Over the past 1 year, we have seen a steady decline in the value of Chinese stocks trading in the NYSE. However, last week saw a more gruesome Chinese stocks sell-off reminiscent of the 2008 crash. Some of the reasons for this journey south for Chinese stocks are related to the pressures they face on multiple fronts. One of them is the extensive Covid-19 lockdowns in major Chinese cities and regulatory threats from within and outside China.
Even China’s most prominent companies were not immune to the sharp falls. Alibaba Group Holding (NYSE: BABA), an e-commerce giant, fell 10.9% in early Hong Kong trading, and on the U.S side, where it is also listed, it fell more than 5% in premarket trading. JD.com (NASDAQ: JD), another giant in China, fell 14.8%, while Tencent (NYSE: TME) lost 9.8% of its value.
The steep declines were not restricted to the tech sector. Another driver of the Chinese economy, the real estate and properties sector, also saw rapid drops. The Hang Seng Mainland Properties Index shed 12% in Hong Kong trading. According to Mark Haefle, an investment officer in UBS Wealth Management, “the recent zero-Covid policy in China resulting in widespread lockdowns, ADR-related concerns, and negative news from the lending and property sector have all contributed to the sell-offs in the Chinese stock market.”
More than 300,000 people were recently forced to quarantine in Hong Kong and another complete lockdown in Shenzhen. Shenzhen is a port city with a population of 1.8 million. If the lockdowns continue in more Chinese cities, it would threaten global supply chains and slow the Chinese economy. The real estate sector that is heavily indebted is also impacting the sell-offs in the Chinese market. For some months now, it has been dragging the Asian markets downward due to its steady stream of negative news. Home prices are expected to drop by as much as 10% in the first half of 2022.
With these pressures in mind, here are two stocks that you should stay clear of in the Chinese market. Unfortunately, these two will soon be delisted from U.S stock exchanges due to their problematic accounting controls.
Yum China (NYSE: YUMC)
Yum China is one of the largest restaurant chains in China. Currently, the company has 11,000 restaurants in over 1,600 cities worldwide, including mainland China. It first got its IPO in America in 2016 at the NYSE and in 2020 at the Hong Kong Stock Exchange, HKEX.
Yum China's fourth-quarter results for 2021 were dismal. This was because its business was impacted mainly by the Covid-19 pandemic and consumer spending was down across the cities where its restaurants are located. As a result, there was a quarterly revenue of $2.2 billion, missing the forecast of $2.3 billion. Also, the top line had a 2% decline year over year. Total systems sales also decreased by 3% year over year, and since this company operates a partnership with KFC and Pizza Hut, sales across those channels in China also reduced.
With the current threat to delist Yum China from NYSE due to accounting irregularities, the company's shares are expected to fall even as China continues to pursue its biting zero-Covid policy.
Hutchmed (China) Ltd (NASDAQ: HCM)
Hutchmed China Ltd was formerly known as Hutchison China Meditech Ltd. This company is involved in the manufacture and sale of drugs. The company has two segments. The oncology and immunology segment is tasked with researching and developing drugs for treating cancer and related diseases. The Other Ventures segment is involved in day-to-day operations like sales, manufacturing, marketing, and distribution of its drugs.
For the 2021 earnings report, oncology and immunology revenues rose 296% to about $119.6 million. Drugs that made this achievable were ELUNATE and SULANDA. In addition, several phase II studies are in development, including AstraZeneca.
Despite the positive results, if the company is delisted from NASDAQ by March, its stock will fall drastically and investors will lose money.
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