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Assessing 4 Chinese Stocks after Regulatory Crackdown

The regulatory crackdown in China has recently intensified across various sectors. This has also led to investor skepticism in regards to Chinese stocks.

Using the TipRanks database, let’s look at some Chinese stocks that still rate as a Buy from analysts.

I am neutral about all the stocks listed in this article.

Alibaba (BABA)

Alibaba’s shares have fallen 26% over the past three months. Recent reports have suggested that Chinese regulators were getting ready to break up Alipay, the company’s mobile payments app. This would force Alibaba to spin off its highly profitable lending business.

The Chinese e-commerce giant also offers cloud computing services, shopping search engines, and electronic payment services.

In fiscal Q1, the company’s revenues rose 34% year-over-year to $31.9 billion, but fell short of analysts’ expectations of $32.5 billion. Adjusted EPS increased 12% year-over-year to $2.57, beating the Street’s estimate of $2.24.

Earlier this year, Chinese regulators had fined some of the retail market’s biggest players for lowering prices to edge out competitors, and violating the country’s pricing laws. (See Alibaba stock charts on TipRanks)

According to the TipRanks Risk Factors tool,Legal & Regulatory risks make up 26% of Alibaba’s risk profile, compared to a sector benchmark of 17.3%.

Stifel Nicolaus analyst Scott Devitt also believes that Alibaba is exposed to further regulatory risk, considering the company’s profitable business model, and exposure to businesses such as cloud services and payment processing.

Recently, the analyst lowered his price target from $260 to $210 (31.4% upside), but kept a Buy rating on the stock.

Turning to the rest of the Street, consensus is that Alibaba is a Strong Buy, based on 22 Buys, one Hold, and one Sell. The average Alibaba price target of $269.18 implies 68.6% upside potential from current levels.

Tencent Holdings (TCEHY)

The Chinese Government has also cracked down on the gaming industry. Regulators in Beijing placed a gaming time limit on minors of three hours per week last month.

Reuters reported last week that Chinese regulators summoned Tencent and NetEase (NTES) to ensure that they implement the new rules. Shares of Tencent Holdings have plunged 8% over the past five days. (See Tencent Holdings stock charts on TipRanks)

Tencent Holdings’ businesses span from communication and social services like Weixin and QQ, to gaming, targeted advertising, and fintech platforms, such as Weixin Pay.

In Q2, the company posted revenues of $21.4 billion, up 20% year-over-year. Tencent reported a net profit attributable to the company’s equity holders of $5.3 billion, up 13% year-over-year.

At Tencent’s Q2 earnings call, the company’s management clarified that it had already started limiting its customers’ gaming time beyond regulatory requirements

The company’s management also said that in Q2, users below 16 years of age made up 2.6% of its “China game grossing receipts, and under 12-year-olds accounted for 0.3%.”

Martin Lau, president of Tencent, referred to the regulatory environment on the company’s earnings call, saying, “I would like to say in terms of the regulators, the regulators are very focused on identifying and rectifying industry misbehaviors and also establishing regulations. … And we should expect in the future — in the near future, more regulations should be coming.”

Investor sentiment regarding the stock is also very negative. In the past week, 2.4% of all portfolios on TipRanks offloaded the stock.

Wall Street analysts are cautiously optimistic about the stock, with a Moderate Buy rating, based on two Buys and one Sell. The average Tencent Holdings price target of $90 implies 52.6% upside potential from current levels. (JD) is a Chinese e-commerce platform that operates primarily under three business segments: Retail, Logistics, and New Businesses.

In Q2, the company posted revenues of $39.3 billion, an increase of 26.2% year-on-year, surpassing analysts’ estimates of $38.51 billion. Adjusted diluted net income per American Depository Share (ADS) came in at $0.45, ahead of analysts’ expectations of $0.36.

The company believes that recent regulations are not “intended to restrict or suppress the Internet and relevant industries, but rather to create a fair and orderly business environment.” (See stock charts on TipRanks)

Stifel Nicolaus analyst Scott Devitt recently reiterated a Buy rating on the stock, and raised his price target from $90 to $100 (32.1% upside). Devitt believes that JD has less regulatory exposure than its competitors.

Furthermore, the stock scores an 8 out of 10 on the TipRanks Smart Score system, indicating that the stock is likely to outperform the market.

Turning to the rest of the Street, consensus is that is a Strong Buy, based on 12 Buys and one Sell. The average price target of $96 implies 23.4% upside potential from current levels.

NetEase (NTES)

NetEase develops and operates popular mobile and PC games in China. Its other service offerings include online learning services offered through its subsidiary, Youdao (DAO), music streaming services, and its private-label e-commerce platform, Yanxuan.

In Q2, the company posted revenues of $3.2 billion, up 12.9% year-over-year, and were in line with the Street’s expectations. Revenues from online gaming services grew 5.1% to $2.3 billion.

Adjusted earnings came in at $0.97 per ADS, surpassing analysts’ expectations of $0.91 per ADS. Earnings, however, declined 21.6% from the year-ago quarter. (See NetEase stock charts on TipRanks)

Earlier this month, HSBC analyst Ritchie Sun lowered his price target from $137 to $125 (52% upside), but reiterated a Buy rating on the stock. Sun believes that minor gaming restrictions in China are unlikely to have much of an impact on NetEase.

NetEase’s management clarified on its Q2 earnings call that minors (gamers below the age of 18, as defined by Chinese law), make up “less than 1% of our total games gross billing financial implication.”

The company’s management also addressed the regulatory crackdown on the education sector and its likely impact on Youdao, its education platform, on its earnings call.

NetEase’s management commented that Youdao will be “somewhat less affected by the recent regulations as it has other high-growth businesses in addition to existing K-12 [Inaudible] after-school tutoring classes, whose revenues accounted for around 41% of Youdao’s total revenue in the second quarter.”

Turning to the rest of the Street, consensus is that NetEase is a Strong Buy based on six Buys. The average NetEase price target of $129.17 implies 57.1% upside potential from current levels.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.​

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