I’m a long-term bull on China stocks. Even as a long-term bull, however, I recognize that beaten up China stocks won’t rebound until China’s economy stops slowing.
Fortunately, over the past few weeks, several signs and trends have emerged which imply that China’s economy is starting to curb its slowdown. Those signs and trends are as follows:
- OECD Leading Indicator Trending Higher: The OECD’s Composite Leading Indicator (or CLI) for China, which has been compressing since late 2018, has improved every month from February through June 2019.
- OECD Consumer Confidence Trend Has Bounced Back: Similar to the OECD’s CLI, the OECD’s Consumer Confidence Index (or CCI) for China compressed throughout 2018, but has rebounded in 2019.
- Retail Sales Trends Improved in 2019: The retail sales growth trend in China has improved from 8.1% to 8.2% in the last two months of 2018, to 8.3% through the first seven months of 2019, including an average gain of 8.7% over the past three months.
- Manufacturing Activity Shows Signs of Bottoming: China’s Purchasing Manager’s Index (PMI) reading compressed rapidly throughout 2018, but has shown signs of stabilizing between 49 and 50 in 2019.
- Trade Data Stabilizing: Amid a trade war with its biggest trading partner, China’s trade data — both imports and exports — has been sluggish over the past several months. But, June trade data was much better than expected on both the imports and exports side.
All these signs and trends may just be a series of head-fakes. But, I don’t think so.
Instead, the volume of data here strongly suggests that China’s economy is finally starting to stabilize, and that means it’s time to start buying the dip in high-quality China stocks, most of which still have compelling long-term upside.
China Stocks to Buy on the Dip: Alibaba (BABA)
Long-Term Bull Thesis: The long-term bull thesis on Alibaba (NYSE:BABA) is very simple. China has more than 1.4 billion people. Less than 60% of those people are connected to the internet, versus a 90% internet penetration rate in North America. Over the next decade-plus, as China’s consumer economy urbanizes and digitizes, China’s internet penetration rate will rise towards 90%, implying hundreds of millions of new shoppers in China’s e-retail ecosystem.
Most of those shoppers will do the bulk of their e-retail shopping on Alibaba. Thus, over the next decade-plus, Alibaba’s revenues and profits will stay on a big growth trajectory. That big profit growth will push BABA stock higher in the long run.
Near-Term Bull Thesis: The near-term bull thesis on BABA stock has everything to do with margins. Specifically, Alibaba has never had a problem with revenue growth. Thanks to secular e-commerce tailwinds, Alibaba has been a 20%-plus revenue growth company for a long time.
Alibaba’s margins have been under tremendous pressure over the past few years, thanks to big growth investments and competitive pressures. Over the past few quarters margin trends have improved significantly. If these margin improvements persist, BABA stock could continue to move materially higher in the near-term.
Long-Term Bull Thesis: The long-term bull thesis on JD.com (NASDAQ:JD) mirrors the long term bull thesis on Alibaba. A ton of consumers in China, a significant portion of whom still aren’t connected to the internet, imply huge growth potential over the next several years for China’s e-commerce marketplace and its biggest players — Alibaba and JD.
On top of that, JD is also looking to expand internationally, and that international expansion provides a huge growth opportunity for the company in the long run. JD projects as a big growth company for a lot longer, and all that growth should propel JD stock higher in the long run.
Near-Term Bull Thesis: Also much like Alibaba, the near-term bull thesis on JD stock has everything to do with margins. JD employs a very similar model to Amazon (NASDAQ:AMZN). Consequently, the company has historically run at anemic margins. But, margins in 2019 have improved meaningfully as the company has reaped the rewards of 2018 efficiency-related investments.
These investments should continue to yield margin-expanding rewards for the next several quarters. As margins continue to track higher, so should JD stock.
Long-Term Bull Thesis: At the risk of sounding like a broken record, the long term bull thesis on online discount retailer Vipshop (NYSE:VIPS) centers around the idea that China’s e-commerce market is in the first few innings of a massive growth narrative which will ultimately power sustained growth at Vipshop.
Specific to Vipshop, you have a company which dominates the online discount niche. Looking over at the U.S. retail landscape, the discount niche is a very valuable one (see Dollar General (NYSE:DG), TJX Companies (NYSE:TJX), or Five Below (NASDAQ:FIVE)). As such, U.S. comps imply that Vipshop has a bright future as the go-to online discount retailer in China.
