Michael Burry's Latest Moves in Chinese Stocks
The debate over the true value of beaten-down Chinese names has prompted Michael Burry, of The Big Short fame, to take a clear side. Burry's Scion Asset Management has recently increased its stakes in Alibaba and JD.com, making them his largest holdings in the portfolio.
According to a quarterly filing with the Securities and Exchange Commission, Scion significantly raised its holdings in Alibaba, the Chinese e-commerce and cloud computing company. The stake grew by 50% between the third and fourth quarters, reaching 75,000 shares with a value of over $5.5 million as of Wednesday's close.
Similarly, Scion also boosted its ownership in JD.com, another Chinese online retailer. The fund increased its position by 60%, owning 200,000 shares worth more than $4.6 million at the end of last year. Alibaba and JD.com now hold the top two positions in Burry's fund by market value.
Both Alibaba and JD.com have experienced substantial declines in their stock prices. Over the past year, Alibaba shares have fallen nearly 30% and have lost more than 75% of their value since reaching a peak in late 2020. JD.com, on the other hand, has seen its stock decline by over 50% in the past 12 months and over 75% since early 2021.
These declines reflect the broader challenges faced by Chinese stocks, particularly in the tech sector known for its rapid growth. Despite their slump, Burry's increased investments suggest that he sees potential value in these stocks and is willing to bet on their future recovery.
Beijing's Regulatory Crackdown and its Impact on Chinese Tech Stocks
The tech industry in China has been marred by challenges in recent years, largely due to Beijing's regulatory crackdown that began in late 2020. This extensive crackdown has had a devastating effect on stocks, causing widespread disruption. As if that weren't enough, the Chinese government's imposition of strict Covid-19 lockdowns throughout 2022 has further exacerbated the pressure on the economy. Unfortunately, despite hopes for a significant recovery, China continues to face an economic slump, which continues to harm Chinese stocks.
Two major players in the online retail sector, Alibaba and JD.com, have particularly borne the brunt of this economic downturn. Given their heavy reliance on China's economy and the purchasing power of Chinese consumers, both companies have faced immense challenges. Not only is consumer spending under immense pressure, but they also have to contend with fierce competition from Pinduoduo, a more budget-friendly platform owned by PDD.
The question that lingers for investors is whether Alibaba and JD.com have reached a point where they present attractive investment opportunities. At first glance, based on fundamental valuation metrics, both stocks seem like screaming buys, as they appear historically cheap. However, over the past couple of years, these stocks, along with several other Chinese names that have suffered significant declines, have proven to be "value traps" – failing to deliver returns or recover from multiyear lows.
While Michael Burry, known for his bullish stance, might see potential in these stocks, it is essential to exercise caution before following suit. Burry himself had to endure years of pressure before his bet against the U.S. housing market ultimately paid off. Therefore, Alibaba and JD.com could prove to be another test of patience for him and other investors alike.
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