[Editor’s note: This story has been edited to correct a misstatement with regard to Weibo’s earnings date.]
While analysts debate whether the volatility and general market selloff are behind us, I would like to discuss why I am getting ready to take another look at the positive long-term prospects of three Chinese stocks: Weibo (NASDAQ:WB), JD.com (NASDAQ:JD) and Ctrip.com (NASDAQ:CTRP).
It’s probably the understatement of the past 12 months to say that the trade wars between the U.S. and China have brought significant uncertainty to the global stock markets. As a result, most Chinese stocks were under pressure in 2018 and are now much cheaper than they were a year ago.
But despite the negative sentiment toward these stocks, one thing remains true: Weibo, JD.com and Ctrip.com stock and many of the Chinese American Depositary Receipts (ADRs) listed in U.S. exchanges still offer investors the possibility to invest in the growing Chinese consumer economy. They were all darlings of investors and ranked among the best stocks in the market until the escalating war of words led to the start of various tariffs between China and the U.S in 2018.
Adding salt to the wound, the International Monetary Fund (IMF) has recently warned that China, the world’s second-biggest economy, has been slowing considerably.
Even so, the wide-reaching economic implications of its political challenges and a potential cooling off in China shouldn’t get in the way of a sensible, long-term investing strategy.
The next several weeks may bring more volatility in WB, JD and CTRP shares. And I do not expect to witness a major favorable sentiment shift toward Chinese stocks. However, although short-term investors should expect daily price swings in these Chinese stocks as each company reports earnings in the coming days, long-term investors may see any further price declines as opportunities to go long.
With all of that in mind, here’s a deeper look into why you should consider these three Chinese stocks to buy.
Weibo, a social media company with a popular micro-blogging website, which was spun off from Sina Corp (NASDAQ:SINA) in 2014, opened with an IPO price of $17 in April 2014. Alibaba (NYSE:BABA) owns 32% of Weibo and is the second-largest shareholder after WB’s parent company SINA (which owns about 46%).
Chinese internet celebrity (better known as “wanghong“) accounts at Weibo, and the website’s rich multimedia functionalities help make WB a much loved and somewhat indispensable social media company within China. Furthermore, WB’s recent investments in live video streaming and fintech have already started contributing to the bottom line.
The company’s revenue comes from two main segments:
- Digital advertising (almost 80% of revenues)
- Value-added services (just over 20% of revenues)
As a leading social media company, Weibo embodies Chinese consumers’ love of social networking. Therefore, in addition to advertising income from Alibaba and Sina, it has been increasing advertising revenue from third parties, mostly thanks to being the website of choice for celebrity accounts.
Weibo is still a high-growth company whereby I expect the earnings report to show that its revenue growth is still over 50%. This growth in revenue trickles down to the company’s bottom line, improving its earnings-per-share. Its daily active users (DAU) is over 200 million and growing, a fact that contributes to its revenue.
Moreover, WB has a quick ratio of 4.1, which demonstrates the ability of the company to cover short-term liquidity needs. Therefore, the group would be in a robust position to weather any headwinds due to an economic slump.
Although many analysts have expressed growth concerns regarding China, the country’s economic fundamentals have vastly improved over the past decade; the internet population is still booming and money continues to pour into Chinese companies operating in this space — factors that help support the long-term durability of WB stock.
Yet, despite this longer-term strength, WB stock has had a difficult period in recent months. And this is despite its strong, proactive management, which has been successfully diversifying Weibo’s advertising, broadening its social influence, especially among Chinese celebrities, and increasing its monetization.
Over the past year, WB stock is down almost 46% and its 52-week price range has been $51.15 (Jan. 24, 2019) – $142.12 (Feb. 15, 2018).
After investors’ harsh response to the uncertainty over trade war threats in 2018, Weibo stock has suffered from a damaging technical picture. Its long-term technical chart still looks rather weak and it is pointing to the possibility for more choppy action, possibly between $50 – $65.
When the company reports earnings (it’s expected this month, though an approximate date has not been announced), investors will pay extremely close attention to the details in the company’s quarterly results as well as any guidance on the health of the Chinese economy. The options markets are pricing in an approximate post-earnings move of 12% in either direction in WB shares.
Any disappointment in the earnings statement could quickly send the shares back below $60.
Weibo stock has a solid story in a country fascinated with social media, thus it remains a long-term growth play on a fundamental basis and it is still one of the best stocks to invest in China. However, in the near-term, there might still be a weakness in the WB stock price, a possibility that investors should factor in their investment decisions.
JD.com, the largest Chinese online retailer out of Beijing, is expected to report earnings on Mar. 1.
