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).
Slides: www.stern.nyu.edu/~adamodar/pd...
Blog Post: aswathdamodaran.blogspot.com/...
Valuation spreadsheets:
1. Tencent (Benevolent): www.stern.nyu.edu/~adamodar/p...
2. Tencent (Net Minus): www.stern.nyu.edu/~adamodar/p...
3. Tencent (Adversarial): www.stern.nyu.edu/~adamodar/p...
4. Alibaba (Benevolent): www.stern.nyu.edu/~adamodar/p...
5. Alibaba (Net Minus): www.stern.nyu.edu/~adamodar/p...
6. Alibaba (Adversarial): www.stern.nyu.edu/~adamodar/p...
7. JD.com (Benevolent): www.stern.nyu.edu/~adamodar/p...
8. JD.com (Net Minus): www.stern.nyu.edu/~adamodar/p...
9. JD.com (Adversarial): www.stern.nyu.edu/~adamodar/p...
10. Didi (Benevolent): www.stern.nyu.edu/~adamodar/p...
11. Didi (Net Minus): www.stern.nyu.edu/~adamodar/p...
12. Didi (Adversarial): www.stern.nyu.edu/~adamodar/p...

[@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.

[@tirthpatel7430]

Hi, What did you deduct from this?

[@arpitmanchanda6903]

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.

[@tirthpatel7430]

Hi, What did you deduct from this video?

[@hurdur6828]

hello casey burns investing, i see you everywhere in the comment section

[@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.

[@rchen404]

As is Baba. Why are they so lazy that they have to hide behind VIE in Hong Kong?

[@rahularora8849]

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.

[@jahouser6273]

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

[@PARKiE]

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

[@LeandroSantos-ev2gm]

exactly

[@UsmanAli-ve6tq]

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

[@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.

[@petelipson3769]

In listening to other lectures by the professor, I believe his opinion of BIDU would be somewhere between his comments on JD and his comments on DIDI. They(BIDU) have the same Cayman Islands shell company thing going on, as I understand it. Their fundamental profit trend in their 10K, and cash flow trend are not as good as Baba, but not as ugly as DIDI.....

[@atulsoni5658]

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.

[@larrycanada2100]

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

[@dolevmazker736]

Thank you for this session, it is a much needed one

[@devathaphani]

Thank you so much for the in depth analysis and learned lot of points in this 40min.

[@zjxn06]

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!

[@cezarykrajewski4840]

this is exactly what i needed, thank you Professor

[@alessandrobuzzin7982]

Thx so much Mr Damodaran. What a deep analysis.

[@nikunj150188]

This is such a good analysis! Thank you Sir for sharing your work with us!

[@rodrigoyanez3982]

Thank you professor! Glad to keep learning from your wisdom!

[@tanmay768]

This informative video needs more views than ever. Very well put together Aswath Damodaran.

[@valueshoken]

Thank you for the free and quality lecture , professor !

[@AlanSii]

I really enjoy your analysis! Thank you very much.

[@eric5901]

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

[@hiteshshewakramani2507]

This is incredible! Thanks a lot, Professor.

[@KelechIwuaba]

I love this entire breakdown!!

[@robchesnutt]

Always appreciate your insight. Thank you.

[@dhyanben]

Wonderful presentation of thesis, interrelating and presenting in an order.

[@amanjha9945]

The Best Thing in the world right now..Thanks Prof.

[@chrishandle2]

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?

[@porpentosa]

I think you are right. Besides, I wonder if buying Naspers or Prosus is not a smart way to avoid the VIE status (besides the discount).

[@shashankgoudboorgu7921]

Excellent analysis!! Thanks a lot prof

[@ericeche1607]

Great insights , thank you so much for sharing.

[@muzammilali007]

Thank you professor for another gem. I was hoping to see you on CNBC discussing China's Evergrande fallout and its implications on the rest of the market and the global growth. Would be great to hear your thoughts on the subject.

[@adityagrover904]

Much needed, thankyou!!

[@_VlCTOR_]

That was the best video on china stock you can find on youtube. Thank you!

[@ThirumalavasanGDamodaran]

Excellent one. Thank you Prof for making this lucid a presentation.

[@rafaelsaldana6235]

Thanks for the video! I enjoyed the analysis. Do you see the situation happening with Evergrande impacting the China stock market?

