Alibaba and Other Big Chinese Tech Stocks Are Getting Crushed by Regulation Concerns

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(The Motley Fool)

A potential crackdown on tech monopolies could threaten industry leaders.
Regulatory initiatives from the Chinese government are shaking up the country’s technology sector. Top companies Alibaba (NYSE:BABA), Tencent, Xiaomi, Meituan, and JD.com saw their combined market capitalizations decline by more than $280 billion in Wednesday’s trading session on the Hong Kong Stock Exchange, according to CNBC.

On Tuesday, China announced a new set of regulatory guidelines aimed at curbing large internet monopolies. Traders reacted by selling the country’s large tech stocks the following day. China has had relatively close relations with many of its tech leaders, but it looks like the country is putting measures in place that could limit growth opportunities for some players in the space.

The sudden shift in the regulatory climate kicked off with the surprise postponement of Ant Group’s initial public offering (IPO) earlier this month. Ant Group was scheduled to have its IPO on Nov. 5, but it was suspended indefinitely after senior management was summoned for interviews by regulators. Prior to its IPO delay, Ant was on track to have the biggest initial public offering in history with expected funding of $34.5 billion on opening day.

Alibaba controls more than half of the country’s e-commerce market. It also owns a roughly 33% stake in Ant Group. Regulators may object to the influence Alibaba and other companies yield over consumer and financial activity in the country. Ant’s Alipay mobile payment service is deeply embedded in Chinese digital life, with roughly 700 million users.

Ant’s delayed IPO and the prospect of increased government scrutiny have cut Alibaba’s valuation, and there are mounting signs of potential challenges for other large Chinese tech companies. The sector could continue to see volatile trading in the near term as investors wait for more information.

Alibaba (NYSE:BABA) is plunging more deeply into the retail sector. The company announced Monday it has reached a deal to pay roughly $3.6 billion to boost its stake in Sun Art, which operates a network of hypermarkets and supermarkets throughout China.

All told, Sun Art’s store count is 481 hypermarkets and 3 midsize supermarkets, operating under the RT-Mart and Auchan brands. Crucially, it also has a sprawling distribution network and a clutch of storage facilities that will help Alibaba carve out share in the hotly competitive grocery delivery market in China.

Added to its existing Sun Art investments, the latest deal will give Alibaba a nearly 72% stake in the retailer, up from 36%. Alibaba, already a dominant force in the Chinese retail sector, bought its initial stake in Sun Art in late 2017 with a splashy investment totaling around $2.9 billion.

“Over the past three years, Sun Art has made significant progress in the digital transformation under a fast-changing market environment by leveraging resources and technology from the Alibaba ecosystem, to capitalize on the growth opportunities in China’s hypermarket and supermarket space,” Alibaba wrote in the press release heralding its latest deal.

All of Sun Art’s retail stores in China are now integrated into Alibaba’s digital platforms. Alibaba says this has allowed the retailer to offer fast, on-demand delivery to its customers.

Alibaba believes the retail sector in its country is still full of potential. Over the past few years, its retail operations have risen to comprise around one-fifth of total revenue in the company’s most recently reported quarter.

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