Opportunity In US-Listed Chinese Enterprises With Compliance Bill In House

Daniel Laboe
·5-min read

Chinese enterprises are on the chopping block Wednesday as the House votes over new audit rules that could force some Chinese shares off US exchanges. Eastern equities are taking a hit this week as domestic investors fear that their Chinese holdings may not be obtainable in the years to come.

Already battered Alibaba BABA shares fell over 4% on Monday, while JD.com JD is down over 5% this week, and Tencent TCEHY took a Monday dive as well. I see this as a 'buy the dip' opportunity for these Chinese tech giants as the Roaring 20s commence. China is rapidly digitalizing, and these digital behemoths are set to continue soaring throughout the next decade.

The Bill & Why It May Present a Buying Opportunity 

The bill passed unanimously in the Senate back in May, and if it can get a two-thirds affirmative vote in the House tomorrow, it will be ready for President Trump's signature. Chinese officials are not happy with this bill, citing more equitable ways to resolve issues between Beijing and Washington that wouldn't have negative implications on US capital markets and its investors.

If this new bipartisan compliance law passes, it will force US traded Chinese companies and enterprises seeking to debut their shares in the US markets to comply with US audit inspection. Existing US listings will have 3 years to comply with the new regulations.

If the bill advances, and I have confidence it will, it is going to be up to these Chinese enterprises whether they elect to stay listed in the US or not. If they decide they would prefer not to follow this new protocol, their shares will undoubtedly plunge. This would allow these businesses to buy back their shares and take themselves private at a sizable discount if they chose.

The biggest and baddest Chinese tech conglomerates don't want to lose the ability to raise capital in the world's most alluring financial system.

More oversight on US-listed Chinese companies is good for domestic investors at the end of the day. It will help protect US investors/traders from fraudulent businesses. 

Luckin Coffee and its demise lost US shareholders billions of dollars in 2020 after it was discovered that the hyperfast, seemingly unattainable growth was too good to be true, with misrepresented sales on its income statement. Luckin was delisted from US exchanges earlier this year but is still available to US investors through the OTC markets, something this new bill is trying to eradicate.

Luckin was the final straw the broke the camels, and US lawmakers decided enough was enough. 

Getting more domestic visibility over these Chinese operations will give shareholders peace of mind about their investments. I believe it could lead to higher valuation multiples as the markets price out some of the geopolitical risk associated with Chinese enterprises.

BABA Opportunity

BABA shares whiplash sell-off in November has created a fantastic opportunity to purchase one of Asia's highest potential enterprises at a substantial discount. From a technical and fundamental point of view, this stock is a buy.

BABA was quite oversold Wednesday, November 18th, when it bottomed, and the shares are headed back down towards that oversold territory.

Alibaba has a cornucopia of digital products at its disposal, and it will use all of them to control and profit off the prolific digitalization occurring in Asia today.

The fact that the Amazon AMZN of the East (aka BABA) has not taken off to the extent of its western counterpart is baffling. Alibaba controls the e-commerce space (80% market share), the cloud-computing category (roughly 50% market share), and a 33% stake in the leading FinTech in the most populous and soon-to-be largest economy on earth.

Alibaba is valued at less than half of Amazon despite producing substantially wider margins, greater profitability, and having a more extensive revenue growth outlook for the next couple of years.

BABA was undervalued before this November sell-off. Today the stock is a stronger buy than ever with robust upward momentum, 15 out of 15 analysts calling it a buy.

Final Thoughts

Tomorrow represents a big day for Chinese equities on US exchanges and could change these businesses' fate.

The new Chinese compliance bill does raise the risk of holding these foreign equities. Still, if these Eastern enterprises are willing to comply, this new bill (if passed) should be favorable to domestic investors in Chinese stocks over the long run.

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