Are looking for Chinese stocks to buy? If you are, they’re much cheaper than they were a year ago. According to Morgan Stanley (NYSE:MS) data, Chinese share prices are down 16.3% year-to-date in 2018 through Nov. 6. Although other markets are doing much worse — Argentina share prices are down 48.5% YTD — the size of the Chinese economy makes it a huge deal.
The hardest thing to do when stocks are cratering is to buy them. It’s human nature to shy away from perceived risk. However, much like Warren Buffett, Sydney-based portfolio manager Nader Naeimi, the man who predicted in September that emerging markets would continue to fall, believes the best time to buy stocks is when everyone else is selling.
“Buying the market when sentiment is depressed and everyone is selling often pays off,” Naeimi said in a recent interview. “The best time to buy a market is when no one wants it.”
Bloomberg reported at the end of October that foreign investors were selling $158 million of Chinese A shares on average per day in a total lack of confidence. Naeimi believes consumer stocks, financials, and healthcare stocks should do well heading into 2019.
With that in mind, here are seven Chinese stocks to buy, that I believe will do well in 2019 and beyond.
Chinese Stocks to Buy: Alibaba (BABA)
Before one considers buying Alibaba (NYSE:BABA) stock, it’s a good idea to review the negatives of owning China’s largest e-commerce company. To do that, I’ve enlisted the help of InvestorPlace contributor Vince Martin. He recently suggested Alibaba’s problems go deeper than a single quarter of earnings results.
Although they were actually pretty good with Q2 2019 revenues up 54% over last year to $12.4 billion with a 14% increase in earnings per share to $1.40, Martin argued that investors are more concerned about China’s future, and the part Alibaba will play in it, than what’s happening with the company in the present.
“The worries here are about what is going to happen in China in 2019 and 2023 — not what happened to Alibaba in the September quarter of 2018,” Martin wrote Oct. 26. “It’s hard to see how Alibaba earnings can offset the external concerns here.” While the big picture in China is a concern, Alibaba is expected to generate at least $54.5 billion in revenue in fiscal 2019 with net income of close to $14 billion based on 5% year over year growth from fiscal 2018.
Down 14.5% year to date through Nov. 6 and 21.5% over the past 52 weeks, BABA stock is trading at levels not seen in 18 months. It’s too big a company to remain down for the long haul.
Chinese Stocks to Buy: China Life Insurance (LFC)
Investors interested in buying insurance stocks look for companies who make money from both their underwriting operations as well as their investment operations. Warren Buffett grew Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) by taking the profits from the underwriting business and reinvesting them in other companies, both public and private.
China Life Insurance (ADR) (NYSE:LFC) is China’s second-biggest insurance company by market value. It had 268 million insurance policies in force at the end of 2017. The Chinese government owns 68% of its shares. On Oct. 25, China Life reported its third-quarter earnings. Although it managed to increase premiums earned by 4.1% in Q3 2018, the company’s net profit fell by 76% to $496.5 million from $2.1 billion a year earlier.
The company’s investment income dropped 40.3% in the quarter to $3.4 billion from $5.7 billion a year earlier thanks to the troubles facing Chinese stocks as well as those in North America and elsewhere. A bet on China Life is a bet on the Chinese economy. Down 31% year to date through Nov. 6, the life insurer’s stock’s underperformed its insurance peers for the last six years.
It’s time to make a contrarian bet on China Life. Just don’t bet the entire farm.
Chinese Stocks to Buy: Yum China (YUMC)
Yum China (NYSE:YUMC), the owner of KFC and Pizza Hut restaurants in China, has seen its stock rise by more than 18% since announcing its third-quarter results Oct. 30. Excluding currency, Yum China’s revenues increased 6% in Q3 2018 to $2.2 billion. The significant growth driver was KFC, which saw system sales grow 6% during the quarter with a 1% increase in same-store sales. That was on top of a 10% same-store sales increase in Q3 2017.
