Hi from Hong Kong. Clay Chandler here, filling in for Alan.
Yesterday, as Grady McGregor and I filed this update on recent developments in China’s tech sector, I was reminded of a line from the old Don McLean tune: “The three men I admire most, the Father, Son and Holy Ghost, they caught the last train for the coast, the day the music died...”
Something like that is going on among investors in China’s internet companies. Over the past several months, a surprising number of formerly devout evangelizers for the boundless possibilities of China’s consumer-facing digital “platform” companies—Alibaba, Tencent, Meituan, JD.com, and a handful of others—have dumped billions of dollars worth of those firms’ shares and, unceremoniously, shuffled off. As Grady and I suggested yesterday, the departures seem to signal the end of an era for the once high-flying sector.
The most prominent exit was by SoftBank CEO Masayoshi Son, who bankrolled Alibaba founder Jack Ma back in 2000. On Aug. 10, SoftBank said it would book a gain of $34 billion by selling a third of its 24% stake in the Chinese e-commerce giant. Days later, a filing with the Securities and Exchange Commission revealed that sometime in the three months to June 30, Bridgewater Associates—whose boss Ray Dalio last year derided investors fleeing China shares for over-reacting to “market wiggles”—cashed out of Alibaba , JD.com, and three other Chinese platform companies. A similar filing, made public in April, shows that in the first quarter, Daily Journal, the Los Angeles-based media company advised by Warren Buffett pal and ardent China bull Charlie Munger, slashed its stake in Alibaba by half. In June, Tencent’s biggest backer, Dutch investment firm Prosus NV, said it would pare its 29% stake in the Chinese company.
You don’t have to drive your Chevy to the levee to know that liquidity in this particular corner of the China market is drying up. As the Wall Street Journal Last week noted, Alibaba, Tencent, and Meituan alone have lost more than $1.2 trillion in value since February of last year when the combined market capitalization of the three companies peaked.
Most of the equity analysts who cover these companies remain bullish about their long-term prospects; Many expect growth and earnings to bounce back later this year as regulators in Beijing “ease” a regulatory clampdown on the sector that is now well into its second year.
Maybe. But the go-go years are gone. China’s faltering economy is the immediate problem. In the April to June quarter, which saw citywide lockdowns meant to contain COVID outbreaks in Shanghai and Beijing, China’s growth slipped to 0.4%. Alibaba and Tencent both reported a decline in year-on-year revenues in the quarter—something neither had experienced in two decades since they were established.
But even after the economy rebounds, the companies will struggle to add new customers. The larger e-commerce players—Alibaba, Tencent, Meituan—are approaching what Bloomberg‘s Tim Culpan calls “peak customer”: they already have captured all domestic consumers with purchasing power. So far, with the notable exceptions of Shein and ByteDance’s TikTok, China’s platforms have failed to find new customers overseas. Private platform companies’ efforts to expand into new business lines like cloud services have struggled to compete with politically favored vendors like Huawei and state-backed telecoms.
What’s really changed is Beijing. It’s clear that China’s leaders, who mostly stood aside for two decades as the platform companies boomed, now view them with suspicion—or at, the very least, judged them to be of far less scientific or strategic value in securing China’s future than “hard” technologies like semi-conductors, quantum computing, or renewable energy.
This may not be the day music died for the platforms. Just that from now on Beijing calls the tune.
More news below.
Biden’s student loan decision
President Joe Biden is expected to announce new student debt relief measures on Wednesday after agonizing for months whether to erase $10,000 in loans per borrower who falls below a certain income threshold, likely in the $125,000 to $150,000 range. Biden will face blowback no matter his decision, with critics on his left arguing the rumored relief doesn’t go far enough to aid Black and low-income Americans who carry a disproportionate share of student debt and critics on his right saying the move could further fuel inflation. Bloomberg
The bombshell whistleblower complaint filed against Twitter by former security executive and well-known hacker Peiter “Mudge” Zatko has put the social media giant in Washington’s crosshairs. Zatko submitted his complaint to the Securities and Exchange Commission, the Federal Trade Commission and the Justice Department, which are expected to investigate his claims that Twitter executives misled federal investigators and the company’s own board about deficiencies in its cybersecurity and its fight against spam. Twitter says the complaint contains “inconsistencies and inaccuracies and lacks an important context,” but it no doubt provides new ammunition to Elon Musk as he attempts to back out of a deal to purchase the platform.
The next Shein?
Chinese giant Pinduoduo found a niche in China’s saturated e-commerce market by gamifying the online shopping experience and pioneering ‘group buying.’ Founder Colin Huang famously said his platform was a cross between Costco and Disneyland. The firm now is launching a cross-border e-commerce platform that will target the American market. Analysts say Pinduoduo’s efficient supply chain, similar to that of Chinese ultra-fast fashion site Shein, could expose rival Amazon’s weak spots. Fortune
AROUND THE WATERCOOLER
Hong Kong may let bankers skip quarantine to get them to attend its banking conference by Nicholas Gordon
The regret of Great Resignation quitters could be bosses’ secret weapon to solving the exodus by Jane Thier
70% of Americans are worried about a recession. Here’s what they can do to prepare by Alicia Adamczyk
Where will housing prices end 2022? New data predicts a 4% drop in 5 months—and homes with these two characteristics will be the hardest hit by Shawn Tully
Coinbase CEO Brian Armstrong warns investors to buckle in for a long crypto winter by Marco Quiroz-Gutierrez
This edition of CEO Daily was edited by Claire Zillman.
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