In terms of both duration and scope, the regulatory tightening that began in China in late 2020 intensified. Stocks were under pressure after the Chinese government passed antitrust and antimonopoly legislation. Investors should avoid fundamentally weak Chinese stocks The9 Limited(NCTY), Recon(RCON), or ZW Data(CNET), as they are not affected by China's regulatory crackdowns. Continue reading ....
China's regulatory environment has become increasingly stricter over the last two years. Unexpected regulatory actions by policymakers have contributed to a challenging environment for business and affected overall market sentiment. Although there is increasing optimism about the changing regulatory climate, there still isn't an end in sight and many Chinese stocks continue taking a beating.
It may be prudent to avoid the Chinese stocks The9 Limited, Recon Technology, Ltd., and ZW Data Action Technologies Inc.
Since late 2020, China's multi-pronged crackdown has targeted a variety of sectors ranging from education to technology, and even real estate. This has resulted in the loss of hundreds of millions of dollars to the market capitalizations for some of China's biggest companies. The regulators canceled at the last moment the record-breaking initial public offering of internet finance giant Ant Group in November 2020.
Ant's IPO had a value of $37 billion. The Shanghai Stock Exchange regulators abruptly halted the offering citing "significant issues, such as changes in the financial technology regulatory climate." China's main goal in adopting a stringent regulatory regime is to strike a balance between social equality, sustainable growth and national security.
The country implemented a number of anti-monopoly, industry-specific, and data security regulations. The State Administration of Market Regulation launched an antitrust investigation into the internet companies of the country. Alibaba was the first company to be subjected this regulatory investigation.
Alibaba was scrutinized during the crackdown on regulatory issues for its monopolistic practices in ecommerce and data-security practices in cloud computing. China's push to enforce data protection also affected Didi and many other companies. Didi's application was suspended by the Cyberspace Administration of China for failing to follow security protocols.
Investors' sentiment can be dampened by the uncertainty around the crackdown on regulatory practices in China. This could lead to a drop in valuations of Chinese IPOs listed in the US. This makes it very difficult for Chinese firms to raise money overseas.
There are no signs of a easing in China's tough stance on the tech industry. Regulators will continue to enforce their position this year and into the future to ensure long-term growth for the digital economy or the broader economy.
Avoid the Chinese stocks NCTY and RCON. These stocks have been hit by China's regulatory crackdowns.
Take a closer view at these fundamentals:
The9 Limited (NCTY).
NCTY is an international internet company. The company also operates cryptocurrency mining and NFTSTAR - a NFT trading platform and community that allows users to buy, trade and interact. Shanghai is the company's headquarters.
NCTY's ROCE, ROTC and ROTA trailing-12 months of negative 145.33% (-58.04%), 111.37% (-111.37%), and 58.04% (-58.04%) are significantly below the industry averages, which are 2.94% (3.54%), 1.32% (1.32%), respectively. The stock's trailing-12 month cash per share is $0.49, which is 68.4% less than the industry average of 1.54%.
NCTY's net revenue for the six-month period ending June 30, 2022 decreased by 59.6% from last year to $7.58 millions. The company's gross loss was $1.57m, compared with a profit of $8.45m the previous year. The loss from operations of the company increased by 456,9% over the previous year to $78.14 millions.
The net loss attributable by holders of ordinary shares increased by 360.9%, or $0.13 per share.
NCTY shares have fallen 68.4% in the last year, closing the last trading day at $0.85. The stock's beta over the past 24 months is 1.95.
NCTY's poor prospects are reflected in its POWR ratings. Our proprietary rating system gives the stock an overall grade F. This translates to a strong sell. The POWR ratings assess stocks based on 118 factors, each of which has its own weighting.
NCTY is rated F for Quality and Growth. Stocks also have a D for Stability. The stock is ranked 46th out of 46 stocks in China's industry.
Click here to view additional POWR ratings for NCTY's Value Momentum and Sentiment.
Recon Technology, Ltd. (RCON)
RCON, headquartered in Beijing in the People's Republic of China offers software, hardware and on-site support to companies involved in the oil mining and extraction industries. The company sells industrial automation solutions and controls, as well as tools and components for oilfield production, other energy industries, and related equipment.
RCON's 12-month trailing gross profit margin is 24.09%, 46.9% less than the average industry of 45.35%. The stock's EBITDA (trailing-12-month) and net income margins, which are negative 75.30% and 60.92% respectively, compare with the industry averages (33.92% and 13.62%).
RCON's total revenue for the six-month period of fiscal 2023 that ended December 31, 2020 decreased 16.3% from last year to $6.60 millions. The revenue drop was due mainly to the decrease in automation products and software revenue, oilfield environment protection revenue, and platform outsourcing service revenue. The company's gross profit dropped 9.7% to $1.90m from the previous year.
RCON also reported a loss of $2.18million. The company also reported a loss of $4.33m and $0.13 per share. Cash was $39 million at December 31, 2022 compared to $47.30 millions as of June 30 2022.
Analysts anticipate that RCON will report a loss of $0.20 per share for fiscal years 2023-2024. The stock fell 55.4% in the past six-months and 53.4% in the past year, closing the last trading day at $0.41.
RCON's POWR ratings reflect this poor outlook. The rating is D overall, which translates to Sell in our proprietary system.
Stocks have an F for Stability, and a D grade for Quality, Sentiment and Growth. It is ranked 42 out of 48 stocks within the China industry.
We've also graded RCON for Value and momentum. All RCON ratings are available here.
ZW Data Action Technologies Inc.
CNET offers integrated online advertising and marketing services, including data analytics and precision marketing. It also develops and offers blockchain-based services and products. Beijing is the company's headquarters.
CNET announced on January 17 that its Board of Directors had approved a reverse split of its common shares, par value of $0.001 per share in a ratio of 1:5. The reverse stock splitting was done primarily to ensure that the company would be able to meet the $1.00 minimum price for Nasdaq listing.
CNET's 12-month trailing gross profit margin is negative 0.74%, which is lower than industry average (50.22%). Its trailing-12 month EBITDA margin is negative 25.85%, compared to the industry's average of 17.89%. The stock's 12-month trailing net income margin is negative 37.32 %, compared to the industry average of 3.38%.
CNET's revenue decreased 44.6% from the previous year to $26.24 millions for the fiscal period that ended December 31 2022. This decline was primarily due to the decrease in mainstream services revenues generated by its distribution of right-to use search engine marketing services, which is a result of repeated regional COVID-19 recovery cases in many provinces throughout China.
CNET also reported a net loss of $0.19 million compared to the $0.10 million profit in the prior year. The company posted a loss of operations of $11.12 for the entire year. CNET's net loss and the loss per share increased by 256%, 226.2% and 1.37 cents respectively.
CNET stock fell 61.1% in the past six-months and 41.8% in the past year, closing the last trading day at $1.57. It has a beta of 1.39 over the past 24 months.
CNET's POWR ratings are in line with the company's bleak fundamentals. The stock is rated D in our proprietary system, which is equivalent to a sell.
CNET gives a grade of F for Stability, and D for Growth and Momentum. The stock is ranked at #45 within the same industry.
Our proprietary model reveals 10 stocks with a high downside potential. Make sure you don't have any of these "death trap" stocks in your portfolio.
NCTY shares dropped $0.85 (-100.00%) during premarket trading on Tuesday. NCTY shares have gained 49.91% year-to-date compared to an 8.31% increase in the benchmark S&P 500 during the same time period.
Mangeet K. Bouns
Mangeet became a financial journalist and investment researcher because of her keen interest in the stock markets. Mangeet uses her fundamental approach for analyzing stocks to help investors make informed decisions.