing behemoth Alibaba has seen its shares rise more than 200% since its 2014 IPO on the New York Stock Exchange.
Yet, more recently, both companies have been caught in the crosshairs of China’s anti-competition regulators.
This government scrutiny of tech firms has also extended to other “platform” companies in China, such as Meituan Dianping (SEHK: 3690).
The root of the tech firms’ current woes can be traced to Alibaba-owned Ant Group’s failed blockbuster IPO in both Hong Kong and Shanghai back in October of 2020.
Slated to raise a world-record US$34.5 billion, and be valued at over US$310 billion, fintech giant Ant was making waves with its eye-catching numbers during the IPO process.
However, just a few days before it was set to go public, Chinese regulators pulled the plug on the listing, citing capital requirement ratio concerns surrounding Ant Group.
Speculation was rife but many commentators pointed to a public symposium that Alibaba founder Jack Ma attended earlier that month.
At the event, he chided the country’s financial regulators and banks as obstacles to innovation and were institutions that required reform.
That has had knock-on effects for other technology giants in China. More recently, investigations into anti-trust practices by Tencent and Meituan Dianping have been announced by the Chinese government.
Last month, Alibaba was also fined a record RMB 18.2 billion (US$2.8 billion) by Chinese regulators for abusing its market dominance in e-commerce.
Alibaba’s share price is down around 30% from its high set just before the Ant Group IPO. Meanwhile, Tencent shares (which hit an all-time high as recently as late January) are down by 20%.
For long-term investors, many have pointed to the strong businesses and wide moats that the two tech giants possess. That is certainly true.
Furthermore, many analysts are saying Alibaba is unbelievably “cheap” and a screaming buy at these prices.
However, it may be worth remembering that the new focus on reining in the technology giants could be detrimental to their long-term growth story, particularly if the Chinese government feels their businesses are stifling competition.
Overall, the most likely beneficiaries from this clampdown on Alibaba and Tencent will be smaller technology companies that compete in the various realms that China’s “Big Tech” operate in.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares of any companies mentioned.