Why Chinese Tech Stocks Are Falling
In this article, we discuss why the Chinese tech stocks are falling. If you want to skip our detailed discussion on the Chinese stock market and technology sector, head directly to Top 5 Falling Chinese Tech Stocks.
The landscape of doing business in China is becoming progressively more arduous, as the Biden administration on August 9, 2023 announced limitations on investments in the region, especially in the technology sector. While these new restrictions compound the challenges that the world's second-largest economy is already facing due to a post-pandemic slowdown, they also highlight the mounting difficulties encountered by global companies operating within China. CNBC reported that the focal point of these new regulations are the high-tech sectors, as the executive order from President Biden is meant to prohibit private equity and venture capital firms from investing in Chinese industries like quantum computing, artificial intelligence, and advanced semiconductors. These sectors are of significant importance to China's technological ambitions, and the restrictions could potentially impede their economic and military progress. China's economic challenges have been further underscored by recent official data revealing that the country has slipped into deflation. Additionally, trade figures released by Beijing indicate a substantial decline, marking the largest drop since the onset of the pandemic. These economic setbacks are placing businesses that heavily rely on the Chinese market in a precarious position.
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One prominent example, as mentioned by Reuters, is Dentons, the largest Western law firm in China in terms of staff, which recently announced its separation from Dacheng, its Chinese unit. The two firms had merged in 2015, with Dentons even incorporating Chinese characters into its logo to symbolize its commitment to the country. However, the new counterespionage law enacted by China has created more hurdles for foreign companies operating there. The law prohibits the transfer of information related to national security without clearly defining what constitutes such information. Furthermore, it grants authorities the power to access data, electronic devices, personal property, and even to prevent individuals from leaving the country. These provisions have made it difficult for companies to adhere to established industry standards and best practices. For instance, the requirement for Chinese firms to keep the names of clients and employees confidential from foreign entities has posed challenges for American lawyers, who must ensure there are no conflicts with existing clients before taking on new ones.
These difficulties aren't confined to a single industry – they reflect a broader trend of divergence in standards between China and Western economies. Eswar Prasad, a trade policy professor at Cornell and a former head of the I.M.F.'s China division, highlighted that China's openness to foreign business has waned over time, resulting in these discrepancies.
In recent months, Chinese authorities have conducted raids on offices of consulting firms with Western ties. Furthermore, Sequoia, a prominent venture capital firm, severed ties with its Chinese unit in June. Reports have also emerged of employees at financial firms operating in China being required to attend lessons on President Xi Jinping's ideology. These actions indicate a heightened regulatory environment and political scrutiny that foreign companies must navigate.
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However, the immense size of the Chinese market remains an undeniable allure for many businesses. Consumer companies see vast potential in the Chinese market, while foreign financial institutions eye significant returns by managing the substantial household wealth present in the country. The allure of the Chinese market is weighed against regulatory and political uncertainties, posing a tough proposition for businesses seeking to capitalize on its potential.
Foreign companies operating in China are encountering additional hurdles due to new laws and regulations, including the counterespionage law, which makes compliance with industry standards challenging. While tech stocks like Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), and JD.com, Inc. (NASDAQ:JD) often catch the interest of investors, we discuss the worst performing Chinese tech names in this article.
Our Methodology
We extracted the two-year performance of Chinese tech stocks by calculating the change in share price manually, then selected the worst performing stocks as of August 30. We have also assessed the hedge fund sentiment from Insider Monkey’s database of 910 elite hedge funds tracked as of the end of the second quarter of 2023. The list is arranged in descending order of the share price performance for the past two years for each firm.
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Why Are Chinese Tech Stocks Falling
12. Zepp Health Corporation (NYSE:ZEPP)
Share price performance for the past 2 years: -90.2%
Number of Hedge Fund holders: 3
Zepp Health Corporation (NYSE:ZEPP) develops, manufactures, and sells smart wearable technological gadgets in the People's Republic of China. The company's operations are divided into two main sections – Self-Branded Products and Others, along with Xiaomi Wearable Products.
In 2020, Xiaomi contributed to almost 70% of the firm’s revenue. The following year, Xiaomi’s contribution saw a sharp decline due to challenges in its wearable technology sector, including a scarcity of chips and a notable decrease in local demand caused by the lockdown measures in China. Zepp Health Corporation (NYSE:ZEPP)’s operating costs also increased due to the higher responsibility of developing new products and successfully introducing them to the market to overcome that loss.
According to Insider Monkey’s second quarter database, 3 hedge funds were bullish on Zepp Health Corporation (NYSE:ZEPP), same as the previous quarter. Ken Griffin’s Citadel Investment Group is the biggest stakeholder of the company.
Unlike Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), and JD.com, Inc. (NASDAQ:JD), Zepp Health Corporation (NYSE:ZEPP) is one of the Chinese stocks that is falling.
11. Ebang International Holdings Inc. (NASDAQ:EBON)
Share price performance for the past 2 years: -90.4%
Number of Hedge Fund holders: 1
Ebang International Holdings Inc. (NASDAQ:EBON) researches, designs, and develops application-specific integrated circuit chips and manufactures Bitcoin mining machines under the Ebit brand in Singapore, Hong Kong, Australia, the Bahamas, and internationally. The firm's business is cryptocurrency-based and hence very volatile. How it performs in the stock market largely depends on bitcoin price. If the price of Bitcoin drops, Ebang International Holdings Inc. (NASDAQ:EBON)’s business performance will also be negatively impacted. Furthermore, the concentration of buyers and sellers and the credit risks makes the business quite unpredictable and vulnerable.
According to Insider Monkey’s second quarter database, Jim Simons’ Renaissance Technologies held 43,013 shares of the company worth $297,000.
