What happened
Shares of Chinese consumer companies NetEase (NTES -1.91%), Bilibli (BLI), and iQiyi (IQ 6.26%) fell hard on Thursday, with the stocks down 6.7%, 14.3%, and 22.5%, respectively, as of 3:05 p.m. ET.
There wasn't any company-specific news from any of the three companies today. However, an announcement from the Securities and Exchange Commission (SEC) regarding five other Chinese companies hit the wires, which sparked speculation that all U.S.-listed Chinese stocks could be delisted. And of course, ongoing Russia-Ukraine tensions have the potential to spill over into U.S.-China relations, as China has attempted to take a neutral stance on the conflict.
So what
On Thursday, the SEC listed five Chinese companies that had so far failed to obey the Holding Foreign Companies Accountable Act, or HFCAA, which was passed in December 2020. Of note, neither NetEase, Bilibili, nor iQiyi were on the initial list. However, the five companies on the list were likely pointed out because they had already filed their annual reports for 2021. While NetEase, Bilibili, and iQiyi just reported their fourth-quarter 2021 earnings in the past couple of weeks, neither has filed its annual report with the SEC as of yet.
However, it is expected that once these companies do file, they, too, will be put on the non-compliant list. Under the HFCAA, Chinese companies that do not allow U.S. regulators to review their audits will be flagged for violations, and a possible delisting from U.S. exchanges. Chinese companies are in a bit of a bind, however, because China forbids company auditors to provide the necessary data to U.S. regulators. So, it's expected that no U.S.-listed Chinese companies will comply.
Image source: Getty Images.
Now what
Under the HFCAA, Chinese companies have three years to comply with the law, so they won't be delisted until at least 2024 and maybe even 2025, if the issue is not resolved.
Even with these non-fundamental factors affecting these stocks, however, the current environment could be challenging for these companies. China is going through a dramatic slowdown as a result of problems in its giant real estate sector. Additionally, Chinese regulators have been cracking down on anticompetitive behavior and fees in the tech sector over the past year.
The tighter financial conditions have likely put a cap on consumer spending, which is affecting all Chinese consumer discretionary stocks. Count NetEase, a leader in video games; Bilibili, a leader in short-form internet videos; and iQiyi, one of three main video streaming services, as stocks likely to suffer amid the consumer spending slowdown.
In their recent earnings reports, both NetEase and Bilibili missed analyst expectations for revenue, though both beat profit forecasts due to cost-cutting. While iQiyi did slightly beat revenue expectations, the streaming video provider only saw flat revenue year over year, and continued losses.
In fact, iQiyi just issued $285 million in stock to majority shareholder Baidu and other financial investors in order to raise money amid China's content streaming wars. Selling shares when your stock is down some 85% in the past 12 months, as iQiyi's is, is a sign of desperation.
In any case, today was yet another example of the high risk of holding U.S.-listed Chinese stocks. Russia's war in Ukraine is only exasperating potential tensions with China, which is Russia's ally. Therefore, I'd still remain cautious on any Chinese stocks listed in the U.S., despite their newly discounted share prices.
