In this article, we discuss the 5 Chinese stocks investors are shorting. If you want to read our discussion on the turmoil in the Chinese economy, go directly to Investors are Shorting These 10 Chinese Stocks.
5. KE Holdings Inc. (NYSE:BEKE)
Float Shorted: 2.43%
Number of Hedge Fund Holders: 34
KE Holdings Inc. (NYSE:BEKE) is a Chinese provider of online and offline housing brokerage services. Beike and Lianja are two of the biggest and most popular online real estate transaction platforms in KE Holdings’ portfolio.
KE Holdings Inc. (NYSE:BEKE) was backed by Softbank Group Corp, but the Japanese diversified financial services firm exited its position in the company during Q2 2022, a period during which KE Holdings Inc. (NYSE:BEKE) reported a record net loss of $23.4 billion.
In December 2021, Muddy Waters revealed its short position in KE Holdings Inc. (NYSE:BEKE) and accused the company of overvaluing its assets and the gross transaction value of its home sales. While KE Holdings Inc. (NYSE:BEKE) refuted the claims, concerns related to the company’s valuation haven’t subsided. KE Holdings Inc. (NYSE:BEKE) is said to be overvalued, trading at 35.4x its 2022 earnings.
Furthermore, KE Holdings Inc. (NYSE:BEKE) has predicted that the residential real estate market will decline over the next 15 years due to the aging population. The Chinese population dependency support ratio peaked in 2010, and there have been instances in Japan and Korea where housing markets declined once the population dependency support ratio peaked. Due to these factors, investors are bearish on the stock’s long-term outlook.
In its Q3 2021 investor letter, Tao Value discussed its outlook on KE Holdings Inc. (NYSE:BEKE). Here’s what the firm said:
“As witnessed in the past quarter, the government intervention in 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 KE holdings (ticker: BEKE), for high potential regulatory risk and the passing of the visionary founder & CEO Zuo Hui (who was a core tenet of our original thesis).”
4. NIO Inc. (NYSE:NIO)
Float Shorted: 3.59%
Number of Hedge Fund Holders: 26
NIO Inc. (NYSE:NIO) is a Shanghai-based automobile manufacturer with a heavy emphasis on electric vehicles. Overall, 26 funds held a stake in NIO Inc. (NYSE:NIO) as of Q1 2022.
NIO Inc. (NYSE:NIO) observed a 22.4% month-over-month decline in production despite the Chinese economy opening up after the COVID-19 lockdowns. The decline in production on a sequential basis was due to supply chain-related problems for the company’s ET7. The delivery delay for the ET7 could be crucial for NIO Inc. (NYSE:NIO), as the EV maker has not been able to ramp up its production because of this variant. The company anticipates solving this problem during the third quarter. However, investors are seeing this as an opportunity to short NIO Inc. (NYSE:NIO), as a further decline in production could cause the stock price to plummet.
Here’s what Horos Asset Management said about NIO Inc. (NYSE:NIO) in its Q1 2022 investor letter:
“At the beginning of April the CSRC (China Securities Regulatory Commission) announced possible changes in its regulation that would allow this inspection by foreign auditors, provided that the companies previously communicate to this body the state secrets that would be exposed, as well as the sensitive information that they might have to hand over, and the subsequent audit is carried out in a framework of collaboration with the CSRC. In short, a move in the direction desired by the SEC, although still far from the optimal result, that is, unrestricted access to information. While these negotiations between the two regulatory bodies are progressing, Chinese companies have to decide how best to preserve their interests. Other entities, such as the electric vehicle manufacturer Nio, have just started trading on this stock market.”
3. GDS Holdings Limited (NASDAQ:GDS)
Float Shorted: 5.45%
Number of Hedge Fund Holders: 26
GDS Holdings Limited (NASDAQ:GDS) is a developer and operator of data centers across China. As of July 14, 10.38 million shares of GDS Holdings Limited (NASDAQ:GDS) were held short. Based on the average daily trading volume of 1.32 million shares, it would take 8.22 days to cover all the short positions.
