The Chinese tech industry is currently under the scrutiny of domestic and U.S. regulators. On the domestic front, the Chinese government has announced several antitrust regulations to keep the growth of tech giants in check. While this bodes well for smaller companies and their stocks, the majority of emerging Chinese companies are dependent on the tech services provided by the country’s largest operators. For example, Youdao, Inc. (DAO), as NetEase, Inc. ‘s (NTES) subsidiary, will likely face substantial challenges resulting from antitrust allegations that are currently surrounding the parent company.

On the international front, the United States has taken several steps to curb the unchecked growth of Chinese companies listed in the country. On December 2, the U.S. House of Representatives passed a bill that requires foreign companies listing their stock on U.S. stock exchanges to comply with U.S. auditing standards. China has not allowed U.S. officials to audit its companies previously. With this new law, many analysts predict the delisting of several mid- and large-cap Chinese companies from U.S. exchanges.

China’s robust economic recovery and reopening might affect tech companies that have been flying high, driven by pandemic tailwinds. The country has already reopened most sectors after successfully curbing the spread of the virus ahead of the rest of the world. Thus, tech companies such as So-Young International, Inc. (SY) and DAO, which reflected a promising outlook earlier this year, are currently suffering a major sell-off and, thus, are best avoided we believe.

Youdao, Inc. (DAO)

DAO, a subsidiary of NTES, is an intelligence learning company offering online content, communication, community, and commerce services in China. It operates in three segments – Learning Services, Products and Online Marketing Services.

On December 1, DAO launched the third generation of its dictionary pen series, Youdao Dictionary Pen 3. While this latest development might bring in additional revenue, the company has failed to deliver any other new products or services over the past 10 months.

DAO’s net revenues increased 159% year-over-year to $132 million in the third quarter ended September 30, 2020. This can be attributed to a significant rise in student enrollment to DAO’s online courses, as schools and colleges remained shut amid pandemic-driven lockdown measures.

The country has resumed its economic and industrial activities since the second quarter and is heading towards complete recovery in 2021. And as educational institutions resume operations next year as expected, DAO’s revenue is expected to fall because students will become less reliant on online courses. DAO’s loss from operations increased significantly to $131.70 million in the third quarter ended September 30. It reported a net loss of $129.30 million, and non-GAAP net loss per share of $1.12.

DAO’s EPS is expected to decline 153.7% in the current year. DAO’s stock has declined 24.8% over the past six months. The stock hit its 52-week high of $47.70 in August but has lost more than 75% since then.

DAO’s POWR Ratings are consistent with this bleak outlook. It is rated “Sell” with an “F” for Trade Grade, and a “D” for Buy & Hold Grade and Peer Grade. In the 53-stock Technology – Communication/Networking group, it is currently ranked #42.

So-Young International, Inc. (SY)

SY is an online platform for the medical aesthetics community headquartered in Beijing. It operates through two segments – Information Services and Reservation Services. It provides research and reviews on aesthetics treatments and blogs under ‘Beauty Diaries’. It also facilitates reservation consulting services through its software-as-a-service (SaaS) platform.

SY’s net income has declined 97.2% year-over-year to RMB0.9 million in the third quarter ended September 30, 2020. Total operating expenses rose 46.6% from the year-ago value to RMB335.10 million.

Analysts expect SY’s EPS to decline 9.1% in the current quarter, and 70.8% in the current year. Moreover, SY missed the Street EPS estimates in three of the trailing four quarters.

SY has declined 4.4% over the past year, and 19.1% over the past six months. SY hit its 52-week high of $16.95 in November but lost 32.7% since then.

SY’s POWR Ratings reflect its poor prospects. It has an “F” for Trade Grade, a “D” for Peer Grade and Industry Rank, and a “C” for Buy & Hold Grade. It is currently ranked #38 of 60 stocks in the Technology – Services industry.

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DAO shares were trading at $25.84 per share on Monday afternoon, down $1.25 (-4.61%). Year-to-date, DAO has gained 83.52%, versus a 17.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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