We’ve all seen the headlines. China’s economy is slowing. Rapidly. GDP growth clocked in at a near 30-year low in 2018. Retail sales growth is running at a 15-year low. U.S.-China trade tensions are creating geopolitical noise. Big companies from Apple (NASDAQ:AAPL) to Intel (NASDAQ:INTC) are warning about slowing China growth.
All in all, the read from China has been quite negative for some time now. As such, Chinese stocks have been in free fall.
But, it increasingly looks like the tide is turning in China. All those aforementioned negative reads? They are all backward looking. GDP growth is a snapshot of economic activity in 2018. Retail sales growth is a snapshot of consumer strength in late 2018. The Apple and Intel warnings are about what happened in late 2018.
Instead, if you observe forward-looking indicators like the CLI (composite leading indicator) and CCI (consumer confidence index) for China, there’s a reason to believe that its economic activity bottomed in the last few months of 2018, and will pick back up in 2019. Consider the following:
- The OECD’s composite leading indicator for China (CLI) has increased month-over-month for two consecutive months (October and November). Historically speaking over the past ~20 years, back-to-back months of CLI improvement after a multi-month streak of CLI deterioration has always indicated a positive inflection point in China’s economy.
- The OECD’s consumer confidence index for China (CCI) has increased month-over-month for three consecutive months (September, October and November). Much like the CLI, consecutive months of improvement in the CCI have historically signaled a turning point in economic trend for China.
- The U.S. Dollar has significantly weakened against the Chinese Yuan in 2019, after strengthening throughout all of 2018. Out-sized U.S. Dollar strength diluted the value of China stocks in 2018. Reversion to a normal dollar should enhance the value of these stocks in 2019.
- The latest buzz in the market is that U.S.-China trade talks are progressing in a constructive manner, and that a resolution will be reached soon. If so, that will reinvigorate consumer confidence and economic activity in China, and provide a boost for Chinese stocks.
Overall, it increasingly looks like China’s economy is on the cusp of a major turning point. This turning point will ultimately provide a major tailwind for hugely beaten up and really cheap Chinese stocks. Many of these stocks still have robust growth profiles, but their valuations suggest otherwise given bearish macroeconomic sentiment.
That sentiment will improve in 2019 as China’s economy finds its footing. As it does, Chinese stocks will fly higher. With that in mind, let’s take a look at seven Chinese stocks to buy now before the big turnaround.
Chinese internet giant Tencent (OCTMKTS:TCEHY) has struggled significantly over the past several quarters due to a confluence of headwinds, including a broad slowdown in China’s economic activity and the Chinese government putting a pause on new video game approvals.
Both of those headwinds created major obstacles for Tencent. As an internet giant touching all aspects of China’s digital economy, a slowdown in China’s economic activity and confidence naturally weighed on Tencent’s growth profile. Meanwhile, Tencent makes a big chunk of its revenue and profits from video games, so a pause on new approvals has significantly diluted the company’s growth.
Both of those headwinds will be left behind in 2018. As mentioned earlier, China’s economy is turning the corner and will rebound in 2019. Meanwhile, China is once again approving video games, and just recently approved two mobile games from Tencent. With both of these headwinds moving to the sidelines, TCEHY stock, which is still 30% off recent highs, has plenty of room to run higher in 2019.
One of the most underrated and undervalued growth stories in China belongs to social blogging giant Weibo (NASDAQ:WB). Weibo is often called the Twitter (NYSE:TWTR) of China given similarities in the core platforms. But, Weibo is much bigger (~450 million monthly active users, versus ~300 million at Twitter). Weibo is also more profitable (42% adjusted EBITDA margins last quarter, versus 39% at Twitter) and growing faster. The only thing Weibo doesn’t do better is make more ad revenue, but that will come with time as China’s digital ad marketplace matures.
Despite Weibo’s favorable comparison to Twitter (WB has more users, it is more profitable and it is growing faster), the market is valuing Weibo at just $12 billion, and Twitter at $25 billion. That doesn’t make much sense. The market is concerned about digital content crackdowns killing the growth narrative. They are also concerned about U.S.-China trade issues dampening growth in the digital ad marketplace.
Those concerns are overstated. China has been threatening digital content crackdowns for a long time. Nothing has happened, outside of Weibo continuing to grow at a 40%-plus rate. Meanwhile, those trade disputes will be resolved soon. As such, sentiment related to Weibo stock should improve dramatically in 2019. When it does, Weibo stock will fly higher, since this is a 40%-plus growth company with 40%-plus profit margins trading at just 18 forward earnings.
Momo (NASDAQ:MOMO) is another really cheap and really beaten-up Chinese stock ready to rebound thanks to improvement in China’s economy.