The company’s loyalty program’s been a big part of KFC’s growth. At the end of the third quarter, KFC had more than 145 million loyalty members, a 45% increase over a year earlier. Year-to-date, Yum China’s opened 411 KFC restaurants in China compared to just 106 at Pizza Hut.
While Pizza Hut’s pulling down Yum China on the top line — same-store sales were down 5% in the third quarter — it managed to achieve the same operating profit as a year ago despite lower sales. With a revitalization plan currently underway at Pizza Hut that includes introducing a more modern looking store along with modern looking uniforms, a positive contribution from Pizza Hut in the next 2-3 quarters would go a long way to boosting Yum China’s stock price.
On the road to recovery, I could see YUMC at $40 by the end of the year.
Chinese Stocks to Buy: New Oriental Education (EDU)
It’s never fun when a stock drops by 36% in less than a year, but that’s what investors who own New Oriental Education (ADR) (NYSE:EDU) face with less than eight weeks until 2018 is in the books.
Although that’s put a dent in the long-term performance of China’s largest provider of educational services — over the past 10 years, EDU’s delivered an annualized total return of 16.6%, 247 basis points better than the S&P 500 — it’s still been one of the better performing Chinese stocks listed on the NYSE.
In April 2017, I called New Oriental one of the seven best Chinese stocks to buy on the country’s renewed growth. Now trading slightly below where I recommended EDU stock, I see a successful resolution of the trade issues currently facing China doing wonders for its share price.
With the company continuing to take market share in China at the expense of short-term profitability, New Oriental is setting itself up for long-term success.
Chinese Stocks to Buy: Autohome (ATHM)
It’s hard to believe that Autohome (ADR) (NYSE:ATHM), China’s biggest source for consumer automotive information, went public almost five years ago to the day at $17 a share. If you bought some of the IPO shares and still hold today, you’re up 355% cumulatively and 35% on an annualized basis.
The question now is whether Autohome stock can continue to grow at such a torrid pace. I think it can. Here’s why. Autohome announces its Q3 2018 results November 12. Analysts expect $0.81 a share, 27 cents or 50% higher than the same quarter a year earlier. In Q2 2018, Autohome delivered earnings per share of $0.94, 31% higher than the 72 cents it earned in Q2 2017.
With revenues and earnings increasing by 30% or more a quarter and net cash of $1.2 billion, I like ATHM’s chances in 2019 and beyond. This could be the best choice of all seven stocks on my list.
Chinese Stocks to Buy: Guangshen Railway (GSH)
You won’t find much online chatter about Guangshen Railway (ADR) (NYSE:GSH). The company operates passenger and freight trains in China’s Guangdong province. So, think of it as the Burlington Northern of China.
In 2017, Guangshen had 85 million passengers take one of its trains and it shipped 52 million tons of freight. Together, it added up to $2.8 billion in revenue and an operating profit of $207.5 million.
Although the railway’s profits were down in 2017; they were up 8.8% in Q3 2018. More importantly, the railway has zero debt and $282 million in cash on its balance sheet.
Down 42% year to date through Nov. 7, Guangshen Railway is the ultimate value play. Not to mention it yields 2.9%.
Chinese Stocks to Buy: Noah Holdings (NOAH)
My rationale for buying Noah, an asset and wealth management company founded in 2005, is that it was growing its recurring service fees at a rapid pace, participating in an industry that was also growing at a fast pace.
More recently, I recommended NOAH after its stock dropped 27% over a three-month period between mid-June and mid-September. Since my recommendation, it’s mostly gone sideways, which isn’t bad considering what happened in October to stocks of all stripes.
In Q2 2018, the company’s “Other Financial Services” grew by 73% to $6.9 million. While that pales in comparison to its wealth management and asset management segments, it’s the future potential of services such as lending and online trading that’s got my attention.
Eventually, I could see a business that act’s like a three-legged stool, with each division delivering profitable growth.
At 7.8 times its forward earnings, it’s another excellent value play amongst these seven Chinese stocks.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.