Near-Term Bull Thesis: As is the case with every other China e-commerce stock, the near-term bull thesis on VIPS stock has to do with the fact that — for the first time in several years — Vipshop’s margins are meaningfully improving. This big improvement was on full display last quarter, when gross and operating margins both increased nearly 300 basis points year-over-year.
The implication is that this margin improvement will persist, driven by continued cost-cutting and logistics improvements. As margins continue to trend higher over the next few quarters, so will VIPS stock.
Long-Term Bull Thesis: The long-term bull thesis on online travel service provider Ctrip.com (NASDAQ:CTRP) revolves around one critical statistic: passenger flight volume per capita. In 2015, America’s passenger flight volume per capita was 2.5. In most developed economies, it was either near or above 1. China’s passenger flight volume per capita in 2015 was around 0.3.
This discrepancy implies huge room for China air travel volume growth over the next several years. China is projected to be the fastest-growing air travel market over the next several years. It’s also projected to become the biggest air travel market by 2024. As China’s air travel market rapidly expands over the next several years, China’s go-to air travel booking site, Ctrip.com, will benefit from big traffic, revenue, and profit growth. All that growth will ultimately power CTRP stock higher in the long run.
Near-Term Bull Thesis: The near-term bull thesis on CTRP stock ties back into this idea that China’s economy is stabilizing. Specifically, air travel is a very economically sensitive industry. That is, when times are good and consumers have extra cash to spend, they often spend it on travel. The converse is true, too.
Consequently, as China’s economy stabilizes and starts to improve over the next several quarters, China’s air travel trends should start to similarly improve. As they do, Ctrip’s numbers will meaningfully improve, which should spark a nice recovery rally in CTRP stock.
Long-Term Bull Thesis: From where I sit, the long-term bull thesis on Bilibili (NASDAQ:BILI) looks a lot like the long-term bull thesis on Pinterest (NYSE:PINS). That’s not to say these two platforms are the same. They aren’t. Pinterest is a visual discovery platform. Bilibili is an anime gaming and comic-focused video platform.
These two companies do have similar characteristics: huge user bases, unique value props, and nascent but growing ad businesses. The implication for Bilibili and Pinterest is that — as these companies build out their revenue models over the next several years — their huge user bases will translate into huge revenues and profits, and ultimately huge market caps.
This dynamic is already playing out at Pinterest. It will play out at Bilibili in a similar fashion over the next several years.
Near-Term Bull Thesis: Near-term, BILI stock looks good because it increasingly appears that China’s economic stabilization is having a positive impact on China’s digital ad market. Specifically, Weibo (NASDAQ:WB) and Baidu (NASDAQ:BIDU) are two Chinese digital ad companies which have struggled over the past few quarters. But, last quarter, each company reported better-than-expected numbers. The implication? China’s digital ad market is finally improving.
That’s great news for Bilibili. Unlike Weibo and Baidu, Bilibili has maintained a big growth rate over the past few quarters as the ad market has slowed. Now that the market is ramping back up, Bilibili’s numbers next quarter should be extra good. If so, that will spark a healthy rebound rally in beaten up BILI stock.
Long-Term Bull Thesis: The long-term bull thesis on Chinese micro-blogging site Weibo revolves around the idea that this company is, for all intents and purposes, the Twitter (NYSE:TWTR) of China. There are just three big differences.
One; Weibo has way more daily active users (211 million, versus 139 million at Twitter). Two; Weibo is more profitable (38% year-to-date EBITDA margins, versus 35% at Twitter). Three; Weibo makes way less revenue per user (Q2 ARPU of about $2, versus around $6 at Twitter).
The first two differences are positives for Weibo. The third is a negative. Presumably, Weibo’s unit revenue trends will improve as their ad targeting capabilities improve and as China’s ad market matures. As this discrepancy narrows, so will the market cap difference between Weibo ($10 billion) and Twitter ($30 billion) — implying huge growth potential for WB stock in the long run.
Near-Term Bull Thesis: The near-term bull thesis on WB stock has to do with two things. First, revenue trends are turning around. Over the past several quarters, revenue growth has been trending down every quarter. Next quarter, though, management is guiding for revenue growth to improve sequentially.
Second, margin trends are improving. Over the past several quarters, margins have been under pressure. Last quarter, that pressure eased in a big way.
So long as revenue and margin trends improve from here, then beaten-up WB stock should bounce back in the near term.
As of this writing, Luke Lango was long BABA, JD, AMZN, TJX, FIVE, CTRP, and BILI.