The Shanghai Composite Index has bounced slightly off its 2015 lows, but still remains nearly 40% 52-week high of just a few months back.
That represents loss at breakneck speeds, and naturally, when an index crumbles that quickly, it takes down just about every stock associated with it.
In this case, it’s Chinese stocks doing the suffering.
The bleeding in many of these Chinese stocks are deserved. However, in a few cases, the losses have gotten excessive and have created an investment opportunity.
Here are three Chinese stocks that are presenting such investment opportunities amid the Shanghai Composite’s turmoil.
Chinese Stocks Offering Some Value: Alibaba (BABA)
Decline From 52-Week Peak: 42%
Alibaba (BABA) is the quintessential king of China’s e-commerce industry, and because of the declining Chinese equity market, Alibaba’s stock has also suffered with losses of 35% this year. During its last quarter, revenue jumped 29% while the total value of merchandise sold on Alibaba stores soared a whopping 34% year-over-year.
With $6.7 billion in free cash flow over the last year, Alibaba is now trading at just 24 times FCF. That’s very cheap for a company that’s growing both revenue and profits well over 20%, and is expected to maintain that growth rate through at least 2016.
Looking ahead, Alibaba has invested billions of dollars in companies all over the world and continues to execute an aggressive expansion plan that involves e-commerce services outside of China. Furthermore, Alibaba continues to reap the rewards from growth in China’s business-to-consumer, or B2C, side of e-commerce.
Alibaba’s Tmall site controls 60% of this B2C market — a market that’s growing far faster than China’s overall e-commerce market. Last year, B2C grew nearly 64% versus 49% for the overall market year-over-year. This trend is expected to continue, meaning B2C should outpace China’s e-commerce market, which is expected to grow 40% this year and 30% next year.
This growth coupled with Alibaba’s ongoing investments, expansion and its beaten-down stock price make BABA a stock to own.
Chinese Stocks Offering Value: Qihoo 360 Technology (QIHU)
Decline From 52-Week Peak: 43%
Qihoo 360 Technology (QIHU) stock has fallen 46% off its high, and now trades at just 9 times next year’s expected earnings.
That’s cheap for a company that has risen up the ranks to become one of China’s top Internet search companies. Qihoo just started to monetize its 30% share of the search market with advertisements late last year. Since then, advertising revenue has soared — $293.9 million in search revenue during its last quarter, an increase of 71.6% year-over-year.
In addition to internet search, Qihoo 360 is one of China’s most renowned mobile, internet, and PC security companies. In total, 514 million people use its PC products and nearly 800 million use its top mobile app, 360 Mobile Safe.
However, QIHU doesn’t earn revenue from the sale of these security products. Instead, it makes money with mobile games and marketing products, also called its value-added services. During the second quarter, revenue in this segment declined 16% to $122 million.
Therefore, Qihoo has both a strong and a weak performing segment, but thankfully the former is more meaningful to Qihoo’s business than the latter by size. That’s why the combined average of gaming’s loss and advertising’s gains equaled a 38% increase in total revenue during the period.
Given Qihoo 360’s 18.5% operating margin, combined with that impressive growth rate and attractive valuation multiple, investors can conclude that QIHU is a stock that has quite a bit to gain, and is certainly a long-term investment opportunity.
Chinese Stocks Offering Value: China Mobile (CHL)
Decline From 52-Week Peak: 20%
China Mobile’s (CHL) stock hasn’t fallen by the same degree as the other two Chinese stocks. However, even a 20% loss from its high is too much for the world’s largest wireless carrier by subscribers.
The company has more than 810 million customers, which is more than double the combined customers of the four nationwide carriers combined here in the U.S. However, it’s not the customer count that makes China Mobile a great investment opportunity.
Instead, it is the adoption of 4G technology, and the migration of mostly 2G and 3G customers to 4G that makes China Mobile so appealing. According to Cisco (CSCO), mobile data consumption in Asia-Pacific will grow at a compound annualized rate of 58% from 2014 to 2019. That’s equivalent to a 10-fold increase in data consumption.
Much like North American carriers, China Mobile’s revenue increases as its customers consume more data, and have higher data packages. China Mobile has 190 million 4G customers, and while enormous, it is still very small relative to its total customer base. What’s mind-boggling is how fast China Mobile’s 4G customer base is growing, up from 153 million in April, 90 million last December, and fewer than 1.5 million in February 2014.
China Mobile’s 4G customer base is likely to keep growing, and that means its 154% increase in mobile data traffic is sure to keep soaring as well.
With the stock trading at just 14 times earnings, and with CHL likely enjoying this 4G growth catalyst for years to come, China Mobile’s midyear losses present a great long-term investment opportunity.
And as an added bonus, CHL investors get a 3%-plus dividend yield.
As of this writing, Brian Nichols was long BABA and CHL.