In addition to the online e-commerce operations, the group also has hundreds of warehouses and thousands of delivery stations as well as fresh food stores across China.
JD stock has been in a downtrend for over a year whereby its 52-week price range has been $19.21 (Nov. 13, 2018) – $549 (Feb. 26, 2018). The downtrend came amid a series of company-specific and global macro events.
In June 2018, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google announced that it would invest $550 million in JD.com. Both companies stated that the combined synergies would enable them to collaborate on various e-commerce and technology related areas. Under the agreements, Google received “27,106,948 newly issued JD.com Class A ordinary shares” at a price that equated to “$40.58 per American depository share.” Although the cooperation between the two companies is likely to benefit both of them in the years to come, so far, JD stock hasn’t reflected any benefit.
On July 6, tariffs on $34 billion worth of Chinese goods came into effect and the selloff in Chinese stocks began. In August, JD.com’s Q2 results gave a mixed message, hampering investor hopes that the downtrend might finally come to an end.
September was also a difficult month for JD stock as in late August 2018, its founder and CEO Richard Li, who owns over 85% of JD.com’s voting power, was arrested in the U.S. following sexual misconduct allegations. The troubling headlines caused a further selloff in JD stock.
The selling intensified following the earnings report on Nov. 18, after which the shares hit a low not seen since June 2016.
In summary, over the past year, JD stock is down over 43% and its long-term technical chart has not yet stabilized. Between now and when it reports earnings on Mar. 1, it is possible that JD shares will have a volatile reaction.
JD.com competes aggressively with Alibaba in China’s massive e-commerce market. When BABA announced its quarterly results on Jan. 30, the stock was up almost 7% on the day. Therefore, we might expect a similar positive reaction from JD.com stock if investors like what they hear in the earnings report.
Otherwise, the shares could easily go down to re-test the November low of $19.21 before the stock price forms a healthy base.
In the next few weeks, trading in JD stock is likely to be choppy with both widely up and down days. and any short-term up move is likely to meet resistance between the $25 – $30 levels.
However, I think JD.com is still one of the best stocks China has to offer, and it could easily find a place in investors’ portfolios … if they’re in it for the long haul. Within two years, I expect JD stock to easily reach the lower $40’s level, or the price Google paid for the shares in 2018.
Ctrip.com, a travel services provider, is expected to report earnings on Mar. 13.
The travel group has a history of beating earnings estimates and coming out with healthy financial numbers across the board. If the Chinese economy is indeed experiencing considerable headwinds, the next earnings report, however, may show a slowing of growth in the short term — a result that may be followed by a drop in the price of CTRP stock.
Currently, CTRP’s revenue comes from four main segments:
- Accommodation Reservations
- Transportation Ticketing
- Packaged Tours
- Corporate Travel
When CTRP reports in about a month, I would not be particularly surprised to see some concern over future guidance in regards to the corporate travel segment. A slowing Chinese economy would likely translate into falling corporate client demand, decreasing margins and slower revenue growth for Ctrip stock.
On the other hand, the lunar new year celebrations of February 2019 are likely to have boosted demand for packaged tours as well as the personalized travel arrangements of the Chinese middle-class, where Ctrip.com’s main focus lies.
I also expect the earnings report to show that the management is pursuing different revenue streams and working to further its organic growth by reaching out to its young customer base, mainly under the age of 35.
As China is becoming more urbanized, younger Chinese citizens are also beginning to spend more money on domestic and international travel, a trend that Ctrip is well placed to take advantage of.
Over the past year, CTRP stock is down almost 25%, and its 52-week price range has been $25 (Nov. 13, 2018) – $51.91 (June 15, 2018). For those investors who pay attention to short-term technical charts, it has been forming a base between $25 – $35, a level that now acts as a support zone. Furthermore, Ctrip’s technical momentum indicators, which describe the speed at which prices move over a given period, are currently in overbought territory. Although these indicators can stay overbought for quite a long time, short-term profit-taking is probably around the corner.
The current short-term overbought chart follows several months of decline in the CTRP stock price, which has caused a damaging longer-term technical picture. Therefore, CTRP stock will need to stabilize and build a base again before another long-term sustained leg up can occur.
When the company reports earnings on Mar. 13, any disappointment in Ctrip’s earnings statement or future outlook could quickly send the shares back below $30. Thus, there might be weakness in the CTRP stock price in the near-term that potential investors should anticipate.
Nonetheless, as travel demand in China grows due to demographic developments, Ctrip will be in a robust position to capitalize on its current market dominance. Within two to three years, investors who buy Ctrip are likely to be rewarded handsomely. As such, it is a standout among other stocks to buy for those with a focus on China.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.