China's State Administration for Market Regulation (SAMR) announced on Friday that Meituan had abused its monopoly in the country's online food delivery market. According to the market regulator, Meituan pressured merchants to sign exclusive collaboration agreements with them and took disciplinary action against those who refused.

Despite the fact that Meituan was hit with a $500 million antitrust punishment, its stock soared by a little under 9% on Monday, as the penalty was not as severe as feared.


Bitter Aftertaste

However, there may be an unpleasant aftertaste. According to analyst projections published by Refinitiv, the firm is expected to produce an operational loss of $3 billion this year as a result of CEO Wang Xing's investments in grocery and ride-hailing. Last month, Fitch Ratings lowered Meituan's rating and warned that it may be relegated to junk status.

The next regulatory path may likewise be less appealing. Recent recommendations read more on providing additional labour rights to gig economy employees have been unclear, but will almost certainly result in decreased profitability in firms with tight margins. Investors will find it more difficult to absorb what is now boiling.


Relief Rally

After closing at a record low on Wednesday, Hong Kong's Hang Seng Tech Index surged as much as 3% in a third day of advances. Meituan surged as high as 8.7%, making it the best-performing stock on the index. The stock also helped to lift the Hang Seng Index, which rose by 2.2 percent.

"Meituan’s better-than-feared antitrust penalty may be leading investors to rethink the severity of punishments that may follow from China’s tech crackdown, [...] However, uncertainty remains and may continue to keep sector valuations depressed for several more months until there’s greater clarity on the situation." Bloomberg Intelligence analyst Matthew Kanterman


BENCHMARK'S TAKE

  • Following a long crackdown, Chinese technology stocks are coming back to life
  • Yet, risks remain as any sign of excessive profitability or growth may be seen as dangerous to Beijing which may choose to punish these players again in the non-distant future
  • Our exposure to China is limited to TIER-1 companies and holdings. We have no plans for now to increase our exposure to these names

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Rowan Freeman on Unsplash.