Momo is another Chinese social blogging giant with online dating and live video service components. Investors didn’t want to own this stock during the U.S.-China trade war because there have been fears related to a Chinese digital content crackdown, the company has a reliance on historically unreliable virtual currency revenue, and margins have been falling.
But, a resolution in the U.S.-China trade war changes everything for MOMO stock. Investors will want to own this stock because its a 50%-plus revenue growth company with healthy profit margins and a steadily expanding user base, and the stock is trading at just 11X forward earnings and is 40% off recent highs. Those are the characteristics that usually lend themselves to a big rally when sentiment improves.
Chinese e-retail giant JD (NASDAQ:JD) was one of China’s biggest losers in 2018. The once high-flying tech stock peaked in early 2018, and proceeded to drop more than 50% throughout the balance of the year due to slowing revenue growth rates and compressing margins amid a rapidly slowing China economy.
Calendar 2019 could have a completely different narrative for JD stock. Let’s assume China’s economic activity does pick back up in 2019, as leading indicators imply. Such a recovery would push JD’s revenue growth rates up. Moreover, management has reiterated that 2018 was a big investment year. Those investments won’t last in 2019, so margins should improve from lower spend and bigger revenue growth. Thus, JD will go from revenue deceleration and margin compression in 2018 to revenue acceleration and margin expansion in 2019.
That is the sort of transition that could cause a big pop in JD stock. That is especially true considering the stock trades at under 0.5X trailing sales, its lowest multiple ever as a public company. Even really distressed companies like GoPro (NASDAQ:GPRO) and Fitbit (NYSE:FIT) trade at sales multiples above 0.6. Thus, JD stock is really undervalued, and an inflection in this company’s narrative could spark a big rally in the stock.
The king of Chinese stocks is Alibaba (NYSE:BABA), and as the king of Chinese stocks, BABA was not spared in the 2018 bloodbath that scarred many stocks from China. At one point, BABA stock was nearly 40% off early 2018 highs. Today, the stock is still more than 20% off its 2018 highs.
There has been a lot of concern regarding how a slowing Chinese economy will impact Alibaba’s red-hot revenue growth trajectory. There has also been a lot of concern regarding the company’s profitability amid rising competition and as the company expands into lower margin businesses. These two major concerns kept BABA stock depressed in 2018.
That could all change in 2019. At its core, this is still a 50%-plus revenue growth business with multiple big potential businesses that span e-commerce, cloud, digital entertainment, AI and more. Thus, as goes China’s digital economy, so goes Alibaba. China’s digital economy isn’t done growing anytime soon. Internet penetration rates are still well below the developed national average, while per capita expenditures are also well below the developed nation average.
Thus, this growth narrative has runway. Investors will realize that in 2019 as China’s economic conditions improve. This realization will push BABA stock steadily higher throughout 2019.
The Google (NASDAQ:GOOG) of China — Baidu (NASDAQ:BIDU) — was one of the more damaged Chinese stocks during the 2018 selloff. BIDU stock fell about 45% off early 2018 highs as concerns regarding slowing growth, compressing margins and government regulation spooked investors.
Such concerns are unnecessarily short-sighted and lack scope. In the big picture, Baidu is a $12 billion revenue company. Google is a $130 billion revenue company, and still growing at a 20%-plus rate. That means Baidu is about 10% the size of Google in terms of revenues. Granted, Google is a global search giant (excluding China), while Baidu exclusively serves China. But, China GDP comprises about 15% of global GDP, and the ratio of China GDP to global GDP excluding China is about 17%.
Thus, at scale, Baidu should theoretically be about 20% the size of Google. Today, Google is a $750 billion company. Baidu is 8% that size, at a $60 billion valuation. This discrepancy will ultimately be corrected once China’s macroeconomic sentiment improves, and there’s a chance of that happening in 2019.
China online travel agency Ctrip.com (NASDAQ:CTRP), like other China stocks, had a rough 2018 due to ongoing macroeconomic uncertainty. CTRP stock, though, got hit worse than others due to its reliance on a healthy economy for strong growth (consumers don’t travel in a bad economy). At its low, CTRP stock had plunged nearly 60% off 2017 highs.
The reality, though, is that China is turning a corner, and the runway for growth is still long and promising given below average per-capita-income and per-capita-household-expenditures. As those numbers head higher toward the developed economy average, Chinese consumers will want and need to travel more. Travel demand will go up. Ctrip’s revenue growth will remain steadily north of 15%. Margins will trend higher with more complex travel packages. And CTRP stock will eventually hit new highs.
All this stock needs is a turning point. It’s tough to call a bottom in this stock since it has been a falling knife for almost two years. But, the stock double bottomed in late 2018 at $26, and the Chinese economy does appear to be improving. As such, if there were ever a time to call a bottom in CTRP stock, that time is now.
As of this writing, Luke Lango was long AAPL, INTC, TCEHY, WB, JD, GOOG and BIDU.