AMD’s share price [AMD] has had a solid start to the summer. Since 13 May, the stock has climbed circa 17%, outpacing the Nasdaq’s 9.6% gain (as of 13 July’s close).
Will the pace continue? One upcoming headwind for AMD’s share price is its proposed $35bn purchase of Xilinx, which now faces scrutiny from China’s market regulator. Opto look at what the deal means for AMD and whether Beijing’s increased scrutiny is creating a discount on Chinese tech stocks.
Why is regulatory scrutiny a problem for AMD’s share price?
Xilinx develops programmable processors and enables networking and storage products. By acquiring the company, AMD will be able to ramp up its data centre offering, which it expects to account for 30% of sales by 2023.
As part of the acquisition process, the deal needs to go through regulatory bodies in several territories. The deal has already been given the go-ahead by the UK and EU watchdogs. Now China’s State Administration for Market Regulation (SAMR) is conducting a 60-day Phase 2 review.
Expected portion of AMD's sales from Xilinx by 2023
After the 60 days pass, the regulator will then decide whether it can move forward to the final 90-day Phase 3 approval stage. Moving through the process isn’t necessarily a bad thing, it just means that the regulator needs more information.
Still, any problems with the deal as it goes through the approval process is likely to add volatility to AMD’s share price. After all, rival Nvidia’s [NVDA] deal to acquire ARM slipped in April when the UK’s Competition and Markets Authority started an inquiry into the deal on security grounds.
Is there a discount in China’s stocks?
What makes SAMR’s probe notable is that it comes at a time when China is bringing its own tech sector to heel. In November, Chinese authorities scuppered Ant Group’s planned blockbuster IPO, and since that point, Beijing has continued to tighten the screws. The latest move was SAMR proposing that any company that processes at least one million users seeking to list in a foreign country will first have to seek approval.
Our own thematic screener shows the impact of the crackdown, with the China tech theme down 2.7% over the past month. The most notable recent example is ride-hailing app Didi Chuxing [DIDI], the share price of which has now dropped more than 17% since its IPO at the end of June after a cybersecurity probe was announced days after the listing. Tencent’s [0700.HK] share price has also suffered, with SAMR thwarting its plans to merge China’s two biggest video game streaming sites.
This may point towards a discount in these companies compared to their US or European equivalent. Jian Shi Cortesi, a fund manager at GAM in Zurich, told Bloomberg that the continuing selloff “could be a rare opportunity to buy some fast-growing Chinese internet companies at extremely attractive prices”.
Alibaba [BABA], for example, closed Tuesday’s session at $209.51, carries a 17.56X forward earnings multiple and has an average price target of $293.11. Its US equivalent, Amazon, closed at $3677.36, has a 51.38X forward earnings multiple and a $4,241.33 average price target.
The share price of Kuaishou Technology [1024.HK], which runs a popular live streaming platform, has tanked circa 34% over the past month. HUYA [HUYA], one of the biggest video game streaming platforms in China, has dipped 7.5% over the past month.
It’s worth pointing out that it isn’t all bad news or that Beijing is scrapping all deals. China’s Hang Seng Tech index climbed 1.9% on Tuesday after SAMR approved Tencent’s purchase of search engine developer Sougou. Tencent’s share price surged 3.9%.
“It is impossible to determine a reasonable or acceptable discount at this stage, given the uncertainties related to the extent of regulatory tightening” - Katherine Chan
Up until the start of July, Beijing’s crackdown on its own tech sector had arguably been priced in. However, the recent round of intervention has shaken that hypothesis.
“It is impossible to determine a reasonable or acceptable discount at this stage, given the uncertainties related to the extent of regulatory tightening,” Katherine Chan, an analyst at Union Bancaire Privée told Bloomberg. “There could be further tightening for existing investigations.”
On the face of it, Beijing is legitimately putting in place robust antitrust, data and financial service regulations. Yet there is also an underlying feeling that under Chinese president Xi Jinping, the Chinese Communist Party is exerting its power over the country’s tech centre for political reasons, reminding its upstart billionaires like Jack Ma who is really in control.
Anyone thinking of jumping into China’s tech sector should be aware that discounts don’t come without risks.