Better to avoid US-listed Chinese companies for some time: Experts

The Chinese government clamping down on private companies that have grown extremely large has become a major cause of concern for Indian investors who have been diversifying their portfolios outside of India.

Shares of Chinese vehicle-for-hire company, Didi Chuxing Technology Co., which was listed on the New York Stock Exchange (NYSE) in late June, slumped over 20% last week after China regulators blacklisted 25 apps associated with the platform.

In the past, the Chinese government’s crackdown resulted in the collapse of Ant Group’s initial public offer (IPO) in November 2020. Anti-trust investigations into Alibaba Group Holding Ltd and Meituan had also hit investors in these companies hard.

“Indian investors should look at the US-listed Chinese companies with caution. The Chinese regulator has become stricter with companies that are listed in the US. All of this is happening due to the increased tit-for-tat relationship between China and the US, and the recent financial fraud of public Chinese companies listed in the US,” said Viram Shah, co-founder and CEO, Vested Finance, a global investment platform.

Experts say that for Indian investors that are holding these shares, the approach would depend on their assessment of the ongoing geopolitical tensions.

“While these companies are fundamentally sound, and provide exposure to a growing economy, short-term concerns do remain around how the Chinese government’s stance towards these companies will finally take shape,” said Viraj Nanda, co-founder and CEO, Globalise, India’s first platform for guided global investing.

According to Nanda, risk-averse investors should wait until resolutions are reached on some of the ongoing topics of concern, before investing in the US-listed Chinese companies.

“For those with a higher appetite, these companies provide some opportunistic plays — they are well run, with good cash flows and growth, and valuations that are not too rich,” added Nanda.

The biggest risk, therefore, is not growth or management, but the potential government interference.

Investors going for such companies must keep in mind that these businesses are highly localized. For example, companies such as Didi, Alibaba, and Tencent are broadly Chinese economy plays, as they derive 80-90% of their revenues from a single country.

“There are basically country risks that you are taking with a company that is localized. You can see how the country risk played out in Didi’s case. As with any other investments, you should make sure you understand the business of the company well and for US-listed foreign companies this means that you need to understand the foreign market well,” said Shah.

One other risk highlighted by Didi’s case is investing in an IPO.

There has been a strong demand for newly-listed companies as investors are looking to invest in new firms that provide access to differentiated products, themes, and geographies.

While Didi, which was listed in the US on 30 June, saw a mixed response from Indians at different investment platforms, earlier listings such as cryptocurrency exchange Coinbase Inc. saw good demand. Coinbase was the 10th most bought stock on Vested Finance in the first six months of the year.

The shares of the company have slumped more than 20% since its listing on 14 April 2021.

“It is important that investors go through a diligence process before investing in newly-listed companies. These companies generally have no financial track record in their filings. Their management also generally has a thin track record in terms of leading a public company, and therefore investors need to rely on how they have operated as a private enterprise,” said Nanda.

One way to reduce risk in investing in newly listed companies is to go for the exchange-traded fund (ETF) route as investors can build exposure to the broader market of newly listed public companies selected by the fund, without being too concentrated in a single investment.

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