6 Chinese Stocks That Could Pop On a Trade Deal

Chinese stocks - 6 Chinese Stocks That Could Pop On a Trade Deal

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The trade war is back, and that’s bad news for Chinese stocks. In late 2018, Chinese stocks and broader financial markets dropped as trade tensions between the U.S. and China escalated. But, in 2019, those tensions cooled off, and the tone from top trade officials from both countries was largely and consistently positive. In response, China stocks rebounded alongside a broad financial market recovery.

Trade talks, however, took a sharp turn for the worse in early May. U.S. President Donald Trump claimed that China “broke the deal”, subsequently raised tariffs on imported Chinese goods from 10% to 25%, and proceeded to have a trade meeting with China that didn’t produce a deal. China has retaliated with its own set of tariffs. A full-blown trade war is now on the horizon.

Chinese stocks have dropped big in response.

But, many market observers are unaware of one critical element about this latest round of tariffs: they have a grace period. This means that while tariffs have been raised from 10% to 25%, that raise will not impact goods that are already in transit. Importantly, the first tariff raise to 10% did not have this grace period. Thus, the grace period broadly implies that the U.S. is hoping to strike a trade deal with China over the new few weeks, before the 25% tariff actually starts impacting products.

In that light, investors shouldn’t expect these elevated trade tensions to persist. They should cool, and when they do, China stocks should pop. That’s broadly why I’m positioning for a trade resolution in the near future, and am buying China stocks on recent weakness.

JD.com (JD)

China Stocks That Could Pop on a Trade Deal: JD (JD)

Perhaps the best Chinese stock to buy on recent trade-related weakness is China e-commerce giant JD.com (NASDAQ:JD).

Context is important here. JD stock was really beaten up in 2018 amid slowing growth and compressing margin concerns, both of which were happening against the backdrop of a slowing China economy. But, in 2019, JD stock has rallied in a big way as growth has stabilized in the 20%-plus range and margins have improved, against the backdrop of a Chinese economy that is picking up steam again.

Now, JD stock is back to sell-off mode. Specifically, the stock is down more than 10% over the past month, despite reporting a robust double-beat quarter during that stretch which broadly confirmed that growth remains resilient and margins continue to improve.

In other words, JD stock is selling off in a big way right now because of what could be, not what is. But, what could be might not come to be, if a trade deal is struck within the next few weeks. If that happens, all these concerns will fade away. Investors will re-focus on the numbers, which have been really good in 2019. As they do, JD stock will rebound in a big way.

Alibaba (BABA)

China Stocks That Could Pop on a Trade Deal: Alibaba (BABA)

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Shares of Alibaba (NYSE:BABA) have dropped 13% in the past week amid escalating trade tensions. This marks the stock’s biggest drop of 2019, as well as the stock’s biggest correction since the December 2018 plunge across global financial markets.

But, the core growth narrative at Alibaba remains healthy. Revenue growth rates remain north of 40%, supported by continued expansion of the Asian digital economy, robust e-commerce growth, and a secular cloud services pivot. Also, trends have improved in 2019 amid renewed consumer confidence throughout China. These new tariffs won’t impact consumer confidence so quickly. Instead, if a deal is indeed struck within the next few weeks, this new round of tariffs will never strike consumer confidence. Thus, Alibaba’s numbers will look like nothing even happened.

But, something did happen: BABA stock dropped nearly 15%. As such, a trade deal could spark a big reversal in BABA stock, and once again push this stock back toward all-time highs.

Baidu (BIDU)

China Stocks That Could Pop on a Trade Deal: Baidu (BIDU)

More so than Alibaba, shares of Chinese digital search giant Baidu (NASDAQ:BIDU) have been killed recently amid rising trade tensions, dropping nearly 20% over the course of the past month.

The reason for the more pronounced sell-off is that the core fundamentals here aren’t quite as good. Specifically, Baidu has been hit with a double headwind of slowing growth and falling margins over the past several quarters, and investors aren’t sure exactly when these trends will reverse course. If trade tensions continue to rise for the foreseeable future, then these headwinds won’t reverse course anytime soon. BIDU stock will continue to drop.