On July 29, Joel Ying at Nomura downgraded GDS Holdings Limited (NASDAQ:GDS) stock from a ‘Buy’ to a ‘Neutral’ rating. The company is expected to report its Q2 2022 results on August 23. Analysts anticipate GDS Holdings Limited (NASDAQ:GDS) to report an adjusted loss per share of $0.41, reflecting a year-over-year (YoY) decline of 46.4%. The revenue forecast for the company’s Q2 stands at $341.75 million. In the last six quarters, GDS Holdings Limited (NASDAQ:GDS) has missed EPS estimates on all six occasions and revenue estimates on two occasions.
Investors believe the increased regulation from Chinese authorities in regard to privacy laws and the challenging economic environment is expected to dent the stock price of GDS Holdings Limited (NASDAQ:GDS) in the near future.
Baron Funds echoed these sentiments in its Q4 2021 investor letter. Here’s what the investment management firm said:
“The Fund’s Core Growth investments were negatively impacted by the market rotation to value-oriented businesses. Fundamentals for most of our Core Growth holdings remain strong. We exited two positions in this space, which included GDS Holdings Limited. GDS, a Chinese data center, suffered from increased oversight and regulation from the Chinese government. While we still appreciate the long-term prospects for both businesses, we believe the current environment for both is difficult and uncertain.”
2. Baozun Inc. (NASDAQ:BZUN)
Number of Hedge Fund Holders: 12
Float Shorted: 6.39%
Baozun Inc. (NASDAQ:BZUN) is a Shanghai, China-based e-commerce solutions provider. The company is heavily reliant on Taobao, which is an e-commerce marketplace owned by Alibaba Group Holding Limited (NYSE:BABA).
As of July 14, 4.32 million shares of Baozun Inc. (NASDAQ:BZUN) were sold short, equivalent to 8.05% of the total shares outstanding. It would take 5.48 days to cover the short positions based on the current average daily trading volume of 789,000 shares.
The e-commerce solutions provider is facing backlash from notable western brands due to the human rights violations reported in Xinjiang. Baozun Inc. (NASDAQ:BZUN) is a Better Cotton Initiative (BCI) member firm. BCI had to cease operations in Xinjiang due to labor abuses-related concerns, as Chinese nationalists initiated a campaign against brands that supported or had ties with BCI. The boycott caused a significant dip in Baozun Inc. (NASDAQ:BZUN)’s sales because of the company’s gross merchandise value-based pricing model.
Investors believe Baozun Inc. (NASDAQ:BZUN) is trading at a premium to its earnings growth. With the loss of sales and its high execution risk, Baozun Inc.’s (NASDAQ:BZUN) stock price is expected to decline further.
1. TAL Education Group (NYSE:TAL)
Float Shorted: 7.41%
Number of Hedge Fund Holders: 14
TAL Education Group (NYSE:TAL) is a Beijing, China-based provider of after-school education and tutoring for students in primary and secondary schools. TAL Education Group (NYSE:TAL) was held by 14 hedge funds at the end of Q1 2022.
On July 29, TAL Education Group (NYSE:TAL) reported a decline in revenue of 84% YoY to $224 million. The significant dip in revenue follows the Chinese government’s decision to crackdown on private tutoring. Meanwhile, the bottom line results for TAL Education Group (NYSE:TAL) also suffered heavily, falling by 50% YoY. The Chinese government has justified the ban on tutoring by saying that it will reduce the pressure on students who are forced to get additional classes to excel in the highly competitive Chinese education system.
As of July 14, around 48.08 million shares of TAL Education Group (NYSE:TAL) were sold short, equivalent to 7.41% of the total float. It would require nearly 5.8 days to cover the short interest in the company based on the average daily trading volume of 8.3 million shares.
TAL Education Group (NYSE:TAL) was discussed in the Q3 2021 investor letter of Tao Value. Here’s what the firm said:
“On the other hand, TAL Education (TAL)’s value is largely destroyed by the policy officially released on 7/24/2021, which essentially outlawed for-profit curriculum-related after school tutoring (which is TAL’s main business). It is a hard lesson learned here that government related risk is a substantial one, especially for Chinese businesses.”
You can also take a peek at 10 Best Dividend Stocks to Buy in 2022 and Cathie Wood’s 10 Favorite Stock Picks For The Rest of 2022.
