No doubt about it. The trade war is hurting China. Just take a look at its latest GDP numbers and you can see the damage being done. For the quarter ending in June, Asia’s Dragon economy saw its GDP grow at just a 6.2% rate. While most nations would be envious of that sort of growth, for China, this was the worst performance in 27 years.
Naturally, Chinese stocks haven’t taken to the trade war too kindly over the last year or so.
But in their recent underperformance and suffering, Chinese stocks are a major bargain in the making. When looking at a price-to-book value basis, Chinese stocks are now the cheapest they’ve been relative to the S&P 500 in nearly two decades. Meanwhile, the broad MSCI China Index can be had for a rock-bottom price-to-earnings ratio of just over 11. That actually makes China one of the less-expensive nations in the world.
And while there are plenty of issues, the reality is, the key emerging market is just too cheap relative to its long-term prospects. The nation still has some of the best catalysts for growth going forward. This could make the huge bargain in Chinese stocks well worth buying today.
For forward looking investors, the discount in China can’t be ignored. And with that, here are three wonderful ways to add the nation to a portfolio.
If you had to choose just one Chinese stock to buy, it should be Alibaba Group (NYSE:BABA). Imagine if you took all the biggest names in U.S. tech — Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) and even PayPal (NASDAQ:PYPL) — and then stuck them together, you’d pretty much have BABA. The firm is a force across a variety of technology offerings. This includes everything from peer-to-peer lending/digital payments, cloud computing, social media and even Alibaba-branded tablets/mobile devices. Founder Jack Ma basically saw what worked in Silicon Valley and then ported it over to China.
That started with BABA’s massive retail business. The key is that many of the firm’s retail operations and websites are set up as marketplaces rather than traditional retailers. BABA simply connects buyers and sellers. Since it doesn’t hold inventory, margins and cash flows at the firm are massive.
And yet, there’s still plenty of growth to be had. Internet saturation in China still hasn’t even come close to peaking and as a result, more people are logging on and using BABA’s services every day. Last quarter, BABA gained more than 22 million new customers and saw its overall revenues jump by 51%. That’s torrid growth and there’s plenty of room to run as Alibaba expands into more rural areas of China.
With a PEG ratio of less than 1 and a forward P/E of around 25, BABA stock is cheaper than its American tech rivals and yet, features a much wider net. For investors looking at Chinese stocks, BABA could be the only one you need.
Baozun Inc (BZUN)
Here in the U.S., Shopify (NASDAQ:SHOP) has been a massive hit for investors. Baozun (NASDAQ:BZUN) has the same potential in China. Both firms’ products enable smaller retailers to set-up online storefronts, produce marketing campaigns and undertake fulfillment services. However, the difference is that Baozun’s whole purpose isn’t doing this for organizations already within China, it’s about bringing the outside in. In essence, BZUN is a gateway for global brands into China’s middle class.
That’s actually a very good place to be. Given China’s massive consumer market that continues to get larger, selling your products in Asia’s top emerging market is key. But, as we’ve seen with the trade spat, operating in China isn’t like opening up shop in Duluth. You need an expert hand. Perhaps even more so as the trade negotiations take place.
Over 200 brand partners now use BZUN’s products. However, new customer additions and subscription revenues continue to rise. Over the last three years, BZUN has been able to grow its revenues by a CAGR of 28% and now, reoccurring subscriptions account for more than half of its total sales. Even better is that unlike Shopify, Baozun has been profitable for a long time. Last year alone, gross profits jumped 62%.
While BZUN’s valuation isn’t as cheap as some Chinese stocks, it’s cheaper than SHOP and offers a much larger runway for growth. That could make a prime buy today.
It’s not just consumerism that makes China a top-notch play for the long term. That population is going to need plenty of healthcare solutions as well. That’s where Chinese biotech stock BeiGene (NASDAQ:BGEN) comes in.
As one of China’s only biotech firms — and the only one listed in the U.S. — BGEN has a long history of firsts in the nation. This includes opening the first real biotech R&D center in the nation as well as one of the largest cancer-fighting pipelines out of any biotech. One of the key pieces of that has been its Hodgkin’s lymphoma drug Tislelizumab. That drug was helped along by American biotech royalty Celgene (NASDAQ:CELG). Celgene would have access to Tislelizumab in America.
But here is where it gets interesting for BGEN. After CELG was acquired by Bristol-Myers Squibb (NYSE:BMY), the American biotech stock was forced to drop Tislelizumab due to competition. This fact, along with the trade war, has caused BGEN stock to drop roughly 40% over the last year.
That drop could be a huge opportunity for investors. For one thing, part of the development deal was that BeiGene would have access to CELG’s proven blockbuster drugs Abraxane, Revlimid and Vidaza in China. Those are huge moneymakers and will provide plenty of revenues for the firm. Secondly, BeiGene is now free to shop Tislelizumab to other drugmakers. Given its effectiveness, it could be a big cancer-fighting prize. Add in its huge pipeline and you have a huge bargain in the making.
As of this writing, Aaron Levitt held a long position in AMZN.