In this article, we discuss the 10 stocks that the China crackdown is crushing. If you want to skip our detailed analysis of these stocks, go directly to China Crackdown is Crushing These 5 Stocks.
In the past few months, the Chinese government has moved to tighten control over dual listed companies operating from the country in order to protect data flows and cross-border security. The crackdown has hammered dual listed stocks trading on exchanges in the United States. According to the US-China Economic and Security Review Commission, there are more than 250 Chinese firms listed in the US with a total market capitalization of over $2 trillion. According to news agency Reuters, this has resulted in losses worth $560 billion for the Chinese market.
The impact of this crisis has been felt in the US as well, with the losses of the three top Chinese stocks in the US totalling $60 billion in March this year. Since eight large Chinese firms trading in the US are state-owned, the Chinese market has been battered too. The prices of Chinese tech stocks are at all-time lows and the tech-laden benchmark index in Hong Kong is at a 10-month low.
Some of the top Chinese stocks that are under pressure because of the government crackdown include Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), Pinduoduo Inc. (NASDAQ:PDD), NIO Inc. (NYSE:NIO), and JD.com, Inc. (NASDAQ:JD), among others. It remains to be seen how these Chinese firms recover from this blow. The crackdown is also affecting planned IPOs on US markets, although it has slowed the tech-enabled disruption in the finance world that has fundamentally altered market dynamics in the past few years.
The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 86 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 86 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
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Our Methodology
With this context in mind, here is our list of the 10 stocks that the China crackdown is crushing. The list is ranked according to the percentage declines in the share prices of dual listed Chinese stocks over the past three months.
The hedge fund sentiment around each stock was gauged using data from the 873 funds tracked by Insider Monkey.
The basic business fundamentals and analyst ratings for each firm are also discussed to provide readers with some context so they can make more informed investment choices.
China Crackdown is Crushing These Stocks
10. Yum China Holdings, Inc. (NYSE:YUMC)
Number of Hedge Fund Holders: 32
Percentage Decline in Share Price Over Past Three Months: 11%
Yum China Holdings, Inc. (NYSE:YUMC) is placed tenth on our list of 10 stocks that the China crackdown is crushing. The firm owns and runs franchise restaurants in China and is headquartered in Shanghai.
On September 15, investment advisory Macquarie downgraded Yum China Holdings, Inc. (NYSE:YUMC) stock to Underperform from Neutral and trimmed the price target to $52.90 from $56, factoring in lower third quarter guidance numbers from the firm.
Out of the hedge funds being tracked by Insider Monkey, London-based investment firm GuardCap Asset Management is a leading shareholder in Yum China Holdings, Inc. (NYSE:YUMC) with 6.9 million shares worth more than $460 million.
Just like Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), Pinduoduo Inc. (NASDAQ:PDD), NIO Inc. (NYSE:NIO), and JD.com, Inc. (NASDAQ:JD), Yum China Holdings, Inc. (NYSE:YUMC) is one of the stocks that investors are viewing with concern amid a regulatory crackdown.
9. Baidu, Inc. (NASDAQ:BIDU)
Number of Hedge Fund Holders: 59
Percentage Decline in Share Price Over Past Three Months: 23%
Baidu, Inc. (NASDAQ:BIDU) is ranked ninth on our list of 10 stocks that the China crackdown is crushing. The firm provides internet search services in China and also has stakes in other internet-related businesses. It is headquartered in Beijing.
On August 20, investment advisory Erste Group downgraded Baidu, Inc. (NASDAQ:BIDU) stock to Sell from Hold, noting that the Chinese leadership was passing laws that would have a “strong impact” on corporate governance and restrictions on firms would be significant.
At the end of the second quarter of 2021, 59 hedge funds in the database of Insider Monkey held stakes worth $3.4 billion in Baidu, Inc. (NASDAQ:BIDU), down from 89 in the preceding quarter worth $6.5 billion.
