About 15 months ago, U.S.-China trade tensions were starting to cool a bit with the signing phase one of the trade agreement.
Then a deadly pandemic that began in Wuhan, China hit the U.S. and the world. And then there was the Luckin Coffee scandal. While 2020 still saw many Chinese IPOs, suffice is to say that investor trust in Chinese companies began to wane. Both political parties in the U.S. supported Trump's effort to crackdown on Chinese fraud with the Holding Foreign Companies Accountable Act (HFCAA), a law Trump signed at the end of 2020 which could lead to the delisting of Chinese U.S.-listed companies if they fail to comply with PCAOB inspections. The bipartisian endorsement of the tough stance on China didn't end with Trump; Biden is continuing on the same path as his predecessor.
As a result, a number of Chinese U.S-listed companies have been flocking to Hong Kong for secondary listings in the past twelve months, with trade relations worsening. That includes internet giants such as Baidu (NYSE: BIDU; HKEX 09888), JD.com (Nasdaq: JD; HKEX: 09618), and NetEase (Nasdaq: NTES; HKEX: 09999).
Add to that a crackdown from Bejing on its very own tech stars like Alibaba (NYSE: BABA) all things Chinese became a harder sell. So how are the IR firms representing these companies navigating these ceaselessly troubled waters and where do they see Sino-U.S. relations headed long-term?
Most say that nothing much has changed on the ground. Biden's rhetoric may be less abrasive, but the effort to contain China and what it means for the markets reamins the same.
“Whether it is [a] period of heightened tensions or not, we think it’s always important for Chinese companies that are listed in the US to understand disclosure standards, and the concerns and expectations of western investors,” Tip Fleming, the managing director Christensen, told CapitalWatch in an email.
Regarding Beijing's own regulatory crackdown that has punished China's tech stocks like Alibaba, Fleming called the effort “long in the making” and said that his clients have “fully complied” with the requested changes.
Year-to-date, shares in Alibaba are up 3% but remain down significantly from the levels seen before regulators put its fintech unit Ant Group’s IPO on hold in early November.
There’s also value on the pullback to buy Tencent and Baidu, whose U.S.-listed stocks are down 17% and 36% respectively since the middle of February.
But still, Beijing may not be done with its fierce antitrust crackdown--making these tech stocks risky buys. According to a report from Reuters last week, citing people familiar with the situation, China State Administration for Market Regulation is planning on adding more staff to bolster up its efforts to cease unfair market practices.
Instead, it might be best to look at some smaller-cap Chinese firms. According to Fleming, the crackdown should help improve competition, “which will hopefully be beneficial for smaller-cap companies.”
On the other hand, Philip Lisio, the managing partner and founder of The Foote Group, says “There is a much stronger sense that the fast changing regulatory landscape will force structural changes in these areas where many small cap companies have exposure,” he told CapitalWatch.
He added, “We’re advising clients to be more proactive in educating the market as to the regulatory environment, to hopefully manage expectations and avoid surprises.”
Two Smaller Chinese E-Commerce Stocks to Buy
Like Fleming, I think there are some interesting Chinese small caps to consider.
In particular, I recommended buying cross-border e-commerce firm LightInTheBox (NYSE: LITB) late last month.
While the stock has been volatile in the last month, there’s some great value to seize here. In 2020, LITB generated $398.2 million in revenues, a 63% jump from a year earlier.
For 2021, LITB sees the rapid growth continuing; the Beijing-based company expects its revenues to surge in the range of 114% and 143% year-over-year in the first quarter.
Currently, the stock is trading about $90 million less than the sales it generated in 2020 and could be a bargain for investors.
I would also take a look at Baozun (Nasdaq: BZUN), which is sometimes referred to as China’s Shopify (Nasdaq: BZUN).
But the truth is both business models are actually quite different. Canada’s Shopify helps smaller merchants develop their online platforms, whereas Baozun targets bigger companies that are looking to enter China’s e-commerce market without setting up tech and sales teams in the country. Some major companies Baozun provides its services to include coffee maker Starbucks (NASDAQ: SBUX) and apparel and footwear manufacturer Nike (NYSE: NKE). For the full year 2020, Baozun’s revenues grew by 22% year-over-year to $1.36 billion. Its net income in the twelve months increased by 51% from a year earlier to $65.37 million.
Like with LITB, there’s a big buy at the dip opportunity with Baozun, which now holds a market capitalization of $2.7 billion. Since peaking at around $55 per share in early February, Baozun’s stock is down 35% to date.
Sino-U.S. Trade Relations Long-Term
Considering all the secondary Hong Kong listings we've seen in the past year, will Chinese companies will continue to go public in the U.S.? It is a question worth asking. While Lisio notes that many will pick “Hong Kong or Mainland exchanges if there is an option,” he still sees the U.S. markets as an “attractive venue” for many Chinese firms. He adds that he does not see that changing in 2022.
According to Lisio, we will see many Chinese firms develop leadership positions in specifically the “pharma, automotive, and batteries” spaces.
Sana Bao, an investor relations director at Wonderful Sky Financial Group, sees a “positive outlook” in the next three to five years for Chinese companies, as they continue to collaborate with the U.S. across industries.
“This time next year, I expect Chinese companies to have a better time being a part of US-related opportunities as global economies recover from the pandemic and borders reopen,” Bao told CapitalWatch.
No matter happens in the broader trade war (or over Taiwan or Human Rights issues or the South China Sea, etc, etc), when it comes to the world of China-based U.S.-listed stocks the message from Washington is clear: Abide by audit inspections and standards or get off American bourses.
Chinese companies with U.S.-listings will have three years to comply with U.S. auditing standards before possibly getting delisted.