Over the past two years, China has witnessed an increasingly tightening regulatory environment. A series of unexpected regulatory actions from policymakers contributed to a challenging business environment and impacted overall market sentiment. While there is growing optimism toward the changing regulatory environment, there is still no end in sight, and various Chinese stocks continue to take a hit.

Amid this backdrop, it could be wise to avoid struggling Chinese stocks The9 Limited (NCTY), Recon Technology, Ltd. (RCON), and ZW Data Action Technologies Inc. (CNET).

Since late 2020, China has waged a multi-pronged crackdown on a wide range of sectors, from technology to education to real estate, wiping hundreds of millions off the market capitalizations of some of the country’s largest companies. Regulators canceled the world’s record-setting initial public offering (IPO) of the internet finance giant Ant Group at the last minute in November 2020.

Ant’s IPO was estimated at $37 billion. Regulators for the Shanghai Stock Exchange abruptly suspended the offering, citing “significant issues such as the changes in financial technology regulatory environment.” The main objective behind adopting a strict regulatory regime in China is to achieve a balance between sustainable growth, social equality, and national security.

The nation implemented various anti-monopoly, data security, and industry-specific regulations. For instance, the State Administration of Market Regulation (SAMR) launched an anti-trust probe into the nation’s internet companies. Alibaba was one of the first companies subjected to this regulatory probe.

During the regulatory crackdown, Alibaba faced scrutiny for engaging in monopolistic behavior in e-commerce and data security practices in its cloud business. Also, the ride-hailing company Didi, among many others, was the victim of China’s drive to enforce data security. The Cyberspace Administration of China (CAC) suspended Didi’s app for violating security protocols.

The uncertainty surrounding the regulatory crackdown in China dampened investor sentiment, potentially lowering valuations for Chinese IPOs in the US. It also made it extremely difficult for Chinese companies to raise funds overseas.

While there are few signs that China’s crackdown on the tech sector is softening at the edges, regulators will likely continue to maintain their stance this year and beyond to ensure the digital or broader economy’s long-term structural growth.

Hence, Chinese stocks NCTY, RCON, and CNET, hit by regulatory crackdowns in China, are best avoided now.

Let’s take a closer look at the fundamentals of these stocks:

The9 Limited (NCTY)

NCTY operates as an Internet company internationally. It also engages in the operation of cryptocurrency mining; and NFTSTAR, an NFT trading and community platform that offers users purchase, trade, and interactive activities. The company is headquartered in Shanghai, the People’s Republic of China.

NCTY’s trailing-12-month ROCE, ROTC, and ROTA of negative 145.33%, 58.04%, and 111.37% are significantly lower than the industry averages of 2.94%, 3.54%, and 1.32%, respectively. In addition, the stock’s trailing-12-month cash per share of $0.49 is 68.4% lower than the 1.54% industry average.

For the six months that ended June 30, 2022, NCTY’s total net revenue decreased 59.6% year-over-year to $7.58 million. Its gross loss came in at $1.57 million, compared to a gross profit of $8.45 million in the prior year. The company’s loss from operations widened by 456.9% year-over-year to $78.14 million.

Additionally, net loss attributable to holders of ordinary shares worsened by 360.9% and 140.5% year-over-year to $86.54 million and $0.13 per share, respectively.

Shares of NCTY have plunged 68.4% over the past year to close the last trading session at $0.85. The stock has a 24-month beta of 1.95.

NCTY’s POWR Ratings reflect its poor prospects. The stock has an overall grade of F, translating to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

NCTY has an F grade for Growth and Quality. The stock also has a D grade for Stability. It is ranked last among 46 stocks in the China industry.

Click here for additional POWR Ratings for NCTY’s Value, Momentum, and Sentiment.

Recon Technology, Ltd. (RCON)

Headquartered in Beijing, the People’s Republic of China, RCON offers hardware, software, and on-site services to companies in the petroleum mining and extraction industry. The company provides equipment, tools, and other components related to oilfield production and other energy industries; and sells industrial automation control and information solutions.

RCON’s trailing-12-month gross profit margin of 24.09% is 46.9% lower than the industry average of 45.35%. Likewise, the stock’s trailing-12-month EBITDA and net income margins of negative 75.30% and 60.92% compare to the respective industry averages of 33.92% and 13.62%.

For the six months of fiscal 2023 ended December 31, 2022, RCON’s total revenues decreased 16.3% year-over-year to $6.60 million. The overall drop in revenue was primarily due to a decrease in revenue from automation products and software, oilfield environmental protection, and platform outsourcing services segments. Its gross profit declined 9.7% from the year-ago value to $1.90 million.

Furthermore, RCON’s loss from operations came in at $2.18 million. Also, the company reported a net loss and loss per ordinary share of $4.33 million and $0.13, respectively. As of December 31, 2022, its cash stood at $39 million, compared to $47.30 million as of June 30, 2022.

Analysts expect RCON to report a loss per share of $0.20 and $0.11 for the fiscal years 2023 and 2024, respectively.  The stock has declined 55.4% over the past six months and 53.4% over the past year to close the last trading session at $0.41.

RCON’s POWR Ratings reflect this weak outlook. It has an overall rating of D, translating to a Sell in our proprietary rating system.

The stock has an F grade for Stability and a D for Quality, Sentiment, and Growth. It is ranked #42 out of 48 stocks in the China industry. 

Beyond what has been stated above, we’ve also given RCON grades for Value and Momentum. Get all RCON ratings here.

ZW Data Action Technologies Inc. (CNET)

CNET provides integrated online advertising, precision marketing, data analytics, and other value-added services serving enterprise clients. Also, it develops and operates blockchain tech-based products and services. The company is headquartered in Beijing.

On January 17, CNET announced that its Board of Directors approved a reverse stock split of its common stock, par value $0.001 per share at a ratio of 1-for-5. The reverse stock split was primarily affected so the company could regain compliance with the $1.00 minimum bid price required for continued listing on Nasdaq.

CNET’s trailing-12-month gross profit margin of negative 0.74% is lower than the industry average of 50.22%. And its trailing-12-month EBITDA margin of negative 25.85% compares to the industry average of 17.89%. Also, the stock’s trailing-12-month net income margin of negative 37.32% compares to the 3.38% industry average.

CNET’s revenues declined 44.6% year-over-year to $26.24 million for the fiscal year that ended December 31, 2022. This decrease was primarily attributable to the reduction in its mainstream services revenues from its distribution of the right-to-use search engine marketing services business segment due to the repeated regional COVID-19 rebound cases in many provinces in China.

In addition, CNET’s gross loss came in at $0.19 million, compared to a gross profit of $0.10 million in the previous year. The company reported a loss from operations of $11.12 million for the full year. Also, net loss attributable to CNET and loss per common share widened by 256% and 226.2% year-over-year to $9.79 million and $1.37, respectively.

CNET’s stock has slumped 61.1% over the past six months and 41.8% over the past year to close the last trading session at $1.57. It has a 24-month beta of 1.39.

CNET’s POWR Ratings are consistent with its bleak fundamentals. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.

CNET has an F grade for Stability and a D for Growth, Momentum, and Quality. The stock is ranked #45 in the same industry. 

Click here to access additional ratings for CNETs Value and Sentiment.

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NCTY shares fell $0.85 (-100.00%) in premarket trading Tuesday. Year-to-date, NCTY has gained 49.91%, versus a 8.31% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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