10. Aurora Mobile Limited (NASDAQ:JG)
Share price performance for the past 2 years: -90.5%
Number of Hedge Fund holders:
Aurora Mobile Limited (NASDAQ:JG) delivers a variety of developer-oriented solutions and services in China through its affiliated companies. These include push notifications, real-time messaging, data analysis, content sharing, short message services, simplified verification processes, and additional offerings.
The company’s recent performance has been lackluster, with its decreasing revenue setting it apart unfavorably from its competitors that have generally experienced revenue growth. This can be attributed to a low price-to-sales ratio, suggesting that investors are skeptical about the likelihood of substantial revenue expansion in the foreseeable future.
According to Insider Monkey’s second quarter database, 1 hedge fund was bullish on Aurora Mobile Limited (NASDAQ:JG). Jim Simons’ Renaissance Technologies held 114,506 shares of the company worth $32,000.
9. Agora, Inc. (NASDAQ:API)
Share price performance for the past 2 years: -90.6%
Number of Hedge Fund holders: 12
Agora, Inc. (NASDAQ:API) offers a real-time engagement platform-as-a-service (RTE-PaaS) in multiple regions including China, the United States, and internationally. The RTE-PaaS provided by the company equips developers with software resources to integrate real-time voice, video, interactive live-streaming, chat, whiteboard, and artificial intelligence features into their applications.
Over the trailing twelve months (TTM), operating expenses for Agora, Inc. (NASDAQ:API) have risen as revenue slightly decreased. Share-based compensation has increased both in absolute terms and as a percentage of revenue. Agora, Inc. (NASDAQ:API) is expected to encounter ongoing challenges in revenue growth due to tough macroeconomic conditions in China, the US, and the Eurozone.
According to Insider Monkey’s second quarter database, 12 hedge funds were bullish on Agora, Inc. (NASDAQ:API), same as the last quarter. Philippe Laffont’s Coatue Management is the biggest stakeholder of the company, with 896,956 shares worth $2.8 million.
Here is what Tao Value has to say about Agora, Inc. in its Q3 2021 investor letter:
“As witnessed in the past quarter, the government intervention in the Chinese private sector is elevated to an unprecedented level. Given this background, I thoroughly reviewed all our Chinese holdings and made a few changes. We exited Agora (ticker:API) as we estimated that it has 25+% of evaporating revenue tied to online education use cases, but the management seemed to be evasive about the potential impact.”
8. OneConnect Financial Technology Co., Ltd. (NYSE:OCFT)
Share price performance for the past 2 years: -92.4%
Number of Hedge Fund holders: 3
OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) provides fintech solutions, online information, and operational support services to financial institutions in China through a cloud-based platform. The company announced a 14% decrease in its revenue during the second quarter of 2023. While there was increased business from new clients, this growth couldn't compensate for a substantial drop in demand from its existing customer base. Due to the downturns, the company has introduced measures to manage costs and has embraced a more comprehensive approach of prioritizing larger clients with higher profit margins over smaller, less lucrative ones. This merits OneConnect Financial Technology Co., Ltd. (NYSE:OCFT)’s inclusion in our list of the falling Chinese stocks.
According to Insider Monkey’s second quarter database, 3 hedge funds were bullish on OneConnect Financial Technology Co., Ltd. (NYSE:OCFT), one down from the previous quarter. Israel Englander’s Millennium Management is a prominent position holder in the company.
7. Taoping Inc. (NASDAQ:TAOP)
Share price performance for the past 2 years: -92.8%
Number of Hedge Fund holders: 1
Taoping Inc. (NASDAQ:TAOP) delivers cloud-oriented systems, resource distribution, and significant data answers to different sectors in China, including Chinese new media, education, management of residential communities, and the Internet of Things (IoT) in the elevator domain.
The firm has a high ratio of current liabilities to total assets (approximately 67%), which indicates that a significant portion of the company's operations is financed by suppliers or short-term creditors, elevating risk levels exponentially. The stock has experienced a significant decline of roughly 93% over the past two years, implying the presence of other aspects within the company that might be negatively affecting its future outlook.
The company recently declared in a ‘Safe Harbor Statement’ to its investors that their potential challenges in attaining or maintaining profitability or accurately forecasting future outcomes is due to their limited history in offering smart cloud services, the impacts of the global COVID-19 pandemic, the emergence of competing technologies, alterations in both domestic and foreign laws, regulations, and taxes, uncertainties pertaining to China's legal framework and economic, political, and societal occurrences in China, the instability of the securities markets, and other risks.
6. 9F Inc. (NASDAQ:JFU)
Share price performance for the past 2 years: -93.3%
Number of Hedge Fund holders: N/A
9F Inc. (NASDAQ:JFU) operates an online securities service platform in the People's Republic of China. The firm functions through three segments – Services for Technological Empowerment, E-commerce activities, and Wealth Management.
9F Inc. (NASDAQ:JFU) has communicated that its operations continue to be notably influenced by the COVID-19 pandemic and the increasingly stringent regulatory norms in China. In June, the company revealed its involvement in a legal conflict with PICC Property and Casualty Company, asserting that PICC had violated a contractual commitment to compensate service fees linked to 9F's direct lending initiative. Concurrently, shareholders have initiated multiple class action lawsuits accusing the company of deceiving investors by omitting information about this dispute.
All of this has resulted in the firm’s stock to crash a whopping 93.3% in the past 2 years. While the stocks may seem like a good purchase option due to lowered price, the revenue performance isn’t expected to improve substantially in the foreseeable future.
9F Inc. (NASDAQ:JFU) is one of the falling Chinese tech stocks, unlike thriving companies in the sector like Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), and JD.com, Inc. (NASDAQ:JD).
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Disclosure: None. Why Chinese Tech Stocks Are Falling is originally published on Insider Monkey.