But, if trade tensions cool and a deal is signed soon, then everything changes for BIDU stock. China’s economy will continue to improve. The digital ad market will continue to expand. As it does, Baidu’s growth rates should stabilize. Margins, too. Growth and margin stabilization on a stock that is 50% off its all-time highs should produce big returns. As such, BIDU stock could fly high on a potential trade deal.

Weibo (WB)

China Stocks That Could Pop on a Trade Deal: Weibo (WB)

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When it comes to Chinese social blogging site Weibo (NASDAQ:WB), you have a hyper-growth company that has remained on a hyper-growth trajectory. But, WB stock has been killed on slowing macro China concerns. Thus, if those concerns hang around, the stock will continue to suffer. But, if those concerns disappear with a trade deal, then WB stock will soar.

Broadly speaking, Weibo is China’s Twitter (NYSE:TWTR). But, Wiebo has more users than Twitter, is more profitable than Twitter, and is growing more quickly than Twitter. Despite all that, Weibo has a market cap about half that of Twitter. Why? ARPU rates. Weibo monetizes its users less than Twitter. This is just a time issue. Over time, as Weibo pivots from growing its user base to growing its digital ad business, ARPU rates will rise. When they do, WB stock should rise significantly.

The one thing holding WB stock back has been a temporary pause in the China digital ad growth narrative, which is the result of less enthusiastic enterprise spend amid slowing economic conditions. But, those conditions have improved in 2019, and will improve meaningfully if a trade deal is struck. Thus, if a trade deal is struck, Weibo’s numbers should improve over the next several quarters. That improvement will spark a big rally in WB stock.

Tencent (TCEHY)

China Stocks That Could Pop on a Trade Deal: Tencent (TCEHY)

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China internet giant Tencent (OTCMKTS:TCEHY) has fared better than its China tech peers during this recent round of tariff increases. As of this writing, TCEHY stock is less than 10% off its 2019 highs, while many of its peers are 10% to 20% off their 2019 highs.

The relative strength in TCEHY stock can be attributed to the stock’s favorable fundamentals. Tencent is the heartbeat of China’s internet economy, from social media to digital payments to music streaming, and everything in between. A big piece of this economy is video games. In 2018, due to various regulatory issues, China put a freeze on new video game approvals. That really hurt Tencent’s business. In 2019, that freeze has been lifted, and new video games are hitting the market for the first time in years.

That’s a big deal for TCEHY stock, and this positive development is mostly why the stock has fared better amid escalating trade tensions in early May. It’s also why this stock could be a big winner if these trade tensions ease. If they ease, Tencent’s two biggest headwinds of 2018 (trade tensions and a video game freeze) will be fully behind it. With those headwinds fully behind it, TCEHY stock, which is still 25% off its all-time highs, could soar.

Ctrip (CTRP)

China Stocks That Could Pop on a Trade Deal: Ctrip (CTRP)

Natural losers in a slowing economy are companies associated with travel. After all, travel is most often seen as a luxury. Consumers travel when they are employed, confident and have extra cash. They don’t travel when they are unemployed, lack confidence and don’t have extra cash. That’s why Chinese online travel site Ctrip (NASDAQ:CTRP) fell off a cliff in 2018 as China’s economy slowed.

It’s also why CTRP stock has bounced back in a big way in 2019 as China’s economy has stabilized and even improved. But, the rally has been hit hard over the past few weeks amid rising trade tensions. During that stretch, CTRP stock has dropped over 15%. The stock will continue to drop so long as these trade tensions hang around. That’s just the nature of CTRP stock and its relation to China’s economic trends.

But, as is the case with JD, recent weakness in Ctrip is the result of fears surrounding what could be, not what is. The current conditions are very favorable for Ctrip. China’s economy is improving, consumer confidence is back, and the company just reported a robust double-beat quarter with 20%-plus revenue growth and healthy margins. If a trade deal is struck, and these current favorable trends persist, then CTRP stock will bounce back in a big way from this recent selloff.

As of this writing, Luke Lango was long JD, BABA, BIDU, WB, TWTR and CTRP.

Article printed from InvestorPlace Media, https://investorplace.com/2019/05/6-chinese-stocks-that-could-pop-on-a-trade-deal/.

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