Velvet Glove, Meet Iron Fist: The China Tech Crackdown

In valuation and investing, we generally do not explicitly consider the effects of the Government, when valuing and pricing companies. That practice, while justified when government policy is stable, can be problematic, when it is not, because government action or inaction can affect almost every aspect of value from increasing/decreasing revenue growth to pushing up/down margins to even changing the price of risk in equity and bond markets. In this session, I look at the Chinese government's crackdown on big Chinese tech companies, and argue that while the stated reasons are noble (protecting customer privacy and increasing competition), the real reason is control (of companies and data). I value Tencent, Alibaba, JD.com and Didi under three scenarios - a benevolent government, a government that is more net negative than positive (my base case) and an adversarial government, and find Tencent and Alibaba to be "under valued", in the base case. (My spreadsheets are linked below, if you are interested).
Valuation spreadsheets:

[volker-meier]

That's by far the best analysis of the tech crackdown in China I've seen so far. Thanks a lot for sharing.

[arpitmanchanda]

In the search for a teacher, I found a Guru. Thanks, Ashwath for all your teachings and most importantly, posting that on youtube to promote a free and open learning ecosystem.

[CaseyBurnsInvesting]

Intelligent no bs information. What the world needs.

[Dronesingndrive]

One thing Mr Damodaran. While tencent is hk listed, they are incorporated in cayman islands as well. They use the same VIE structure as Alibaba.

[rahularora]

Today is Teachers' day in India, and I just wish I knew about you just 5/7 years earlier.... My life would have been so different!
But anyways it's never too late... I'm glad you're my teacher now (best in your subjects)
Happy teachers' day Professor.

[PARKiE]

The Tencent shares in Hong Kong are also VIEs just not ADRs I believe

[havrenne]

Amazing as usual ! A shame Baidu was not here instead of Didi, which is clearly too risky, whereas Baidu has a recent history of investments and shift towards AI that can explain the drop in financial performance but could let the investors (well, VIE holders) reap the fruits in a near future. Would have loved M. Damodaran's view on this, but also the risk related to data and CCP when it comes to Baidu specifically.

[UsmanAli-vetq]

Great lecture. Unbiased, clear and easy to understand. Thank you for this!

[jahouser]

Appreciate your work on this analysis. So much “no way” or “time to load up”. Makes it difficult to trade with confidence.

[zjxn]

I've bought several tranches of BABA at an average price of $140.15. Your video was instrumental in my committing the capital. Should do well over a decade. Thank You!

[eric]

35:05 Alibaba is also listed on HKEX, Jack Ma is no longer involved with alibaba

[acoessimples]

that moment when i valued tencent at 532HKD and I bought it and Aswath also buys it :D

amazing analysis professor as always. I know you would like some feedback loop. Can't give you one.

Good day

[jaimelaw]

Thank you for the very insightful article. I hold three of the aforementioned. Your pick is excellent, in the sense that I also think Tencent has the most potential, but more due to the business they are in as opposed to retail and service. The reasoning on your pick; however, omits material facts on Alibaba, which may in the process change your valuation. You can actually own Alibaba without buying the ADR; buy Alibaba in Hong Hong and avoid the concerning delisting risk. Jack Ma no longer actively involved in management. Also, one of JD's business components, a crucial one, is logistics, last mile delivery services, in which it has invested robustly in recent years. Therefore, and in addition to capturing market share, operating performance seems lackluster. Taking these factors into considerations may improve your valuation. Noting also, that your point is well taken, the Chinese Government may be adverse with regulations, but not necessarily directly adversarial as in an active target. Meaning, looking at the larger picture of why a socialist government imposes regulations is key to how that affects these companies and may provide better insights on its future actions. Thank you again.

[larrycanada]

Excellent presentation. Thank you so much for the well informed analysis. Your students are lucky to have you.

[mingmataaaa]

You could buy alibaba on Hong Kong exchange too under 9988, not only BABA on US markets :)

[jesmiscellaneous]

What a great video title. Bloomberg wishes they did that for their own headline

[DaMingC]

Thanks for sharing. I like your approach. Like many chinese ppl, I owe shares of both companies. They are digital infrastructure in China and still have huge potential in long term, say 10 to 15 years. There is a big difference between BABA and Tencent in investment strategy. BABA tends to recruit its invested company into its operating side. And Tencent tends to stay as an investor behind the growth stories. Thus Tencent is more successful internationally. It is a holding company. A big portion of the revenue comes from the investment. It is behind the names like epic games.
BABA has some short term problem, which is due to politics. That is the most problematic part in China. They dislike the politicians to be related to business. Generally, I am long on both.

[atulsoni]

Simply amazing explanation!! Thank you for sharing knowledge! I am watching your videos on valuation. I have been learning it for long time but never find awesome content with simple explanation. Thank you very much.

[chrishandle]

A unique and informative perspective. Thanks for posting.

Edit: I'm a little confused regarding the Tencent VIE comments. My understanding is that the HKG listed 0700 security and the OTC listed TCEHY both are part ownership in a VIE structure. Could you elaborate on this?

[andrewtee]

Thank you Professor Aswath Damodaran. Of all the value investing analysis I get in the internet for chinese tech companies, only yours are able to provide me a more detailed explanation. The crackdown is not temporary and it could bring permanent shift towards a company's value, hence merely looking at its past fundamentals and expecting status-quo like you mentioned do have risk.