To The Moon

Last Friday's sudden draft rules on gaming hit Tencent & NetEase hard, and in the Friday's trading session on the US market TCEHY fell 9.8%, while NTES fell 16%. Bilibili fell around 4.9%. According to a Bloomberg report, that had wiped out $80 billion in Tencent, NetEase and Bilibili combine market value on the Hong Kong and China exchanges.

The draft rules are designed to protect users from spending too much time and money on online gaming. Rewards cannot be given for daily logins, first-time recharge, and continuous recharge. All online games must set user recharge limits and announce them in service rules. In addition to that, pop up warnings should be issued for irrational consumption behaviour. Also also include caps on the amount each player can spend within a game. Online game publishing business units should strictly control the time and duration for minus to use online games.

Investors in industry watches were caught by surprise by these new draft rules, and reminded many of the tech sector crackdown in 2021. That started the decline of Alibaba and Tencent. 

In July 2021, the Chinese government clampdowned on the private tuition sector, banning them from providing for-profit classes on school curriculum subjects. The objective was first to ease the burden on families struggling to pay for tuition, and reduce the burden on overworked students. Secondly, the industry had expanded too quick and they wanted to "curb the disorderly expansion of capital". That drove many tuition companies into the red or even bankruptcy, and wiped out billions of dollars of listed companies who were involved in the business of private tuition and online education.

Hang Seng down more than 16% in 2023

The Hang Seng Index is one of the worst performers this year, when initially it looked like China was on the path to post pandemic recovery, and instead it has now fallen. Even the local Straits Times Index was down only 3.25% in 2023 (year-to-date). The S&P 500 is up almost 24%, while the Nasdaq 100 is up by 54%!

Alibaba's ADRs went as high as $120 at the end of January, but now trades for around $75, year-to-date it is down 18%. It scores a very good valuation in terms of its PE ratio of 10 times earnings, much lower than the sector median of 17.8 times earnings. 

Unfortunately due to the policy risk that Chinese stocks are exposed to, such valuations are not useful in the case of Alibaba. As its future cash flows cannot be guaranteed due to the inconsistency in regulations, it will scare investors out of the door and lower confidence in the Chinese and Hong Kong stock market.

What should you do if you are holding the bag?

I currently own shares of Alibaba, having acquired them this year just as the spin off plans of Alibaba was announced. When I acquired them, I found that Alibaba was very much undervalued, but I had failed to understand the policy risks of being an investor of Alibaba. Such policies do protect the Chinese consumers, and doesn't favour businesses. They are currently down around 18%, and at some point I will find an opportunity to exit as I believe there are better opportunities in the US market. 

What are your plans if you are a current bag holder?

@TigerStars 

$Alibaba(BABA)$ 

$TENCENT(00700)$ $HSI(HSI)$