 China’s tech sector has been in the headlines in recent days for three key reasons: a) ownership structure, especially after China’s education sector was massively impacted by the new guidelines by the government, b) regulatory risk on new policies regarding user data, and c) heightened oversight on business practices. Most of China’s tech companies in the software space operate as a VIE structure which we discuss in this report. Hence, investors are understandably concerned on whether the government’s recent education sector guidelines to restrict foreign ownership of education companies in China, including through VIE structure, would be a concern extrapolated to the tech sector. We do not think China government’s policy guidelines on the education sector explicitly targeted VIE structure, in our view, but it has become part of the discussion more because the government looks to discourage foreign investment in the sector.

 Separately, our view on increased regulatory oversight on user data is that there would be greater competition in the sector as companies open up their ecosystems to other companies and, hence, potentially lower margins for several credits in this sector. However, we think this is not very negative for most credits under coverage as most have strong ratings buffers to absorb some credit deterioration, barring a few like Meituan, but regulations on subsidies could limit potential cash burn from its new businesses.

 On technicals, we think the US-listed credits could face bit more pressure than others given the natural higher following by cross-regional investors in such names and, also, we continue to think that the China SOE should trade tighter than the China tech space, for similar ratings.