News flash: after several quarters of slowing down, China’s economy is in the early stages of a big rebound, and that means it’s time to buy beaten-up China stocks.
The logic here is simple. China’s red-hot economy started slowing in early 2018. thanks to the U.S.-China trade war. Throughout 2018 and the first half of 2019, U.S.-China trade tensions escalated. As they did, Chinese economic activity continued to slow, because trade uncertainty caused corporate leaders to lose confidence and reduce investment levels.
But over the past three months, U.S.-China trade tensions have eased in a big way. Considering both countries seem to be on board with striking a series of mini-deals and that U.S. President Donald Trump is entering a re-election year, it appears that this most recent easing of trade tensions will persist for a lot longer. As the market has adopted this consensus belief, corporate leaders have regained their confidence, investment levels have risen, and China’s economy has bounced back.
Need evidence? Look at the OECD’s composite leading indicator numbers for China, which have improved for six straight months. Or, look at the manufacturing PMI in China, which after several months of compressing, has stabilized over the past six months. You could also look at the country’s retail sales numbers, as that growth has stabilized in the 7-8% range over the past three months. Alternatively, you could look at the SPDR S&P China ETF (NYSEARCA:GXC), which is up almost 10% over the past three months.
Big picture: no matter where you look, China’s economy is in rebound mode. This rebound should persist into 2020, and that means it’s time to buy beaten up China stocks.
Alibaba (BABA)
% Off 5-year high: 11%
Three-month gain: 14%
First on this list, we have China’s most important technology company, Alibaba (NYSE:BABA). Alibaba is the heartbeat of China’s digital economy. BABA is the country’s biggest e-commerce platform, with a sprawling offline retail business, a huge cloud business, a massive digital advertising arm, and many, many other verticals which together span across the entire Chinese digital economic universe.
Consequently, as goes China’s economy, so goes Alibaba. When China’s economy is struggling, consumers and businesses spend less, Alibaba’s revenue growth trajectory slows, and margins come under pressure. Profit growth rates fall. BABA stock drops. In 2018, of course, China’s economy was hit hard by a slowdown and BABA stock shed 25%.
Similarly, when China’s economy is doing well, consumers and businesses spend more, Alibaba’s growth trajectory improves, and margins move higher. Profit growth rates surge. BABA stock pops. The 14% rally BABA stock has staged over the past three months amid building Chinese economic optimism is a prime example of this.
The implication? So long as China’s economy stays in rebound mode — and it should in 2020 — then BABA stock should keep bouncing back. I think this stock will easily soar above $200 soon.
Weibo (WB)
% Off 5-year high: 62%
Three-month gain: 48%
Second, we have social media platform Weibo (NASDAQ:WB), which was one of the most beaten up China stocks during the slowdown, and now has an opportunity to be one of the best-performing stocks during the rebound.
Weibo is the Chinese version of Twitter (NYSE:TWTR). It’s a micro-blogging platform which Chinese consumers use to communicate their thoughts in a quick and concise manner. Chinese consumers love Weibo, and the platform hasn’t had any problems with user or engagement growth over the past two years. But, the company has had problems on the revenue growth front, where revenue growth rates spiraled in 2018 amid slowing digital ad spend across all of China.
In response, WB stock sunk from $140 to $35.
But as China’s economy has stabilized over the past few quarters, the digital ad spending environment in China has improved. Consequently, Weibo’s growth trajectory has re-accelerated higher. As it has, WB stock has bounced back. Shares are up 48% over the past three months.
But they are still more than 60% off their 2018 highs. That means there’s still tons of firepower here for further upside in the event that Weibo’s growth trends continue to improve. They will, mostly because this is an important and necessary platform with a ton of users in a digital ad market that’s on a comeback. As such, over the next few quarters, WB stock should stay on a winning streak.
