Many Chinese tech stocks have lost their luster over the past year. China's antitrust regulators and censors aggressively cracked down on the country's top tech companies, while U.S. regulators threatened to delist shares of Chinese companies that didn't comply with tighter auditing rules.
I wouldn't recommend buying any Chinese stocks before those headwinds wane, but investors should keep an eye on three big names this month to see where this out-of-favor sector might be headed.
1. Tencent
After Alibaba's antitrust probe ended with a record $2.75 billion fine in April, all eyes turned toward Tencent (TCEHY -0.15%) as the next potential target. Tencent dominates China's mobile messaging, video game, and streaming media markets.
Image source: Getty Images.
It's also one of the country's top cloud, fintech, and advertising companies. It locks over 1.2 billion monthly active users into WeChat, a monolithic communications app that hosts millions of Mini Programs for buying products, making payments, playing games, and more.
China's State Administration of Market Regulation (SAMR) previously fined Tencent over several unapproved acquisitions, and could reportedly levy another $1.5 billion fine against the company over Tencent Music's dominance of the country's streaming music market.
The SAMR could also block Tencent's planned merger of Huya (HUYA 5.24%) and Douyu (DOYU -2.98%), the country's two largest video game streaming platforms, this month. On the bright side, its planned takeover of Sogou (SOGO), China's second-largest search engine after Baidu, will likely be approved.
None of these developments will derail Tencent's core business, but they suggest its days of unrestricted inorganic growth are over. However, reining in Tencent could grant smaller competitors like NetEase, which competes against Tencent in both video games and streaming music, more room to grow.
2. DiDi Global
DiDi Global (DIDI), the largest ride-hailing and ride-sharing company in China, recently went public on the New York Stock Exchange. The stock closed slightly above its IPO price of $14 a share on its first trading day on June 30, but two disastrous developments sank the stock over the following week.
On July 2, DiDi announced that its registration of new users had been suspended in China due to an abrupt change in the Cyberspace Administration of China's (CAC) data collection laws. On July 4, DiDi said the CAC had ordered the complete removal of its app from all of the country's app stores.
DiDi warned the suspension could have an "adverse impact" on its Chinese business, which accounted for about 98% of its top line last year. The abrupt crackdown has cast serious doubts on DiDi's ability to recover this year after suffering an 8% revenue decline in 2020 during the pandemic.
Some analysts have speculated that the CAC cracked down on DiDi in retaliation for listing its IPO in the U.S. instead of a Chinese exchange. If that's true, we could see fewer Chinese IPOs in the U.S. and a lot less enthusiasm for the market's existing Chinese stocks.
3. New Oriental Education
Lastly, the SAMR fined a long list of private education companies in the first half of the year for violating pricing, competition, and false advertising laws. The government also criticized these companies for exacerbating the privilege gap between poor and affluent students, and it proposed the launch of a dedicated government division to oversee all of the country's education platforms. Those proposals, along with tougher year-over-year comparisons for online education platforms that flourished throughout the pandemic, torpedoed the country's top education stocks.
New Oriental Education (EDU 0.23%), one of the country's oldest education companies, lost nearly 70% of its value over the past six months. However, New Oriental Education remains one of the best houses in a bad neighborhood, and the stock looks cheap at just 18 times forward earnings and three times this year's sales.
Analysts had expected New Oriental's revenue to rise 17% this year before the Chinese government turned against its top education companies. But if the crackdown finally ends this summer with just a few minor fines and changes, New Oriental could recover very quickly -- and its stable profits make it a more stable investment than unprofitable online-only challengers like Gaotu Techedu.
