The escalating Chinese trade war has put Chinese stocks in a bear market. With seemingly one retaliatory round of tariffs leading to another, the Shanghai Composite Index is in freefall. It has fallen about 19% from its 52-week highs. Other Asian markets have followed suit, with markets in the Philippines and Vietnam already down more than 20% from their peaks.
This also leaves investors in Chinese stocks in limbo. With the prospects for trade in question, investors are left wondering if and how they can still profit by investing in China. To be sure, large segments of the Chinese economy depend on international trade. Also, a trade slowdown will set China’s growth back for a time.
However, many of its companies already operate without significant involvement in the U.S. These companies can continue to grow as China’s middle class becomes larger and China and East Asia in general claim ever larger shares of the world economy.
Assuming the trade war does not escalate to the point that trade in Chinese stocks gets banned, American investors can still profit from the Chinese growth stories in these stocks.
Chinese Stocks to Consider: Baidu (BIDU)
Baidu (NASDAQ:BIDU) stands out among Chinese stocks as one that can prosper with or without U.S. trade. As the so-called “Google of China,” Baidu dominates Chinese-language internet search. Also, the Chinese government has largely kept Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) outside of China. A trade war will further set back Google’s ability to establish itself in China.
The financials of BIDU stock also remain compelling. BIDU currently trades at a price-to-earnings ratio of about 25. Although Wall Street has modestly trimmed back profit forecasts, analysts still expect double-digit profit growth in 2019 and 2020. Hence, a trade war would at worst slow down this growth.
Also, the long-term growth potential remains higher for BIDU stock than for GOOGL. Baidu’s market cap stands at about $90 billion, making it about one-ninth the size of Alphabet. About 4.1 billion people in the world use the internet. An estimated 19.4% of those speak the Chinese language. That would place nearly one-fifth of world internet users in Baidu’s universe. Assuming Baidu’s 70% market share within China, that presumes Baidu would claim 14%, or about one-seventh of the world’s internet usage. This factor alone should take the market cap to about $114 billion.
Moreover, this share should grow as more of China’s population gains internet access. With 25% of its current potential not realized, and more potential to come, Baidu can continue its growth regardless of its trade status with the U.S.
Chinese Stocks to Consider: China Unicom Limited (CHU)
China Unicom (NYSE:CHU), like other Chinese stocks in the telecom space, operates outside the sphere of U.S. influence. As the second-largest wireless company in China, it is much smaller than China Mobile (NYSE:CHL), though it exceeds China Telecom Corporation (NYSE:CHA) in size. It has again placed itself on a growth path. Although profits remain a small fraction of the profits earned by CHL stock, the growth remains with China Unicom.
Admittedly, the appeal here hinges on CHU stock serving as the nicest house in the worst neighborhood. Chinese companies can turn to Huawei Technologies or possibly European firms to source 5G equipment, so matching the U.S. regarding technology will not become an issue. The problem comes in funding such an upgrade. The massive cost of a 5G upgrade places pressures on the profits of all wireless companies. As a result, both CHL stock and CHA stock expect diminished earnings in coming years as a result.
CHU stock stands as the exception. Analysts expect the company will double profits in 2019. Double-digit profit increases are also likely to continue through at least 2021. The stock also has become a bargain. It currently trades at a price-to-book ratio of 0.8. Although it trades at a 26 P/E ratio now, its rapidly rising profits make that a bargain. Despite a looming trade war and a costly upgrade, CHU stock remains well-positioned to weather its formidable challenges.
Chinese Stocks to Consider: JD.Com (JD)
With the looming trade war, JD.Com (NASDAQ:JD) stands as one of the Chinese stocks blessed with limited U.S. exposure. Millions of Chinese jobs depend on U.S. trade, so it remains possible some customers will have less cash to spend at JD for a time. However, that remains the extent of its direct or indirect U.S. exposure.
Moreover, the recovery may have already begun. The stock fell for most of the year. The overall market saw a slump, and many investors criticized infrastructure spending that cut into profits. However, the infrastructure also gives JD more control over its destiny, and more investors may now see that.
JD stock saw a sudden surge in June. The stock has risen about 15% since the beginning of the month.
As I stated in a recent article, JD stands poised for massive growth despite geopolitical fears. Analysts expect profits to double each year in 2019 and 2020, significantly higher than Amazon. Also, Amazon supports a much higher P/E ratio. Moreover, as China’s middle class continues to expand, JD will remain in a strong position to sell to this expanding customer base. Also, it has set an expansion path into Southeast Asia with its hub in Thailand, so JD has ample room to expand internationally within Asia alone.
Admittedly, the $550 million investment by Google could become a casualty in the trade war. If this happens, investors should treat this as a buying opportunity. With the opportunities in China and East Asia and a well-developed infrastructure in this growing market, JD could become too strong of a competitor to ignore.
Chinese Stocks to Consider: PetroChina Company (PTR)
Most Americans first heard of PetroChina Company (NYSE:PTR) because of Warren Buffett’s past interest. The investment guru behind Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) sold his initial $500 million stake for $3.5 billion before the financial crisis. He also claimed that he “sold too soon.”
Many years later, the PTR stock price remains below 2007 levels. Also, its current P/E of about 30 appears pricey. However, that could soon change. The company reported a tripling of profits in 2017 on cost cuts and higher energy prices. For 2018, they report an expected profit of $7.43, which means another triple-digit percentage increase if that estimate holds. Though profit growth will slow in 2019, they forecast profit growth of around 30% in 2020.
PTR stock also benefits from the duopoly that exists in the Chinese oil and gas industry. Along with China Petroleum & Chemical Corp (NYSE:SNP), these Chinese stocks dominate both the wholesale and retail petroleum business within China.
PTR also focuses internationally. In fact, involvement in Sudan motivated many American investors to divest PTR stock in 2005. However, it has also made less controversial deals in places such as Kazakhstan, Australia and Canada over the years. This helps to secure oil and natural gas supplies to fuel China’s economic boom. Rising prices allow PTR to sell this energy at a higher profit. With rising energy prices and a lack of dependence on the U.S., PTR stock should perform well with or without a trade war.
Chinese Stocks to Consider: Weibo (WB)
Weibo (NASDAQ:WB) is considered by many to serve as China’s equivalent of Twitter (NYSE:TWTR). Thanks to the Chinese government, they enjoy market protection from both Twitter and Facebook (NASDAQ:FB). This means the company and the stock behave as if the U.S. does not exist anyway. In light of that, a trade war with the U.S. should not make much difference to WB stock.
At the beginning of the year, I called WB stock a bargain and recommended a buy. That remained true until it was not true, and beginning in February it became caught in a generalized market slump. It is down a little over 5% since the beginning of the year. However, it has risen by about eightfold since the $12.09 per share low of 2016. Most investors would tolerate a few months of stagnation for such a return.
Hence, I stand by my conclusions from January and expect growth to continue. Although profits have stopped rising by triple digits, the stock will likely see profit growth above 50% per year both this year and next. It should remain above 40% in 2020. Most growth investors would agree that paying 55 times earnings stands as a bargain for such growth.
Weibo has grown its active user base to 411 million users, up from 376 million last year. Even if trade with the U.S. declines, WB stock should continue to rise as its user base continues to grow.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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