JD.com (JD)
% Off 5-year high: 34%
Three-month gain: 22%
Much like Alibaba, Chinese e-commerce juggernaut JD.com (NYSE:JD) goes as China’s economy goes. Thus, as China’s economy rebounds over the next few quarters, so should JD stock.
In China, there are two giant e-commerce platforms: Alibaba and JD.com. The two have co-existed for a long time, and will continue to co-exist for the foreseeable future, mostly because consumers like options, and because each platform has their own set of unique value props (JD, for example, owns its logistics network, so they are known for having the best delivery times in China).
Consequently, competition isn’t a big concern for JD. So long as China’s e-commerce market grows, JD will grow, too.
The problem is that in 2018, China’s e-commerce market materially slowed at the same time that JD.com was pumping a bunch of money into things like geographic business expansion and logistics enhancements. The result? Revenue growth rates slowed meaningfully, margins got whacked, and the stock got killed.
In 2019, though, China’s e-commerce market has rebounded amid improving economic conditions. JD has also phased out its big 2018 investments. Revenue growth rates have stabilized as a result, margins have improved, and the stock has surged higher.
Will this rally continue? Yes. The dynamic of revenue stabilization and improving margins will persist into 2020. As it does, JD stock will continue to rebound from its big 2018 plunge.
Bilibili (BILI)
% Off 5-year high: 22%
Three-month gain: 21%
One of the lesser-known stocks on this list, anime gaming and comic-focused video platform Bilibili (NASDAQ:BILI) has an opportunity to stage a huge comeback over the next few quarters.
Long-term, there’s a lot to like about Bilibili. The company services a unique industry, with a unique value prop, and has very little overlap with other Chinese social media platforms (no one else has this focus or offers this service). This unique industry isn’t that small, and Bilibili both has a ton of users (110 million monthly active users) and is growing its user base rapidly (30% user growth last quarter). They are also monetizing that user base quickly (50% revenue growth last quarter), and have a respectable margin profile which lends itself to producing sizable profits at scale.
Given that backdrop, the huge plunge in BILI stock in 2018/19 might not make sense. Unlike the other stocks on this list, Bilibili maintained huge revenue growth during this time. Margins were hit hard, but that was all near-term noise. User growth was unaffected. Why, then, did BILI stock plunge?
Sentiment. No one wanted to touch China stocks when the U.S-China trade war was escalating and when the China economy was slowing to decade-low growth rates. Now, though, the U.S.-China trade war is de-escalating, and China’s economy is rebounding. As such, investors will rush back into China stocks, especially the ones that probably shouldn’t have been sold off that much in the first place.
BILI stock is exactly that. As such, over the next few quarters, shares of this beaten-up internet platform should rebound in a big way.
Vipshop (VIPS)
% Off 5-year high: 60%
Three-month gain: 81%
Last, but not least, on this list of hot China stocks to buy on the rebound is online discount commerce king Vipshop (NYSE:VIPS).
VIPS stock was killed in 2018 thanks to three things. One, escalating U.S.-China trade tensions weighed on investor sentiment and scared potential buyers away. Two, the company’s revenue growth rates slowed meaningfully. Three, margins dropped in a big way amid falling gross margins and rapidly rising opex rates.
But, in 2019, everything has reversed course for Vipshop. First, U.S.-China trade tensions have eased. Second, Vipshop’s revenue growth rates have stabilized. Third, gross margins have improved and opex rates have dropped. In response to all these positive developments, VIPS stock has bounced back from the dead, and is up a whopping 81% over the past three months, and 111% year-to-date.
All of these tailwinds should persist into 2020. As stated in the intro, it appears that the U.S.-China trade war will remain sidelined. As it does, China’s economic activity should rebound, providing support for stable Vipshop revenue growth rates. Further, gross margins will improve with stabilizing revenue trends, and opex rates will continue to fall because more cost-cutting measures are in the pipeline.
Because all of these tailwinds will persist, VIPS stock should continue to rebound, too. It’s that simple.
As of this writing, Luke Lango was long BABA, WB, and JD.
