Beijing’s regulators have been cracking down on its internet companies. Chinese authorities have also attempted to rein in the country’s burgeoning after-school tutoring industry.
Chinese companies’ U.S.-traded shares fell sharply on Monday. TAL Education fell 26.6 percent, while Gaotu Techedu fell 28.9 percent. Alibaba, a widely followed internet retailer, fell 7.1 percent, while Tencent fell 2.9 percent. The iShares MSCI China ETF fell more than 5.6 percent, while the KraneShares CSI China Internet ETF fell 9.6 percent.
“I think there is this recognition that the regulatory risk and the political risk are far more elevated than the market initially anticipated,” said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. “Many people hoped that the Chinese government would not hurt their own golden goose by pursuing their more successful companies.”
Be wary of the deal.
Despite the fact that Chinese company valuations are much lower than their US counterparts, Chang advises investors to be cautious. Alibaba, for example, has a trailing price-earnings ratio of 23, while Amazon has a price-earnings ratio of 70.
“I believe we are waking up to the fact that the Chinese government is dead set on implementing their vision for how they want to manage the economy and how these companies fit into that picture. “I believe the Didi IPO provided an excuse for Chinese regulators to crack down harder on companies and use it as an example,” Chang said.
Didi, a ride-hailing company, reportedly ignored warnings from Chinese regulators to postpone its public listing in the United States and conduct an audit of its network security. Didi is now worth less than half of what it was when it went public last month. The stock was downgraded by Atlantic Equities on Monday due to regulatory uncertainty in China and the fact that the company is the subject of ongoing investigations.
Previously, Chinese authorities cracked down on Jack Ma’s Ant Group. Ant, the financial technology giant, was forced to halt its much-anticipated share sale last fall. The company is refocusing and will be more regulated and limited in scope in the future.
“I believe the market will stabilize, but in the short term, you don’t want to catch a falling knife,” Chang said. “If it isn’t overly draconian, people will read the tea leaves and conclude that this must come to an end. It is harming some private equity investors in some of the planned IPOs that were to be listed in the United States.”
According to him, these IPOs may eventually shift to Chinese listings. “I believe it was done on purpose. “The Chinese regulators prefer that these IPOs be listed in Hong Kong,” he explained.
According to Gary Dvorchak, managing director at The Blueshirt Group, some companies were previously warned not to list in the United States, so they canceled their IPOs. He now believes that dual listings in China and the United States are likely because China wants its national champions to list on its home exchanges.
“The tide is definitely receding,” Dvorchak said on Monday. “Of course, there have been a few IPOs, but I believe that in the near term, the possibility of any Chinese company doing an IPO or SPAC is pretty remote, simply because of the uncertainty, valuations, and heightened risk awareness.”
A special purpose acquisition company, or SPAC, raises funds from investors in order to merge with and publicize a private company.
“Investors are continuing to buy the dip,” said Brendan Ahern, chief investment officer of KraneShares. “There have been significant inflows… We are seeing the gap between fundamentals and sentiment continue to widen.”
He stated that companies are still expected to have strong earnings, which could potentially benefit company stocks. earnings that are impressive “Hopefully, this will act as a catalyst to get these KWEB [KraneShares Chinese Internet ETF] companies back on track,” he said.
The blow to China’s education companies was severe, and the country is attempting to address its new push to encourage families to have multiple children.
“By removing for-profit companies from the equation, up to 25% of urban family income has been dedicated to after-school tutoring.” “Public schools will take on that role in the future,” said Ahern.
According to Goldman Sachs analysts, the new rules for education companies will reduce the after-school tutoring market by more than 75%, reducing it from $106 billion last year to $24 billion.
Prices offsetting inflation
Mentions of inflation on second-quarter earnings calls have increased by more than 1,000% year on year, according to a Bank of America analysis released Monday morning.
Many companies have detailed plans to deal with inflation by raising prices on earnings calls in the last few weeks, with several businesses reporting strong preliminary results. After raising prices, Chipotle encountered “no resistance whatsoever” from customers.
However, according to Bank of America’s Savita Subramanian, “a number of companies said they won’t be able to fully offset accelerating cost inflation through higher pricing in the near term (mostly due to a lag in raising prices).”
Conagra, whose brands include Slim Jim and Reddi-wip, said it is “pleased with the initial results” of inflation-justified price increases. Conagra, on the other hand, warned that price increases would take time to take effect.
“We have a number of levers at our disposal that we are actively and strategically pulling in order to manage this inflation, but the profit lag effect is real. Certain pricing actions, for example, can take 90 days to implement, or a cost-cutting initiative may not be actionable until later in the year when a contract is up for review,” Conagra chief financial officer David Marberger said during the company’s fourth-quarter earnings call on July 13.
Conagra has reduced its full-year earnings-per-share guidance for the fiscal year that has just begun.
Unilever, the British consumer goods company whose brands include Dove, Lipton, and Vaseline, has also warned investors that price increases will be delayed.
Kimberly-Clark, whose brands include Kleenex and Kotex, stated that it expects pricing action to fully offset inflation over time — but not this year.
Kimberly-Clark CEO Michael Hsu stated on the company’s earnings call on Friday that a broader inflationary environment may affect consumers’ sensitivity to price increases.
“In this environment, consumers are facing broader inflation across all categories,” Hsu said. “So that could be one factor… that makes it a little more difficult.”
Astra debut seems promising
The rocket company went public on July 1st through a merger with a special purpose acquisition vehicle and officially began trading. The stock has dropped below $9 after rising above $15 per share on its second day of trading.
“With an increasing number of private rocket launch companies, we see Astra’s differentiation as a focus on developing high-frequency, low-cost small rockets and associated infrastructure.” According to the note, “this approach should enable much broader access to space, allowing companies to more easily commercialize applications.”
Given Astra’s demonstrated ability, Deutsche Bank stated that the valuation was in line with other companies in the industry.
In premarket trading on Tuesday, Astra rose 4.7 percent.
“Based on recent private market fundraising rounds, we believe rocket launch companies perceived to have compelling technology and reputable management can fairly ‘easily’ garner a low-mid $1 billion valuation without having demonstrated orbital capability. “Depending on the circumstances, the valuation will likely increase 2-3x after reaching orbit,”.
According to Deutsche Bank, if Astra can demonstrate success with satellites or other aspects of the space industry, the company’s value could skyrocket.