Along with Alibaba Group Holding Limited (NYSE:BABA), Pinduoduo Inc. (NASDAQ:PDD), NIO Inc. (NYSE:NIO), and JD.com, Inc. (NASDAQ:JD), Baidu, Inc. (NASDAQ:BIDU) is one of the stocks facing the heat of a government crackdown.
In its Q1 2021 investor letter, Horos Asset Management, an asset management firm, highlighted a few stocks and Baidu, Inc. (NASDAQ:BIDU) was one of them. Here is what the fund said:
“We have also fully exited our stake in Baidu, following their outstanding performance during the period and their lower relative upside potential compared to other investment alternatives, which we will discuss below.
The Chinese technology platform company Baidu has also been held in the portfolios managed by Alejandro, Miguel and myself for several years. During this period, we have seen very high volatility in its share price, which we have taken advantage of to make significant rebalancing moves in our position (in fact, we even sold our entire position once, when we thought the stock’s upside potential was exhausted). After several years of instability, market sentiment turned very positive, putting an end to the historical advertising problems in the healthcare sector, the divestments in O2O (Online-to-Offline) businesses that continued to weigh on the company’s margins, the IPO of part of the iQiyi streaming business (which hid Baidu’s underlying cash generation capacity) and the tough competition from other industry giants such as Tencent and Alibaba, as well as the entry of new players with disruptive business models (ByteDance). At the same time, the company’s recent commitment to electric vehicles contributed even more to this change of narrative. Baidu’s share price rose almost fourfold from the March 2020 lows to all-time highs and reached a valuation where the margin of safety, in our view, was too narrow.”
8. Pinduoduo Inc. (NASDAQ:PDD)
Number of Hedge Fund Holders: 49
Percentage Decline in Share Price Over Past Three Months: 24%
Pinduoduo Inc. (NASDAQ:PDD) is a Shanghai-based company that owns and operates an ecommerce platform. It is placed eighth on our list of 10 stocks that the China crackdown is crushing.
On August 25, investment advisory Benchmark maintained a Buy rating on Pinduoduo Inc. (NASDAQ:PDD) stock but lowered the price target to $156 from $176, underlining that the firm had posted mixed earnings results for the second quarter.
At the end of the second quarter of 2021, 49 hedge funds in the database of Insider Monkey held stakes worth $5.2 billion in Pinduoduo Inc. (NASDAQ:PDD), down from 56 in the preceding quarter worth $6.2 billion.
In its Q1 2021 investor letter, Tao Value, an asset management firm, highlighted a few stocks and Pinduoduo Inc. (NASDAQ:PDD) was one of them. Here is what the fund said:
“Pinduoduo reported a strong quarter, reporting MAU of 720 million, now surpassing Taobao. However, it was overshadowed by a bigger news on Colin Huang resigning from Board and completely disassociating himself from PDD’s management & operation. Huang explained in his letter to shareholders that he would start fundamental research initiatives in food science. Although not entirely shocked (as he already stepped down from CEO July 2020), I am surprised by the fast pace of such transition. I remain confident in the organization and the culture Huang built but will monitor it closely.”
7. GDS Holdings Limited (NASDAQ:GDS)
Number of Hedge Fund Holders: 38
Percentage Decline in Share Price Over Past Three Months: 29%
GDS Holdings Limited (NASDAQ:GDS) is a Shanghai-based company that primarily develops and operates data centers. It is ranked seventh on our list of 10 stocks that the China crackdown is crushing.
On July 23, investment advisory Morgan Stanley downgraded GDS Holdings Limited (NASDAQ:GDS) stock to Equal Weight from Overweight with a price target of $80. Yang Liu, an analyst at the advisory, issued the ratings update.
At the end of the second quarter of 2021, 38 hedge funds in the database of Insider Monkey held stakes worth $1.6 billion in GDS Holdings Limited (NASDAQ:GDS), down from 40 in the previous quarter worth $2 billion.
Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), Pinduoduo Inc. (NASDAQ:PDD), NIO Inc. (NYSE:NIO), and JD.com, Inc. (NASDAQ:JD) are some of the top Chinese stocks in the US, along with GDS Holdings Limited (NASDAQ:GDS).
In its Q1 2020 investor letter, Baron Asset Fund, an asset management firm, highlighted a few stocks and GDS Holdings Limited (NASDAQ:GDS) was one of them. Here is what the fund said:
“In the most recent quarter, we acquired shares of GDS Holdings Limited, the leading data center developer and operator in China serving the premier Chinese cloud service, e-commerce, social media/gaming, and internet players. Although we have not invested in many foreign-based companies, we believe that GDS represents a compelling opportunity. Its business shares many similarities with Equinix, Inc., a U.S.- based data center operator that has been a profitable long-term investment for the Fund. In addition, our real estate research team has met extensively with GDS management over the course of the last few years and has built increased confidence in the team’s growth aspirations and its ability to successfully execute them.
We believe that the Chinese data center industry remains in the earlier stages of its growth curve, and we believe it will experience one of the fastest multi-year growth rates globally as the Chinese government continues to support the rapid rollout of 5G connectivity. GDS’s current and future data centers support the critical IT infrastructure that empowers cloud adoption and enables numerous consumer and business applications. In addition to experiencing robust organic growth, GDS has accelerated its growth runway through select M&A. These acquisitions have allowed the company to obtain additional capacity in supply constrained markets at attractive prices. In addition, GDS has supplemented its dense urban strategy with a “campus strategy,” whereby it secures additional supplies of land and power on the outskirts of cities with minimal capital committed.
To provide some perspective on GDS’s growth rate, it signs more “bookings” in a single quarter than many global data center companies sign over the course of a year. Lastly, after two well received capital raises in 2019, GDS remains well funded with ample cash on its balance sheet to support multiple years of accelerated growth. GDS also has several deep-pocketed backers, including the Singaporean government’s investment fund, that have remained supportive of GDS’s growth plans and have participated in several of GDS’s capital raises. We believe there are many similarities to our other data center investments–GDS is earlier on its growth curve but growing at a much faster clip. We see a path for GDS to nearly triple its cash flow over the next few years, and we see a path to double our investment over that timeframe.”
6. Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Holders: 146
Percentage Decline in Share Price Over Past Three Months: 36%
Alibaba Group Holding Limited (NYSE:BABA) is placed sixth on our list of 10 stocks that the China crackdown is crushing. The company operates as a technology infrastructure and marketing firm. It is headquartered in Hangzhou.
On September 15, investment advisory Stifel maintained a Buy rating on Alibaba Group Holding Limited (NYSE:BABA) stock but lowered the price target to $210 from $260, noting the firm was “exposed to regulatory risk” in a government crackdown against dual listed firms in China.
Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Alibaba Group Holding Limited (NYSE:BABA) with 14 million shares worth more than $3.2 billion.
Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), Pinduoduo Inc. (NASDAQ:PDD), NIO Inc. (NYSE:NIO), and JD.com, Inc. (NASDAQ:JD) are some of the most popular Chinese stocks in the US.
In its Q1 2021 investor letter, Polen Capital Management, an asset management firm, highlighted a few stocks and Alibaba Group Holding Limited (NYSE:BABA) was one of them. Here is what the fund said:
“Alibaba also detracted from performance as the company continues to remain under regulatory scrutiny from both the Chinese State Administration for Market Regulation on antitrust concerns and the U.S. Securities and Exchange Commission on ADR listing requirements. Despite the regulatory overhang, we believe that Alibaba’s competitive positioning and growth outlook remains intact, even if the company must pay fines or modify some business practices. We viewed the current valuation at <20x next twelve month’s earnings as a compelling opportunity to add to our position. Alibaba is the second largest position in the Portfolio.”
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Disclosure. None. China Crackdown is Crushing These 10 Stocks is originally published on Insider Monkey.