[@sherifomar5092]

Amazing analysis, thanks alot ; question given your valuation model vs today's market values for both BABA and Tencent, it seems that they are below the worst case scenario that you have shared in the video , thus theoretically it has good margin of safety. Based on the current business, monetary and geopolitical environment what are your views about those valuations vs today's prices ?

[@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.

[@sanjaybhatikar]

Thank you 🙏 I am surprised so few investment managers share this information. You would think it is relevant to investment decisions.

[@josephchoi417]

I'm deeply grateful for the knowledge you share thank you

[@FRANKWHITE1996]

great content! thanks for sharing!!! 👑

[@nirajpavagadhi2085]

Sir You are Gem ! Always amazing content !

[@jesmiscellaneous8938]

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

[@acoessimples8453]

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

[@mingmataaaa]

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

[@PARKiE]

It's still a VIE, just not an ADR :]

[@maxhugen]

👍 A very interesting video, I learnt a lot, thank you! I'd really like to see a video of some of India's major emerging public companies too? 🇦🇺

[@arielburbaickij2012]

Do you maintain statistics on price convergence time of your investments? Would be interesting to cross-check against market returns for the same time.

[@florazhangxh]

Hi professor, thanks for the great post. I found one inconsistency regarding the currency you used for the input sheet of Tencent Valuation. The actual number you input here is RMB instead of HKD.

[@suntacha]

Very well thought of analysis!

[@ivinitmittal]

Thank you soo much prof!!

[@matteozerbin4586]

Thank you professor, amazing work

[@SinisaStojanovic]

Thank you, Professor 🙏

[@adhirajmukherjee8455]

Thank you, Professor!

[@bikashbaid]

Good analysis and i will go with both tencent and alibaba... 50:50

[@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.

[@jaimelaw1]

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.

[@irenelye5706]

Hi were u able to open the attached valuation spreadsheets? thks

[@jaimelaw1]

@@irenelye5706 I did not open the valuation spreadsheet.

[@faltitudebossareas1882]

Ever thought about changing the templates here and there?

[@ManasR]

Thank you 🙏

[@teachingwealth425]

Thanks Prof

[@harshitsaini3310]

Sir you are a lovely teacher.

[@tonyzhang5251]

Tencent holding is a shell company in Cayman, too. Is there any difference between Tencent and Alibaba VIE?

[@acoessimples8453]

Ok I have feedback. Why at 30:03 Tencent value on the net negative the value is 512.83KH$ and in the net Minus spreadsheet it's 531.16HK$ ?

[@DeepakRajput-ko8ge]

Thank you sir

[@kanika.28]

I stumbled upon him through CFA's linkedin post and then saw his video on 'groww'.I had no idea he is one of the top most finance proffesors in the world.He is such a good Orator.We need him in Indian B School.

[@sundarraman6206]

Superb.. Loved it 🙏

[@ddds898]

Alibaba and JD are listed in the hong kong stock exchange, ticker 9988 and 9618. Is Damodaran wrong or am I missing something? Most likely the second one :)

[@jakelo1045]

I think you are correct. Adding to the confusion, their current prices in HKD do not correspond at all with the share prices in CNY that Damodaran uses in the spreadsheets. Did he make a mistake with the ADR ratio or the currency translation?

[@jiaxinxu6845]

@@jakelo1045 IIRC Baba's HKSE shares and NYSE shares have a ratio of around 1:8, derived from the (mostly) set exchange rate between HKD and USD. It's designed such that the prices are roughly equivalent both ways despite different currencies. Not sure about JD or how the notional of CNY used in his presentation affected things here.

[@zjxn06]

Professor, Suggest you doing a quick video on recently released draft rules on overseas listing from Chinese regulator. Legitimizes VIE structure. SCMP article suggests Chinese companies will be also able to direct list on US exchanges, eliminating need for VIE. More specifically, BABA could eventually dump VIE structure and directly list in the US.

[@SanjeeviNarasimhan]

Great wisdom of fishing in choppy waters.

[@Pondichery2France]

Thanks for the video. 🙏 Holding Tencent in the name of prosus.🎁

[@brianlarson8088]

Excellent presentation.

[@macfiona4545]

Thank you Guru.

[@Prakhar_CAN]

Thank you sir🙏🏻

[@non5309]

Спасибо!

[@aimlesfez]

At which dates were prices sampled for this video?

[@simonroese2596]

Great insight

[@sik9802]

are the valuation spreadsheets are longer available?

[@rampathak1]

Thanks for sharing!

