If you’re in charge of one of China’s technology platform giants, the recent anti-trust moves by the Chinese government are not encouraging indicators that the crackdown is over.
The latest Big Tech company in China to be caught out by regulators is Meituan Dianping (SEHK: 3690).
Although to be fair, the food delivery and online travel platform firm had already been mentioned as a target of anti-trust investigators, alongside Tencent Holdings Ltd (SEHK: 700) and Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988).
Regulators coming for tech platforms
It was announced at the beginning of May that Meituan was being investigated for anti-competitive practices on its food delivery platform.
Focusing on what regulators deem “choose one from two”, it’s claimed that Meituan is forcing businesses to exclusively sell on its platform – effectively excluding it from other rival platforms.
These exclusivity requirements have been part and parcel of the tech industry in China for a while. Now, it could be the Achilles heel of the tech giants as regulators starts to prise open their closed gardens/ecosystems.
Sell in May and go away?
The popular investment adage to “sell in May and go away” definitely appears to have applied to Meituan stock (even amid a wider tech sell-off so far this month).
Meituan’s share price has shed close to 20% of its value in the seven trading days in May. Over the past two days, shares are down a whopping 12%.
However, earlier this week there was more bad news. Shares in Meituan fell heavily after its CEO Wang Xing posted a classical poem on social media about book burning by the Qin’s dynasty’s emperor.
Although posted last week, and quickly deleted, the damage was done. According to Bloomberg, #MeituanSharePriceSlump was trending on Weibo (the Chinese equivalent of Twitter) and had been read more than 32 million times.
Business remains strong
For investors though, understanding where Meituan will end up on the regulators’ radar is a big uncertainty.
What’s not in doubt is how well Meituan’s business is performing. Having released its fourth-quarter 2020 earnings at the end of March, revenue was up 35% year-on-year to RMB 37.9 billion (US$5.8 billion).
However, its large net loss of RMB 2.2 billion was mainly attributable to investments in new initiatives such as community buying, also known as Meituan Select.
The online Chinese grocery market is booming and Meituan’s fast delivery (utilising its driver fleet to sometimes deliver within 30 minutes) is winning market share.
Beware of fines
For long-term investors, it’s still unclear where Chinese regulators will stop in its clampdown on the tech giants.
As a case in point, in early April Alibaba’s hefty fine of RMB 18.2 billion for its own anti-competitive practices saw investors rejoice that the overhang on its share price was finally over.
After initially popping over 9% the day after the news, Alibaba shares have resumed their descent downwards over the past few weeks. The large tech platforms in China will continue to be under scrutiny.
As I’ve said before, I believe that for longer-term investors – who have a time horizon of at least five to 10 years – better returns will likely be found in the burgeoning ecosystem of small and mid-cap tech companies in China.
Ultimately, they will benefit from a more level competitive playing field as the closed tech platforms start to become more open and transparent for businesses and consumers alike.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares in any companies mentioned.
