Fear of missing out fuels Chinese instant commerce bids, as reality bites Hong Kong AI stock bubble

“There’s no way that this acquisition could help them rebuild their image strongly enough that they could eventually do a listing in the U.S.” (speaking on why some Hong Kong-listed AI stocks could soon come under pressure)

Key Takeaways:

• Corporate fear of missing out is driving aggressive acquisitions in China’s instant commerce sector, highlighted by Alibaba’s $1.5 billion bid for a regional grocer
• Surging valuations for AI stocks in Hong Kong are facing a harsh reality check as lock-up periods expire and global enthusiasm shifts toward U.S. megadeals

By Doug Young & Rene Vanguestaine

There are two narratives unfolding in China’s financial markets right now that perfectly illustrate the current shifting tides of capital. On one front, the country’s fast-moving instant commerce war is heating up once again, marked by a surprising $1.5 billion bid for a regional online grocer. On the other, we’re seeing the latest signals that the air is coming out of Hong Kong’s AI stock bubble. The developments underscore a broader theme: market participants are making aggressive, highly calculated bets — and retreats — in sync with ebbs and flows in the Chinese economy.

On the instant commerce battlefield, Alibaba (BABA.US; 9988.HK) has stunned observers with a hefty $1.5 billion bid for Pupu, a local online grocer dominating the wealthy Southern provinces of Fujian and Guangdong. To put this in perspective, another bidder — the traditional grocery chain Sun Art (6808.HK) — had offered just $600 million in a previous bid. Alibaba essentially went in with a hammer, more than doubling the existing offer to ensure there’d be no contest.

We believe this is a textbook example of corporate fear of missing out. Alibaba, Meituan (3690.HK) and JD.com (JD.US; 9618.HK) have been duking it out for quite a while in the food delivery space. Earlier in February, Meituan abruptly altered the landscape when it agreed to buy national online grocer Dingdong (DDL.US) for about $700 million. Dingdong is renowned for its highly specialized supply chain control, down to the farm level, for fresh produce. After Meituan snatched it out of the blue, it was only a matter of time before a competitor responded. Four months later, Alibaba made its move. Some reports mentioned JD.com might be involved in the bidding, but they’ve apparently denied it.

Alibaba has a history of overpaying for acquisitions and taking big write-downs later. But securing one of China’s last remaining large independent online grocers seems to have justified the premium in their eyes.

However, there’s a significant regulatory cloud hanging over these instant commerce consolidations. Market regulators have been repeatedly calling on JD.com, Meituan and Alibaba to tone down their unbridled competition. The government is highly concerned about the relentless “involution” that has affected sectors from autos to solar manufacturing, and now e-commerce.

While this intense rivalry lowers food costs for consumers, authorities clearly want it reined in. Thus far, the companies seem to have mostly ignored these directives. Regulators still haven’t approved Meituan’s purchase of Dingdong after four and a half months. It’s a complicated black box of political and economic considerations. But if Meituan’s deal is approved, it’ll be very difficult for regulators to veto Alibaba’s acquisition of Pupu, despite the historic friction between Beijing and Alibaba.

Deflating Hong Kong AI bubble?

While corporate capital floods into grocery delivery, retail and institutional money looks to be retreating from Hong Kong’s AI sector. The market has seen valuations expand significantly over the last year and a half following a deluge of Mainland company IPOs. Now, a sobering correction may be underway.

The most telling sign comes from the Stock Connect program. Mainland investors — an important force behind the recent market rally — sold a combined HK$3.6 billion ($460 million) worth of shares in May. It marked the first time in three years they’ve been net sellers, as they now chase opportunities on domestic exchanges in Shanghai and Shenzhen. Major global investment banks, including Citigroup, Goldman Sachs, and Morgan Stanley, are also turning cautious on Hong Kong compared with Mainland markets.

The macroeconomic backdrop isn’t helping. Consumer spending in May took a dive, further dimming the outlook. But more specifically, there are growing global concerns about how AI companies will actually monetize their technology. In China, this monetization hurdle is exceptionally high. Buyers are reluctant to pay for AI services, and many software applications remain open for free use.

There are some cases illustrating this sharp downturn among pure AI stocks. For instance, Phancy Group (6682.HK) — which used to be called Fourth Paradigm — and SenseTime (0020.HK) are both down about 30% this year. Other names like MiniMax (0100.HK) and Knowledge Atlas (2513.HK),also known asZhipu AI, have also lost quite a bit of value over the last few weeks as they come up on the expiration of their post-IPO lock-up periods. When these thematic AI stocks originally listed, their freely trading floats were extremely small, causing prices to rapidly increase beyond fundamentals. As lock-ups will end soon, and floats of MiniMax and Knowledge Atlas are both under 6% of total equity, massive selling pressure has been created. Finally, we can’t ignore the vacuum effect of the U.S. market. Megadeals are sucking up global investment capital. SpaceX (SPCX.US) just executed the biggest IPO of all time last week, and its stock continues to climb, drawing in substantial funds. With OpenAI and Anthropic slated to list before the end of the year, this unprecedented investor enthusiasm in the West is poised to cause massive drawdowns of capital, leaving Hong Kong’s overvalued AI stocks further out in the cold. We’re witnessing a necessary breather, and investors are correct to step back and reassess where the real value lies.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

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