Shocking! Chinese Tech Industry Plummets As Foreign Investors Flee: What’s Really Going On?

Chinese online entertainment platform Bilibili was worth $54 billion two years ago when Wall Street investors rushed to bet on the rising tech giant.

Today, the Nasdaq-listed group’s market capitalization is down to about $6.5 billion, a slump ahead of debt repayments that threaten to dry up remaining cash, leading to a dramatic reduction in the company’s costs. .

The travails of Bilibili are symptomatic of wider problems among the Chinese tech scene. Overseas investors are also selling shares in lucrative internet giants like Tencent and Alibaba, while growing reluctant to back the country’s most promising start-ups.

Venture capital giant Sequoia Capital last week became the latest group to bow to rising geopolitical tensions between Beijing and Washington, announcing a plan to split its China business in a separate entity.

The flight of foreign capital is compounded by a shaky economic recovery that has deflated Chinese tech stocks that had briefly raised hopes for the country’s post-pandemic reopening. The downtrend has left employees and investors worried that depressed valuations for Chinese tech groups listed in New York and Hong Kong could last for long.

“China is written off and the economy is a dumpster fire,” said a Hong Kong-based equity analyst. He noted that JPMorgan Chase’s controversial labeling of Chinese internet stocks as “uninvestable” last year now seemed better judged.

The trend is also hurting cash-heavy groups like Tencent and Alibaba, which have tightened their belts and channeled savings into share buybacks. Employees at those companies said that endless cycles of cost-cutting and lowering pay affected staff morale.

Recent positive financial updates from the internet giants have done little to boost their share prices, with shares Tencent down 19% and Alibaba down 29% from their January highs.

Since the start of the Covid-19 pandemic, China’s 10 largest tech groups have collectively lost $300 billion in market value, while their largest U.S. peers have added nearly $5 trillion, according to S&P Capital IQ.

For many investors, rising US-China tensions are a constant reminder of the fate of those who have backed Russian companies, with billions of dollars worth evaporating soon after Russian President Vladimir Putin orders a full-scale invasion of the Ukraine, leading to crippling Western sanctions.

Adding to the complexity are Washington’s mulled restrictions on US investment in China, which would come in addition to export controls designed to limit Beijing’s access to vital technologies such as advanced semiconductors and chip-making equipment.

As a result, large foreign investors are backing off, including Western pension funds that have historically been major backers of Chinese technology in both private and public markets.

The Ontario Teachers’ Pension Plan, Canada’s third-largest pension fund, invested nearly $1 billion in Alibaba and Tencent stock two years ago. Neither company ranks among its top investments today, and the group recently cut its Hong Kong-based team that spearheaded those deals.

Warren Buffett has quietly sold more than half his stake in Chinese electric car group BYD in the past year. Buffett bought and then promptly sold a large stake in TSMC, the Taiwanese chipmaker, this year after reassessing “its position of him” at the center of a potential US-China geopolitical hotbed.

Winnie Wu, China equity strategist at Bank of America, agrees that the future does not look bright for Chinese internet groups in particular. “Stocks and sectors once well owned by foreign investors are experiencing a higher cost of capital and more downgrading,” she said.

There are currently 252 Chinese groups operating in the US or Hong Kong that meet the definition of “net-net”: companies with current assets minus total liabilities in excess of their market value, according to S&P Capital IQ. This group includes deeply depressed stocks like Tencent-backed DouYu, a profitable video game streaming platform with $880 million in net cash and a market cap of just $323 million.

“Global long-only [investors] have been out of action for a long time,” a trader at a Chinese brokerage group said of the country’s Internet stocks.

With the recession unabated, tech groups have prioritized stock buybacks and slimming down. A large Chinese tech investor and director of several leading companies said such strategies made sense with share prices so low, adding that he hoped it would help lift stock prices so his company could sell positions held by long time.

The depressed ratings are more problematic for smaller, unprofitable groups like Bilibili, where employees said management has cut bonuses and laid off staff, while also curtailing business lines as they struggle to break even.

The company’s stock price crash made the challenge more acute. Investors who lent the group $2.9 billion, betting that its shares would continue to rise, now have the opportunity and the momentum to call their convertible bonds early.

By mid-June, Bilibili will have spent $1.7 billion buying back the convertible bonds, reducing his liquidity to about $2 billion. It faces another $900 million in debt payments next year, potentially problematic when paired with its massive losses, which totaled nearly $900 million in the past 12 months after adjusting for some non-cash charges. Bilibili declined to comment.

“There’s not enough funding to support their cash consumption,” said a person close to the company, noting that management “lacked the imagination on how to grow it.”

Even the biggest Chinese tech companies are taking drastic measures. Alibaba has spent the equivalent of about half of its free cash flow buying back shares over the past year and cutting 24,000 positions. Employees widely expect that the group’s continued split into six entities will result in further job losses.

Staff said they were doubly hit by the decline in the value of stock compensation, which for some made up half of their pay, and by increased workloads.

A Tencent developer said the pay was no longer worth the pressure. “Everyone is doing the work of three people,” he said. “There’s not much money now, so they want to bring costs down and efficiency up. The golden age of Internet companies is over.

Additional reporting by Andy Lin in Hong Kong