[@okigan]

Why US government risk not included in the model? (ex delisting risk)

[@matteofee7069]

When 40 mins worth 40 hours

[@Fire-ci4se]

Can you do the same for Evergrande or Huarong?

[@cjentila9127]

Isn't alibaba listed as well in HKEX?

[@stockswithleah3590]

Good analysis

[@FreeFrag777]

Hi! I see that Prosus owns about 29% of shares. Not 46.5. What do you ment saying that it owns 46%?

[@notzachpowers]

Wonderful video

[@maxjames00077]

@35:20 Isn't Tencent also listed under the VIE structure?

[@TK-ed9vl]

I'm at the gym right now but when I saw this video I immediately clicked.

[@crazyoatmeal]

Why are the valuations so conservative for the "probable" scenario at 30:00? My guess is that they are aligned with current PE ratios. Would it be valid to assume these ratios could fall closer to what we saw before the crackdown, if the final extent of the regulations are somewhat reasonable 1 or 2 years into the future?

[@necromancer7712]

my average cost on BABA is 153$. not that great compared to 112$ today but considering to buy more. This can be an opportunity where risk reward is highly asymmetrical

[@samarthshrimal2111]

Why is the cost of capital 0% for Didi in the column "Government as adversary" ?

[@oaasal]

I’m wondering where those 2 thousands data of GDP came from?

[@pard_ghy9529]

Pure gold

[@emanuelederiu5154]

The Valuation spreadsheets links doesn't work

[@BradKaellner]

I believe that the Prosus discount will narrow over time, but it won't be fast or easy. I certainly can't fault you for wanting to avoid stacking corporate governance risk.

[@Simon_S22]

He’s afraid of being canceled by China

[@anssi9137]

@@Simon_S22 Logically thinking if one is afraid government Prosus sounds the safest option, since if China took radical measures Prosus at least is located in EU and would probably have best chance to recouping something due to EU pressure.

[@srh80]

Why does the discount exist in first place. Even with techy rallied until feb the discount was similar. Its not a big secret and any institutional investor who wanted to arb it out, would have. Why havent they? Why should retail investors take the initiative on one more layer of risk? I havent found this point addressed in anywhere in value investor community...

[@anssi9137]

@@srh80 Perhaps the current discount is fairly close to the bottom discount that will remain until something happens? For example, maybe one of the other Prosus investments becomes valuable enough that owning it + tencent even through layer is worth more than tencent. Until then, maybe the discount just remains and even slightly widens.

[@2ayonsarkar]

content like these r for free. India will gain a lot

[@kirankumarsukumar]

Top notch

[@bill7580]

Professor, you are very clever and knowledgeable. But high investment return needs luck element. If I want to invest in Chinese market, I will invest in both Tencent and Baba instead of single company.

[@paulsebastian3017]

Is alibaba any different from a spac

[@shubhadeepbanerji2107]

Sir can you do a video on hedera hashgraph

[@dannyz955]

Aren't HKEX-listed alibaba and tencent shares also VIE's?

[@AswathDamodaranonValuation]

Alibaba and Tencent. Tencent's VIE is in Hong Kong, but Alibaba's is in the Cayman Islands.

[@sumeetsureshvandakudari346]

@@AswathDamodaranonValuation Hi Prof, how does a VIE in HK differ from Alibaba's structure, If I understand correctly you still own the shares of the shell company, which has Wholly owned foreign entity that is in china, which in-turn has agreements with the VIE.

[@thedavidbrother2]

Thanks for this video and walkthrough! Been following the discussions around chinese tech for a while. Sudden pricedrops combined with revenue increases should usually demand some attention. Actually the first thing that interested me was the 'Trump vs Huawei' debacle in 18..19, and later 'Trump vs TikTok'. Here it was stated from the american side that chinese tech was dangerous to people in the west, controlled by the state, spying on us etc. When chinese govt is so actively trying to reign in its own tech giants, that narrative seem to have broken down now! Instead chinese tech is seemingly loathed by both the western and chinese govt. (While tik tok and aliexpress are still very popular). I find the discussion about these issues very poorly informed, for various reasons. I like the pricing of that sector compared to qqq for instance, BUT given what you say in this video, I'm trying to avoid individual companies, because I realize how poorly informed I am... Instead trying something like KWEB. Again, thanks for the video, china is not easy to understand or predict.

[@Rohit-mu1gg]

Sir please review indian stock market