In this article, we discuss the 10 Chinese stocks hedge funds are selling amid crackdowns.
The stocks of major China-based companies that trade on exchanges in the United States have taken a beating over the past few weeks amid an intensifying government crackdown against dual-listed firms by the Chinese government. This has caused a major investor exodus from Chinese stocks, resulting in a huge drop in the share prices and several ratings downgrades by reputable investment banks. Government data indicated that at the end of May this year around 248 Chinese firms worth $2.1 trillion in market capitalization were trading in the US.
Some of the top Chinese stocks trading on exchanges in the US include Alibaba Group Holding Limited (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU), Pinduoduo Inc. (NASDAQ:PDD), NIO Inc. (NYSE:NIO), and JD.com, Inc. (NASDAQ:JD), among others. The share prices of these firms have registered losses of 23%, 13%, 20%, and 21% respectively in the last three months, with only JD.com climbing close to 4% over the period. All these firms have had the price targets on their stocks lowered as well.
In late March, as the crackdown was just beginning, three of these top firms collectively lost $60 billion in market value in just three days, according to a report by news platform CNBC that used Refinitiv data for the purpose. In July, a statement by the State Council, the chief administrative authority in China, underlined that the overseas listing system for domestic enterprises was in the process of being updated. According to the body, this was being done to tighten restrictions on cross-border data flows and security.
The crackdown has already slowed down a slew of planned Chinese initial public offerings on the US market, with new companies hesitant about the impact of new policies on their operations. According to data from Renaissance Capital, 30 Chinese IPOs in the US last year had raised the most capital since 2014. This number has been expected to increase in 2021 before the crackdown. The technology sector, which comprises the majority of the market share of the dual-listed Chinese sector, has been hit hardest by the new developments. Even hedge funds have turned on these Chinese firms amid market uncertainty.
The tech-enabled disruption that has upended entire investment portfolios in recent years and even transformed the world of finance is facilitated by the Chinese firms on the US market, most of which deal in fintech and crypto products. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 115 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Our Methodology
With this context in mind, here is our list of the 10 Chinese stocks hedge funds are selling amid crackdowns. The main aim of this article is to acquaint readers with the Chinese companies that have suffered a dip in investments from hedge funds in the past few months.
The firms were selected using data from the 873 funds tracked by Insider Monkey. Only those that saw a decrease in the number of hedge fund holders in the second quarter, as compared to the first quarter of 2021, were picked. The list is compiled according to the number of hedge funds having stakes in each stock.
The basic business fundamentals and analyst ratings for each firm are also discussed to provide readers with some context so they can make more informed investment choices.
Hedge Funds are Selling These Chinese Stocks Amid Crackdowns
10. Adagene Inc. (NASDAQ:ADAG)
Number of Hedge Fund Holders in Q2: 7
Number of Hedge Fund Holders in Q1: 10
Adagene Inc. (NASDAQ:ADAG) is placed tenth on our list of 10 Chinese stocks hedge funds are selling amid crackdowns. The firm operates as a clinical stage biopharmaceutical firm focusing on the development and production of drugs for cancer treatment.
On June 24, investment advisory China Renaissance initiated coverage of Adagene Inc. stock with a Buy rating and a price target of $40.57. Claire Wang, an analyst at the firm, issued the ratings update.
At the end of the second quarter of 2021, 7 hedge funds in the database of Insider Monkey held stakes worth $13 million in Adagene Inc., down from 10 in the previous quarter worth $18 million.
Just like Alibaba Group Holding Limited, Baidu, Inc., JD.com, Inc., Pinduoduo Inc., and NIO Inc., Adagene Inc. is one of the Chinese stocks affected by the government crackdowns.
9. 360 DigiTech, Inc. (NASDAQ:QFIN)
Number of Hedge Fund Holders in Q2: 14
Number of Hedge Fund Holders in Q1: 19
360 DigiTech, Inc. (NASDAQ:QFIN) is ranked ninth on our list of 10 Chinese stocks hedge funds are selling amid crackdowns. The firm owns and runs a digital consumer finance platform that provides finance products to borrowers funded by institutional partners.
On August 23, investment advisory Citi maintained a Buy rating on 360 DigiTech, Inc. stock but lowered the price target to $24.99 from $43.67. The ratings update was issued by Judy Zhang, an analyst at the advisory.
Out of the hedge funds being tracked by Insider Monkey, London-based investment firm GLG Partners is a leading shareholder in 360 DigiTech, Inc. with 516,372 shares worth more than $21 million.
