Last week was a week of great anxiety for SA investors. Naspers and Prosus, together the biggest local companies on the JSE and with disproportionate weightings in indices and investor portfolios, fell sharply following a crackdown by the Chinese government on the operations of big technology companies.
The share price of Tencent, one of the largest tech companies in the world and one of the two biggest in China, fell by 40% within days.
“We can categorise this as a crash,” says Peter Armitage, founder and CEO of stockbroking and investment firm Anchor Capital.
“Due to the dominance of Tencent in the valuation of Naspers, Naspers fell to only R2 500 [last] week, down about 20%, compared to its all-time high of R4 000,” says Armitage.
“The Anchor valuation models show that Tencent composes 81% of the net asset value [NAV] of Naspers,” he adds, leaving one with the impression that Naspers (and Prosus) shareholders should be happy that they only suffered losses of 20%.
The reason for this is the well-known fact that both Naspers and Prosus are trading at deep discounts to their NAVs.
Anchor calculates that Naspers is trading at a 49% discount to its NAV and Prosus at a 35.5% discount.
That Naspers and Prosus are so important in the investing environment in SA makes the changes in legislation and regulation concerning tech companies in China very important, motivating Anchor to solicit the services of an expert on investment matters and Chinese regulatory issues to explain the thinking behind the latest moves by the Chinese government.
SA investors are clearly very interested in the topic, with 700 people attending the online presentation hosted by Anchor.
Lillian Li can be accepted as an expert on Chinese technology shares. Born and raised in China, living and working in Europe and the US, with a background in economics and venture capital, she is perfectly positioned to explain the thinking behind the latest crackdown by the Chinese government on the tech sector.
The crackdown was huge, or seemed huge. Within weeks, different Chinese government agencies issued fines, enacted new regulations, and restricted the operations of many technology companies.
Says Li: “Mere days after Didi Global’s $4.4 billion IPO [initial public offering] on the Nasdaq, their apps were removed from online stores at the behest of the Cybersecurity Administration of China. The reason cited was violations of personal data collection.
“Over the past nine months, Ant Group’s IPO got pulled, Community Group Buying players were fined for price dumping, Alibaba was fined for anti-monopoly violations and Meituan was also fined for anti-monopoly violations,” she says of the actions against several big tech firms in China.
Tencent was caught up in the furore. The company had to suspend new subscriptions to its popular WeChat app when Chinese authorities raised concerns over security of users’ information.
Power and influence
At the centre of it all is the exploratory growth of technology companies and their ever-growing influence of people.
“In my opinion, there is a global need to rebalance power between state, tech players and consumers; this calls for more regulatory intervention,” says Li.
“For China specifically, being a developing country means it has more regulatory needs and approaches than others.
“We need to consider how powerful these companies are,” says Li.
“Tech platforms pose significant challenges to nation states’ legitimacy. They are becoming de facto institutions, not just providing crucial utilities that are central to the lives of citizens, but setting the rules of the game in which society operates.
“Facebook sets the content moderation policy for one third of the world. Twitter and others ‘de-platformed’ the former president of the US, reducing him to a digital persona non grata.
“These are powerful private entities that are part monopoly and part public goods, but consumer welfare is not a core part of their agenda.
“There is gradually increasing awareness among lawmakers, which is why governments on three continents are reassessing the impact and reach tech giants have on their citizens.
“The backlash against big tech is global.”
China playing catch-up
Li notes that private companies are strong in developing countries, while the state and state institutions are often weak. “If we were to use the US and Europe’s regulation systems as benchmarks, China lags in rudimentary law-making and implementation.
China’s anti-monopoly laws were first passed in 2007, almost a century after the US Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914.
It’s also worth noting that Alibaba was founded in 1999, Tencent in 1998 and Baidu in 2000 — all ahead of anti-monopoly laws. “Laws themselves also aren’t enough, and the State Administration of Market Regulation was established only in April 2018 with holistic coverage to enforce the legislation.
“There’s catching up to do for Chinese law and regulators to reach parity with established western practices,” says Li, explaining that last week’s announcements suddenly caused havoc.
Having lived and worked on three continents, Li could not help to notice the difference in people’s attitude to legislation.
“China follows a policy of innovate then regulate, Europe believes in regulate then not innovate and the US in innovate then not regulate,” says Li.
Thus, China has a complete different attitude to regulation than the west. “These companies would have been shut down if they were in the US,” she says.
“There’s a delicate balance of allowing growth and innovation to take shape while safeguarding societal and consumer interest, “ says Li, while admitting that regulators don’t always get it right and act too late or inappropriately.
However, she stresses that Chinese authorities are not set on breaking companies down.
“They don’t destroy a company, they let it restructure and it is allowed to carry on. The aim is to put a company on a path that is more sustainable for consumers and ensure a sustainable industry and business environment.
“It might lead to value destruction in the short term, but create more value over the long term. It is not a power play, it is to protect consumers,” says Li.
To understand these moves, one needs to consider the nature and reach of these tech companies. “The tech companies are taking the shape of institutions, making rules and influencing legislation. They have a lot of influence and power.
“We have private companies doing what government institutions have traditionally been doing. These companies are huge in the lives of people,” notes Li, citing the growth of educational companies an example.
Big tech’s own shift
She notes that the thinking is that people are feeling the pinch from tech companies. Tech platforms have shifted towards value extraction rather than innovation for growth.
“Growth was very easy up to now. Effortless.
“The last few years, the market became mature. All people that are going to connect, are connected. Growth not so easy anymore and we need behaviour to be innovative and not destructive,” she says.
As an example, Li mentions the Chinese government’s focus on food delivery companies, another high-growth area based on tech apps.
“Having exhausted competing on price, they shifted to competing on delivery times. The result was forcing delivery drivers to shorten delivery times, shortening the time to get to delivery points.
“An example of anti-competitive behaviour is that tech companies blocks competitors in that once a user signs up on one platform, [they] need to forfeit others.
“The crackdown is about opening competition, just like in the west,” says Li.
She notes that the agencies regulating markets and business are similar to those in western economies.
This is reasonably new for China
“The bad news is that they are relatively new agencies, sometimes with no clear lines of authority and overlapping jurisdiction,” says Li.
She notes that the (powerful) Cybersecurity Administration of China was only formed in 2014. It deals with licences of tech companies and oversees compliance with recently promulgated legislation concerning companies that have more than a billion users.
The State Administration for Market Regulation is concerned with anti-competitive behaviour and monopolies, including food security and market distortion. The bad news is that it was only formed in 2018, an amalgamation of different smaller agencies.
The Ministry of Industry and Information is just as important when it comes to tech companies. It looks at, among others, data security, internet connections and misleading advertisements and news.
In all, says Li, the recent crackdown is effectively to catch up on legislation and regulation that already exists elsewhere.
“I’m positive about the long term, but cautious in the short term. The intent with regulation is not to kill innovation, but to redraw the boundaries within which private companies can operate to maximise their profits.
“What use is a dead company to anyone? Especially when it is handling something as crucial as modern-day utilities. That being said, there’s a long backlog of regulatory enforcements to get through,” says Li.
She says the end result that the Chinese government is hoping for is to force companies to become more innovative and sustainable over the longer term.
That should serve the interest of investors too.