Quick review of Chinese Tech Stock selloff – what does Mr. Market know that you don’t

Chinese tech names are hit hard in the past few months. As holders of a handful of them, I’m curious to know what Mr. Market knows about them that I don’t.

Starting with Tencent, game monetization approval is indefinitely halted, corporate structure is shaking up. Maybe that’s why it lost 38% of its value in past 180 days. How about JD? Founder CEO Richard Liu got into this sexual assault scandal. That must be why it lost 48%% of its market value. YY? Oh, that must be because the new type of short video, e.g. Douyin/Tik Tok gaining traction leading to it’s 43%% market valuation evaporation. BABA? Jack Ma retiring must lead to 34% market value drop.

Well, if they are plausible, what about BIDU, WB, NTES, MOMO, SINA, CTRP & GDS who all happened to lose 30-50% from their recent high? Are there plausible fundamental reasons to explain each of them incurring so similar negative returns? I’m sure financial journalist could help find them if they want to. However, it looks to me such synchronized movements could hardly be explained well by idiosyncratic risks. I just want to see how much these movements are synchronized (correlated), thus can be attributed to market as a whole, rather than for each specific name.

I’m a R person, and below I try to do some simple statistic summary. I also attached my R scripts in markdown file for whomever is familiar with R and may want to play around with it.

Download R Markdown Notes: Link

  • Here is how daily close price looks in past 180 trading days:20181017_1_StockCharts
  • Here is the performance and max drawdown in same period


  • here is the correlation matrix & its visualization


All these large blue dots indicate highly correlated daily price movement between these names, as well between single names and CQQQ (a Chinese tech ETF).

  • Let’s try to do a linear regression for YY to see how we can use CQQQ’s return to explain YY’s.

First, scatterplot the return of them, the best fit line already looks positive and close to 1.


Based on below linear model, slope of CQQQ is highly statistically significant (p value basically is 0). In other words, CQQQ’s return has high power to explain YY’s return. Note YY is less than 3% of CQQQ’s holdings.




In conclusion, my interpretation is that Mr. Market may not know more about each of these individual company than I do, rather it may be more driven by overall fear to macro events.

YY – an Under-Followed Chinese TMT Play with Margin of Safety

YY is a Chinese video live streaming + social networking business with two main operational segments, YY Live (the general entertainment content streaming, a loose equivalent of Periscope) and Huya (Gaming content streaming, an equivalent of Twitch). Its share has risen 135% YTD and valuation moved from a dirt cheap 11 trailing P/E by 2016 to a less cheap trailing 16 P/E (still cheap compared to other Chinese Tech peers), so why I am still interested in this name?

In short, a debt-free cash-gushing main business poised to take more market share as the general entertainment streaming market start to mature and consolidate, plus a fast growing gaming/e-sports streaming platform close to turn profitable and filing IPO in a favorable secular tailwind should warrant a market average valuation.  In addition, I noticed both platforms achieved market leading positions without promotion and successfully fended off competitors who tried to copy their business model. Add to it, YY has a deep-thinking founder-CEO with some track records of continuous innovation in fast changing market environment. All in all, this is something I think should be priced at a premium to market. My neutral assumption based valuation shows there still could be 29% upside, and a conservative assumption based valuation shows 0% downside. (optimistic assumption indicates 90% upside, but I don’t have to count on it)

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