Along with Alibaba Group Holding Limited, Baidu, Inc., JD.com, Inc., Pinduoduo Inc., and NIO Inc., 360 DigiTech, Inc. is one of the Chinese stocks feeling the heat from government crackdowns.
8. KE Holdings Inc. (NYSE:BEKE)
Number of Hedge Fund Holders in Q2: 31
Number of Hedge Fund Holders in Q1: 33
KE Holdings Inc. (NYSE:BEKE) is a Beijing-based firm that owns and runs an integrated online and offline platform for housing transactions and services. It is placed eighth on our list of 10 Chinese stocks hedge funds are selling amid crackdowns.
On August 16, investment advisory Goldman Sachs downgraded KE Holdings Inc. stock to Neutral from Buy and lowered the price target to $19.30 from $35, noting that there was “unpredictability” around the property market slowdown in China.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm ARK Investment Management is a leading shareholder in KE Holdings Inc. with 5.8 million shares worth more than $276 million.
In addition to Alibaba Group Holding Limited, Baidu, Inc., JD.com, Inc., Pinduoduo Inc., and NIO Inc., KE Holdings Inc. is one of the Chinese stocks suffering amid crackdowns.
7. Yum China Holdings, Inc. (NYSE:YUMC)
Number of Hedge Fund Holders in Q2: 32
Number of Hedge Fund Holders in Q1: 34
Yum China Holdings, Inc. (NYSE:YUMC) is a Shanghai-based company that owns and runs a string of franchise restaurants like KFC and Pizza Hut. It is ranked seventh on our list of 10 Chinese stocks hedge funds are selling amid crackdowns.
On September 15, investment advisory Macquarie downgraded Yum China Holdings, Inc. stock to Underperform from Neutral and lowered the price target to $52.90 from $56, noting that the sales recovery of the firm would remain “bumpy” in the coming months.
Out of the hedge funds being tracked by Insider Monkey, London-based investment firm GuardCap Asset Management is a leading shareholder in Yum China Holdings, Inc. with 6.9 million shares worth more than $460 million.
Alibaba Group Holding Limited, Baidu, Inc., JD.com, Inc., Pinduoduo Inc., and NIO Inc. are some of the Chinese stocks in the US affected by crackdowns, alongside Yum China Holdings, Inc..
6. Vipshop Holdings Limited (NYSE:VIPS)
Number of Hedge Fund Holders in Q2: 36
Number of Hedge Fund Holders in Q1: 54
Vipshop Holdings Limited (NYSE:VIPS) is placed sixth on our list of 10 Chinese stocks hedge funds are selling amid crackdowns. The company owns and runs an online discount detailer for various brands and operates from Guangzhou.
On September 3, investment advisory UBS downgraded Vipshop Holdings Limited stock to Neutral from Buy and lowered the price target to $17 from $33, predicting that the revenue and user growth of the firm would slow down in the next few quarters.
At the end of the second quarter of 2021, 36 hedge funds in the database of Insider Monkey held stakes worth $1.30 billion in Vipshop Holdings Limited, down from 54 in the preceding quarter worth $1.34 billion.
Alibaba Group Holding Limited, Baidu, Inc., JD.com, Inc., Pinduoduo Inc., and NIO Inc. are some of the Chinese stocks in the US affected by crackdowns, just like Vipshop Holdings Limited.
5. GDS Holdings Limited (NASDAQ:GDS)
Number of Hedge Fund Holders in Q2: 38
Number of Hedge Fund Holders in Q1: 40
GDS Holdings Limited (NASDAQ:GDS) is ranked fifth on our list of 10 Chinese stocks hedge funds are selling amid crackdowns. The firm develops and operates data centers and is headquartered in Shanghai.
On August 19, investment advisory RBC Capital reiterated an Outperform rating on GDS Holdings Limited stock but lowered the price target to $100 from $122, underlining that the “country risk and macro uncertainty” factored in the ratings update.
At the end of the second quarter of 2021, 38 hedge funds in the database of Insider Monkey held stakes worth $1.6 billion in GDS Holdings Limited, down from 40 in the previous quarter worth $2 billion.
