If you've been keeping tabs on Chinese technology stocks over the past few months you've probably noticed something startling: Many of them have crashed spectacularly. Hundreds of billions of dollars of market value have been erased in just a matter of weeks.
That's left many investors wondering, "What exactly is going on with Chinese stocks?" To help answer that, I want to take a look at four Chinese tech stocks -- New Oriental Education & Technology (NYSE:EDU), Alibaba (NYSE:BABA), DiDi Global (NYSE:DIDI), and Tencent Holdings (OTC:TCEHY) -- and how new regulations from the Chinese government have thrown these companies into a tizzy over the past few months.
New Oriental Education: After-school tutoring receives low marks
One of the most staggering Chinese tech stock drops came in July when New Oriental Education's share price plummeted 74% just in July. The company is one of the largest providers of education services in China, mainly focusing on online tutoring for kids.
The company's massive share price drop came as the Chinese government announced restrictions to after-school tutoring, which is an estimated $124 billion industry in China.
The new regulations included not allowing classes on weekends, holidays, and summer/winter breaks, as well as restructuring tutoring companies as nonprofits. The move is part of what's referred to as China's "double reduction" policy, in which schools are cutting back on homework and after-schooling tutoring programs are having to scale back their offerings.
New Oriental Education and other companies like it were caught off guard by the extent of the restrictions, and, not surprisingly, many investors were spooked by the sweeping changes.
The future of the massive after-school tutoring industry is still up in the air, leaving New Oriental Education and other tutoring companies reeling. The company's share price hasn't recovered and is down nearly 88% from a 52-week high set in mid-February.
Alibaba: New anti-monopoly restrictions put a damper on growth
Investors may remember a staggering move by the Chinese government in late 2020 when Ant Financial's much-hyped initial public offering (IPO) was suspended. The company, of which Alibaba owns about one-third, was set to debut on the U.S. stock market at a valuation of around $310 billion.
But the Chinese government's new anti-monopoly regulations put Ant Financial squarely in the government's sights. Not only did Ant indefinitely suspend a lucrative IPO, but the government also took a closer look at Alibaba's massive operations and decided to slap a massive $2.8 billion fine on the company.
Alibaba is one of China's largest e-commerce websites, and the huge fine signaled that the government is getting serious about anti-monopoly regulations.
Investors were rightly scared about the move and have pushed the tech stock's price down more than 19% over the past three months. For a company with a valuation of $474 billion, that means Alibaba has lost roughly $100 billion of its market cap.
DiDi Global: China hits the brakes on DiDi's ridesharing business
DiDi Global, the largest ride-hailing company in China with 377 million annual active users, has also seen its market value sliced because of China's latest anti-monopoly regulations.
DiDi just went public back at the end of June, raising about $4.4 billion from the IPO. But just days after it went public, the Cyberspace Administration of China began investigating DiDi's data practices.
The agency prohibited DiDi from adding new customers and took its app off of two Chinese app stores. Investors panicked, and DiDi's stock price is down 31.5% since the June IPO.
The company wants to get back into the Chinese government's good graces and has reportedly considered going private -- just weeks after its massive public debut -- though the company denies the reports.
Tencent: It's nearly game over for minors
Most recently, the Chinese government clamped down on the amount of time children can spend playing video games, limiting them to just three hours of game time per week.
The move came after the government had already set video game limitations for minors back in 2019. For context, an estimated 110 million minors play video games in China. But the new rules are much stricter than before and they hit Tencent Holdings, a technology conglomerate, particularly hard.
Tencent, among its many other services, makes video games, and the new rules have hurt the company's stock at a time when it was already feeling the effects of China's increasing anti-monopoly rules.
As a result of the new restrictions and the anti-monopoly regulations, Tencent's share price has fallen nearly 33% from 52-week highs set in mid-February.
So should investors avoid Chinese tech stocks?
Not surprisingly, some investors are alarmed that these major technology companies have all experienced significant share price drops for an extended period. But what should worry investors more is that the way some of these companies conduct business is no longer the same.
For example, New Oriental Education's business model has been significantly disrupted, and it appears that there's no going back.
Could some of these companies see their share prices rebound? They could. But there are still a lot of unknowns for investors right now, and jumping into these Chinese tech stocks could be a premature move.
A better strategy may be to wait a little longer and see if there are any more regulations placed on these companies. Then, determine which companies still have more potential to grow in their business segments -- like Alibaba -- and potentially avoid companies who have seen their industries completely uprooted, like New Oriental Education.