Buy the Dip or Avoid Risk? Investors Disagree on Chinese Tech Stocks

Recent volatile moves by U.S.-traded Chinese technology stocks amid regulatory crackdowns in China prompted divergent moves by institutional investors: Some bailed out, and others doubled down.

Hillhouse Capital Group, for example, dumped all its holdings in Chinese ride-hailing platform Didi Global Inc., gaming giant NetEase Inc. and tutoring leader New Oriental Education & Technology Group Inc. It also slashed its stakes in Chinese low-cost retailer Miniso, delivery carrier ZTO Express Inc., electric-car maker XPeng Motors, video-sharing website Bilibili and e-commerce platform Pinduoduo Inc., according to filings Monday with the U.S. Securities and Exchange Commission.

The sell-off came after the Chinese government introduced stricter rules that weakened internet business prospects and dramatically altered operations of the country’s online education companies But not everyone turned bearish on Chinese stocks.

Among those buying on the dip were renowned investor Charlie Munger, chairman of Daily Journal Corp. and vice chairman of Berkshire Hathaway who is known for helping Warren Buffett make investing decisions. He boosted his position in Alibaba by 83% in the third quarter, buying 136,740 shares. Hedge fund Bridgewater Associates increased its Alibaba stake by 132% from the second quarter to $490,000. Goldman Sachs Group Inc. bought more shares of New Oriental and TAL Education Group, while Morgan Stanley bought 170,000 shares of Bilibili.

The opposing moves reflected differing assessments of the outlook for Chinese tech stocks. The sector has been the focus of a wide-ranging regulatory crackdown. Alibaba was fined a record 18.2 billion yuan ($2.8 billion) in April for anti-competitive behavior, followed by other tech giants like Tencent, Meituan and JD.com Inc., which were all penalized for similar reasons.

China drafted revisions to regulations that could mean any Chinese company holding the personal information of 1 million or more users would have to seek a government cybersecurity review before selling shares abroad. In July, Beijing prohibited after-school tutoring businesses from making money off teaching the compulsory curriculum, tanking shares of New Oriental and TAL.

The crackdown rattled investors. In the third quarter, $781 billion was wiped off the market value of Chinese internet companies.

But Chinese tech shares staged a rebound as authorities appeared to slow the pace of regulations, pushing the Nasdaq Golden Dragon China Index up 5% this month. The index, which measures the performance of 98 companies traded in the U.S. that conduct a majority of their business in China, is still down 25% this year, while the S&P 500 Index advanced 25%.

“The worst is likely behind us in terms of the regulation intensity and the corresponding shocks to the market,” Goldman Sachs strategist Kinger Lau wrote in a note. Goldman said it expects a better year in 2022 for Chinese equities, with onshore stocks to return 16% and offshore stocks 13% in the next 12 months.

Meanwhile, there’s growing optimism about the China-U.S. relationship after the virtual summit Monday between U.S. President Joe Biden and Chinese President Xi Jinping.

As of the end of September, Hillhouse held 2.81 million shares of Pinduoduo, one of its top 10 holdings, down nearly 60% from the end of second quarter, the company’s filing showed.

Overall, U.S.-traded Chinese stocks are still the Asia-focused private equity firm’s main investment. Nasdaq-listed Chinese cancer-drug maker BeiGene accounts for more than a quarter of Hillhouse’s portfolio. The company also increased its holdings in the third quarter in Chinese e-commerce platform JD.com Inc. by nearly 30% and in cancer-drug developer I-Mab Biopharma by 10%.

Singapore’s state-owned investor Temasek Holdings Pte. sold all its holdings in Chinese search engine Baidu, TAL and New Oriental, and online recruiting service provider Kanzhun Ltd. in the third quarter, according to its SEC filing Monday. Meanwhile, Temasek trimmed its stake in Alibaba Group Holding and Didi Global while expanding holdings in Alibaba’s rival Pinduoduo, the filing showed.

In the third quarter, ARK Investment Management LLC, the tech fund manager run by Cathie Wood, dumped shares of Alibaba and Chinese food delivery platform Meituan and reduced holdings in Baidu, JD.com and Tencent Holdings Ltd., according to its regulatory filings.

Authors: Jing Yuhan, Denise Jia, Caixin Global