In its Q1 2020 investor letter, Baron Asset Fund, an asset management firm, highlighted a few stocks and GDS Holdings Limited (NASDAQ:GDS) was one of them. Here is what the fund said:
“In the most recent quarter, we acquired shares of GDS Holdings Limited, the leading data center developer and operator in China serving the premier Chinese cloud service, e-commerce, social media/gaming, and internet players. Although we have not invested in many foreign-based companies, we believe that GDS represents a compelling opportunity. Its business shares many similarities with Equinix, Inc., a U.S.- based data center operator that has been a profitable long-term investment for the Fund. In addition, our real estate research team has met extensively with GDS management over the course of the last few years and has built increased confidence in the team’s growth aspirations and its ability to successfully execute them.
We believe that the Chinese data center industry remains in the earlier stages of its growth curve, and we believe it will experience one of the fastest multi-year growth rates globally as the Chinese government continues to support the rapid rollout of 5G connectivity. GDS’s current and future data centers support the critical IT infrastructure that empowers cloud adoption and enables numerous consumer and business applications. In addition to experiencing robust organic growth, GDS has accelerated its growth runway through select M&A. These acquisitions have allowed the company to obtain additional capacity in supply constrained markets at attractive prices. In addition, GDS has supplemented its dense urban strategy with a “campus strategy,” whereby it secures additional supplies of land and power on the outskirts of cities with minimal capital committed.
To provide some perspective on GDS’s growth rate, it signs more “bookings” in a single quarter than many global data center companies sign over the course of a year. Lastly, after two well received capital raises in 2019, GDS remains well funded with ample cash on its balance sheet to support multiple years of accelerated growth. GDS also has several deep-pocketed backers, including the Singaporean government’s investment fund, that have remained supportive of GDS’s growth plans and have participated in several of GDS’s capital raises. We believe there are many similarities to our other data center investments–GDS is earlier on its growth curve but growing at a much faster clip. We see a path for GDS to nearly triple its cash flow over the next few years, and we see a path to double our investment over that timeframe.”
4. New Oriental Education & Technology Group Inc. (NYSE:EDU)
Number of Hedge Fund Holders in Q2: 39
Number of Hedge Fund Holders in Q1: 45
New Oriental Education & Technology Group Inc. is a Beijing-based company that markets private educational services across China. It is placed fourth on our list of 10 Chinese stocks hedge funds are selling amid crackdowns.
On July 25, investment advisory Goldman Sachs downgraded New Oriental Education & Technology Group Inc. stock to Neutral from Buy and lowered the price target to $3.60 from $14.20, noting that the after-school tutoring market was shrinking in China.
At the end of the second quarter of 2021, 39 hedge funds in the database of Insider Monkey held stakes worth $590 million in New Oriental Education & Technology Group Inc., down from 45 in the preceding quarter worth $2 billion.
In its Q1 2021 investor letter, Polen Capital, an asset management firm, highlighted a few stocks and New Oriental Education & Technology Group Inc. (NYSE:EDU) was one of them. Here is what the fund said:
“New Oriental Education shares declined in the quarter, seemingly on account of two notable drivers. First, Chinese online education is currently under a regulatory microscope, although the online tutoring area is not central to New Oriental’s business. We continue to believe that, as a large player in a highly fragmented market, New Oriental is well-positioned to manage regulatory change and offers regulators an easier touchpoint to regulate and monitor than individual mom & pop operators.
As regulatory fears hit the after-school tutoring market, we think New Oriental, a leading player in brick-and-mortar after-school tutoring, could gain strength. We think the long-term backdrop for after-school tutoring remains quite favorable. Significant scale advantages and a highly cash generative model with just approximately 5% market share indicate that New Oriental has potential to grow at a high rate, in our opinion. Further, movements by another investor in New Oriental in late March 2021 prompted indiscriminate selling of shares. Those sales left shares trading at a compelling valuation, in our opinion, so we acted by adding to our position. We think New Oriental remains poised to grow earnings at approximately 25% annual rate in the coming years.”
3. Bilibili Inc. (NASDAQ:BILI)
Number of Hedge Fund Holders in Q2: 47
Number of Hedge Fund Holders in Q1: 53
Bilibili Inc. (NASDAQ:BILI) is a Shanghai-based company that provides online entertainment services, including live broadcasting. It is ranked third on our list of 10 Chinese stocks hedge funds are selling amid crackdowns.
On August 20, investment advisory HSBC maintained a Buy rating on Bilibili Inc. stock but lowered the price target to $127 from $140, underlining that the potential outperformance in non-game would offset weaker game contribution for the firm.
