Notes on regulatory scrutiny
One of the major reasons that drove the more than 40% correction in MeiTuan (and the Chinese Internet sector overall) since February is the increased regulatory scrutiny from Beijing.
Some concerned investors are drawing parallels here with their peers in the US, where a string of lawsuits are currently being lined-up, and where the threat of eventual break-ups appear to be growing in potential over time. It is ATEC’s view that this fear might be wrongfully founded upon the belief that Beijing’s motivation for doing this is similar to that of Capitol Hill.
ATEC opines that Beijing’s philosophy here towards the Chinese Internet platforms is to have them align their interests with that of the CCCP, and not to place a hard cap on their growth potential. This is clear from the (rather) meagre fines placed upon the behemoths Tencent and Alibaba recently.
It is clear from the ‘persons’ whom Beijing chose to severely penalise. It is also obvious through the list of corrective actions meted out, where both companies have just to re-organise their financial operations into a holding company, so Beijing can have better control and oversight of the financial system. ATEC wonders if this is not just forcing them to be more socially responsible?
Meanwhile, the growth that MeiTuan continues to deliver remains astronomical, as evidenced by their recent quarterly results. Sceptics might point to the concern over a ‘spending war’ between competitors, but ATEC does not remember a time in this sector when the competition was not aggressive. The unintended consequence of the new regulatory environment that ATEC sees, is that many of these Internet companies will now have no choice but to innovate even faster, rather than sticking with old unfair competition methods. Does this not remind us of what Capitol Hill is trying to do with Amazon and Apple?
We go long Meituan here. So long as the stock holds its recent breakout of HK$295/300, we think it can eventually recover its entire prior correction.