Looking to dump those 3 potentially delisted Chinese stocks? We’ll take a look.

This may seem like a recurring question: to buy Chinese stocks or not? The No. 1 concern on your list of concerns could be the deterioration of China-US relations, and Chinese companies risk being delisted by the Securities and Exchange Commission (SEC). Should you risk investing in them anyway?

Some Chinese companies risk being delisted from US stock exchanges for failing to meet Washington’s disclosure requirements. In simple terms, it means that a company is taken off a stock exchange because the stock exchange forces the company to delist. Should you “do business” with a communist nation that has a government that can demarcate as it sees fit?

Let’s take a look at several actions on the chopping block and what you might want to do about them.

Risks of Investing in Chinese Stocks

Delisting a company means that it does not trade on a major stock exchange, but you are not stripped of your ownership of the shares. You still own the shares, but of course the natural result is that the value of the company’s stock plummets.

There are other risks inherent in investing in Chinese companies, including regulations that have affected performance, government espionage and fraud, and scandals:

  • Regulations: The Chinese government has imposed extensive restrictions and regulatory scrutiny on some tech companies to reassert the role of state power in a more state-dominated economy after China opened up its markets. The state has tried to reduce some major Chinese companies through regulation. However, it is worth mentioning that it has only started cracking down on companies that have failed to meet the strategic goals of the state. However, the government may have realized its mistakes and shown signs of change, perhaps hinting that it has tried too hard to tame tech platforms. Experts are divided on what this could mean for tech companies.
  • Global Espionage: Chinese companies have been on the verge of using cyber intrusions as well as physical theft to steal innovation from American companies. The FBI has hundreds of ongoing investigations into China’s attempted theft of US-based technology.
  • Frauds and scandals: Chinese companies listed in the United States are known to falsify documents and produce fraudulent financial reports and often exaggerate their performance through balance sheets. Take the example of Luckin Coffee. Luckin was delisted from the Nasdaq stock exchange in June 2020 after falsely inflating his sales by over $300 million. The company agreed to pay a $180 million fine to settle accounting fraud charges with the SEC.

However, these flaws aside, it’s easy to see how enticing China is for ambitious investors. The market capitalization of Chinese stock quotes doubles that of the Eurozone. Despite historical, political and economic challenges, China still holds a major hold on the growth potential of the global market and offers infrastructure and a manufacturing base like no other.

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Possible write-offs

Delisted stocks often continue to trade over-the-counter. However, you may face higher transaction costs and wider bid-ask spreads, as well as dealing with falling investor confidence.

JD.com Inc. (NASDAQ:JD)

JD.com, Inc. offers China-based supply chain technologies and services, including:

  • Computers
  • Communication and consumer electronics products
  • Household appliances
  • General merchandise including food, drink and fresh produce
  • Baby and maternity products
  • Furniture and household items
  • Cosmetics and other personal care items
  • Medications
  • Health care products
  • Books
  • Automotive accessories
  • Clothes and shoes

It also provides online marketplace services for third-party merchants as well as marketing services and omnichannel solutions for offline customers and retailers. The Company also owns logistics facilities and other real estate and provides asset management services to logistics real estate investors.

Here’s a reason you might want to keep it: JD.com said it would do everything possible to try to retain its US listing by continuing to comply with applicable laws and regulations in China and the United States and maintaining its status on the Nasdaq and the Hong Kong Stock Exchange. However, these efforts might not be enough and you might want to go for a bigger warranty.

Pinduoduo (NASDAQ:PDD)

E-commerce platform operator Pinduoduo Inc. (PDD) has seen its shares tumble over the past year due to regulatory repression, although it has recently seen a continued rise in the stock market.

Pinduoduo Inc. operates an e-commerce platform in China and offers the following products:

  • Clothes
  • Shoes
  • Bags
  • Childcare products
  • Food and drinks
  • Fresh products
  • Electronic appliances
  • Furniture
  • Household items
  • Cosmetics and other personal care items
  • Sports and fitness items
  • Car accessories

Analysts expect Pinduoduo’s revenue and net profit to continue to grow and have demonstrated that it is reasonably valued. Even so, that may not be enough to sway nervous investors who see Pinduoduo on the list of US stocks to be delisted.

Bilibili Inc. (NASDAQ: BILI)

Bilibili Inc. provides online entertainment services including:

  • Video services
  • Mobile Games
  • Comedy and audio content
  • User-generated professional videos
  • The live broadcast

Bilibili generates a lot of revenue from its Value Added Services (VAS), including virtual gift sales and subscriptions for live streamers, as well as ad sales and its
“e-commerce and other” segment.

Total net income in the first quarter of 2022 reached $797.3 million, an increase of 30% compared to 2021. The average number of monthly active users reached 293.6 million and mobile MAUs reached 276, 4 million, an increase of 31% and 33% respectively compared to 2021. Average daily active users (DAU) reached 79.4 million, an increase of 32% compared to 2021. Finally, the average number of Monthly Paid Users (MPU) reached 27.2 million, a 33% increase from 2021.

Should you dump due to radiation?

The SEC has added more than 80 Chinese companies to a delisting watchlist, including JD.com, Bilibili and Pinduoduo. Therefore, dumping may be your best bet.

Here’s the bottom line: if you’re holding out hope that a delisted stock might resurrect, remember that it’s rare for a delisted stock to come back on a major exchange. Solving all the financial problems and at the same time avoiding bankruptcy while refilling all the necessary financial documents usually does not happen.

Companies mentioned in this article

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Should you invest $1,000 in JD.com right now?

Before you consider JD.com, you’ll want to hear this.

MarketBeat tracks Wall Street’s top-rated, top-performing research analysts daily and the stocks they recommend to their clients. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the market takes off…and JD.com wasn’t on the list.

While JD.com currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

See the 5 actions here

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