At the end of the second quarter of 2021, 47 hedge funds in the database of Insider Monkey held stakes worth $2 billion in Bilibili Inc., down from 53 in the preceding quarter worth $3 billion.
In its Q4 2020 investor letter, Tao Value, an asset management firm, highlighted a few stocks and Bilibili Inc. (NASDAQ:BILI) was one of them. Here is what the fund said:
“Bilibili (ticker:BILI) similarly reported a blast Q3 2020. Bilibili reached average MAU of 197m with high 7.6% pay ratio, showing strong user growth and high engagement. Additionally, the high margin advertisement segment showed exceptionally strong trend, growing 126% yoy. Though surprising to many, I think it is a natural outcome of building an ever-more valuable user generated contents platform. If it is not by ads, I believe these values created by Bilibili will accrue to it in other ways. One interesting data point is that management mentioned the average age of new cohorts are still around 20, indicating it is still in its early stage of a long growth runway. I am happy to see this position played out like how I envisioned in original thesis and will be excited to continue to follow its progress.”
2. Pinduoduo Inc. (NASDAQ:PDD)
Number of Hedge Fund Holders in Q2: 49
Number of Hedge Fund Holders in Q1: 56
Pinduoduo Inc. is placed second on our list of 10 Chinese stocks hedge funds are selling amid crackdowns. The firm owns and runs an online ecommerce platform and is headquartered in Shanghai.
On August 25, investment advisory Benchmark kept a Buy rating on Pinduoduo Inc. stock but lowered the price target to $156 from $176, noting that the firm had reported mixed second quarter earnings.
At the end of the second quarter of 2021, 49 hedge funds in the database of Insider Monkey held stakes worth $5.2 billion in Pinduoduo Inc., down from 56 in the preceding quarter worth $6.2 billion.
In its Q1 2021 investor letter, Tao Value, an asset management firm, highlighted a few stocks and Pinduoduo Inc. (NASDAQ:PDD) was one of them. Here is what the fund said:
“Pinduoduo reported a strong quarter, reporting MAU of 720 million, now surpassing Taobao. However, it was overshadowed by a bigger news on Colin Huang resigning from Board and completely disassociating himself from PDD’s management & operation. Huang explained in his letter to shareholders that he would start fundamental research initiatives in food science. Although not entirely shocked (as he already stepped down from CEO July 2020), I am surprised by the fast pace of such transition. I remain confident in the organization and the culture Huang built but will monitor it closely.”
1. Baidu, Inc. (NASDAQ:BIDU)
Number of Hedge Fund Holders in Q2: 59
Number of Hedge Fund Holders in Q1: 89
Baidu, Inc. is ranked first on our list of 10 Chinese stocks hedge funds are selling amid crackdowns. The firm provides a range of internet-related services, including search, across China. It operates from Beijing.
On August 13, investment advisory Oppenheimer maintained an Outperform rating on Baidu, Inc. stock but lowered the price target to $320 from $355, underlining that the COVID-19 cases in China were impacting advertising budgets for the firm.
At the end of the second quarter of 2021, 59 hedge funds in the database of Insider Monkey held stakes worth $3.4 billion in Baidu, Inc., down from 89 in the preceding quarter worth $6.5 billion.
In its Q1 2021 investor letter, Horos Asset Management, an asset management firm, highlighted a few stocks and Baidu, Inc. (NASDAQ:BIDU) was one of them. Here is what the fund said:
“We have also fully exited our stake in Baidu, following their outstanding performance during the period and their lower relative upside potential compared to other investment alternatives, which we will discuss below.
The Chinese technology platform company Baidu has also been held in the portfolios managed by Alejandro, Miguel and myself for several years. During this period, we have seen very high volatility in its share price, which we have taken advantage of to make significant rebalancing moves in our position (in fact, we even sold our entire position once, when we thought the stock’s upside potential was exhausted). After several years of instability, market sentiment turned very positive, putting an end to the historical advertising problems in the healthcare sector, the divestments in O2O (Online-to-Offline) businesses that continued to weigh on the company’s margins, the IPO of part of the iQiyi streaming business (which hid Baidu’s underlying cash generation capacity) and the tough competition from other industry giants such as Tencent and Alibaba, as well as the entry of new players with disruptive business models (ByteDance). At the same time, the company’s recent commitment to electric vehicles contributed even more to this change of narrative. Baidu’s share price rose almost fourfold from the March 2020 lows to all-time highs and reached a valuation where the margin of safety, in our view, was too narrow.”
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