Chinese Big Tech Companies Got Crushed - It is time to bottom fish?

CSOP HSI Tech Index ETF (3033.HK) traded at a low since listing in August 2020

The CSOP HSI Tech Index ETF (3033.HK) listed in Aug 20 (as shown in Figure 1) and has traded below its year low today.

The ETF is mainly comprised of heavy techs like Alibaba, Tencent, Meituan, Jd.com, SMIC etc, China’s ongoing regulatory agenda against the internet sector in China, be it over monopolistic market positioning or control of data has contributed to the dismal performance China’s Tech sector and the divergence between the US Big Tech share has become extreme.

China’s crackdown US listed China tech companies like Didi and private tutoring has significantly unnerved financial markets with a 6% drop in the CSOP HSI Tech Index ETF and a 4% drop the HSI index today (26 July 2021).  

Figure 1: CSOP Hang Seng Tech Index ETF (3033.HK) Broke Its Year Low Since Listing on August 2020

I’ve received many questions whether this is the right time to bargain hunt on these Chinese big Techs, let me share my thoughts.

 

So why is the CCP suddenly acting against all these big techs?

 

China is waking up to fact that data is the new gold, and it needs to institute rules to accumulate, govern and share it. CCP makes decisions based on what they think is in China’s best long-term strategic interests in achieving its economic growth, reduce the gap between the rich and the poor and the control of China consumer data which is deemed crucial to the China’s national security.  

 

If you are a big tech company in China, you must know who’s the Boss and that the Chinese state’s strategic priorities will take precedence over corporate interests to a greater extent than in the past.  The CCP is likened to be like the emperor and its decision is like the emperor’s edicts, obey and you stay alive, and disobedience will almost be the end. The blunt assertion of the state’s interests over private enterprise in China also raises the risk premium of investing in Chinese assets.

 

In order to reduce inequality and promote sustainable economic growth, China needs to ensure competition is sustainable and it means you cannot win by creating a artificial monopoly and if you win it must bring tangible benefit to the Chinese consumers. Alibaba and Tencent is a good example of company that infringed on these rules. The days of free play for the Chinese techs are over, they are likely to grow their business under a strict regulatory guideline which means their future earnings will be hurt and it will ultimately hurt their valuation, and this is precisely the reasons why Cathie Woods has been selling Chinese techs on fear over a “valuation reset”.

 

Is it time to jump in?

In the short term, there’s going to be volatility as the crackdown is clearly showing no sign of abating and it will take time to play out. I believe this clampdown by CCP is long term positive for China Tech because it will enable them to grow at a sustainable pace although I would agree that it is a short-term negative.

 

Am I still bullish on Chinese Tech stocks?

 

Well, I think the potential of these stocks are enormous. If you are a short-term investor, you need time your entry well, however if you are a long-term investor (3-5years horizon) this could be a great opportunity to start dollar cost averaging on these stocks.

 

Many of you who have been following me know I have been very successful with timing the market with my charts, so what does the chart say?

 

Let me just share the Alibaba and Tencent Trade Plans:

1.    Alibaba Trade Plan: First called a Sell on Alibaba (11 November 2020)

On 11^th of November last year, I called a short on Alibaba based on my trade plan. It has since hit all the targets on my trade plan (as shown in Figure 2).  

 

Figure 2: Alibaba (9988.HK) 

2.    Alibaba Trade Plan: (27 July 2021)

Alibaba current trading at 191.76 (at the point of this write up).

According to my trade plan, the key support that offers a good entry level is between 172 – 182 levels while 212 – 230 levels post a huge resistance. Turn long term bullish only when the price breaks above 230.

3.    Tencent Trade Plan: (26 July 2021)

Tencent closed at 490.00 on 26 July 2021.

According to my trade plan, the immediate target could be 472 (first target), and if it breaks down further, we could be looking at targets of 425 (second target) and 405 (third target).

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All posts and charts are for educational and illustration purposes only