The Chinese New Year — celebrating the year of the rat for 2020 — is also of importance for investors. Last year, Chinese consumers spent $149 billion during this holiday period. Original forecasts pegged $156 billion as the total this time. However, the mood for celebration this year may not be as festive. Although the government is taking decisive steps to stop the spread of the coronavirus in its Hubei province, markets will closely watch the impact of the temporary travel restrictions in and out of the region.
The stock market may discount China-based companies to reflect the growing risks of lighter spending during the Chinese new year. If that happens, investors will treat the market’s drop as a short-term setback but a long-term opportunity.
Conversely, if worries about the spread of the virus abate and health officials report minimizing its spread, investors will turn their buying to a number of stocks.
There are seven stocks investors may consider buying for the Chinese New Year’s year of the rat.
Stocks to Buy: Baidu (BIDU)
Baidu (NASDAQ:BIDU) stock broke out from the $100 support level set in October 2019. Just as Alibaba (NYSE:BABA) sought and completed a Hong Kong listing, Baidu may do the same. And after Alibaba raised over $13 billion and attracted Asian investors, Baidu would also benefit.
Baidu’s fundamentals improved sharply in its third quarter. It earned $1.76 a share (non-GAAP), while its GAAP earnings came in at a loss of $2.57 per share. Revenue was flat year-over-year at $3.9 billion. The reason for the difference between GAAP and non-GAAP earnings is the Ctrip write-down. The company also de-consolidated Qunar, an online travel company.
The loss recognition with Ctrip does not change Baidu’s commitment to working closely with the firm. It will continue to foster the mobile ecosystem and introduce its artificial intelligence capabilities to the travel agency.
Last quarter, Baidu’s user traffic grew by 25%. Improving the user experience on the app, along with directing users from third-party browsers to the app drove traffic growth. For the Chinese New Year period and beyond, expect revenue growth improvements in its self-management system will align the higher traffic growth to increasing revenues.
iQiyi (NASDAQ:IQ) stock may have erased all of 2020’s rally last week, but higher subscriber counts might lift the stock for the rest of this year.
In Q3, the company reported double-digit growth in users. Membership revenue grew by 30% to 3.7 billion yuan. But ad revenue fell 14% and content revenue fell by 18%. Still, the Chinese New Year period may spur an acceleration in subscriber growth. Advertisers may increase spend at iQiyi as the company continues to take market share from its competitors.
iQiyi lost $396.2 million in Q3, with a net loss of $516 million. For now, the company has $1.9 billion in cash. So, the company may raise its subscription fees by a modest 10% or by an aggressive 25%. That would bring in more revenue that the company may use to invest back into content creation.
Online ad revenue fell because of challenging macroeconomic headwinds. A delay in various content launches and higher competition for in-feed advertising hurt this segment. iQiyi may benefit from the improving economy in China after the U.S.-China trade deal.
Brand advertising may improve as macroeconomic conditions improve. And performance-based ads will grow as iQiyi’s investments in its technology and product pay off.
Stock Rover is cautious on iQiyi, with a score of 19.
The low valuation score is despite the stock trading at a price-to-sales ratio below the industry average. Still, the fair value (based on enterprise value-to-sales) is $27.46. Conversely, based on future cash flow, the stock is worth $28.94. Wall Street’s average price target is $24.17.
Momo (NASDAQ:MOMO) stock fell from over $40 to $30 last week on no news. Investors forgot about the company’s strong Q3 results issued on Nov. 26. In that period, the company grew its revenue by 22% year-over-year to $622.8 million.
In the same quarter, Momo’s user community enjoyed a 114.1 million monthly active user count for its app. This is up 3% from last year. Momo also added a greeting experience, such as allowing users to send gifts alongside messages. The higher user engagement will let the company grow its revenue as it rolls out payment features.
Momo generated $164.5 million in cash from operations in the last quarter. It had $1.9 billion in cash and cash equivalents. The strong cash flow generation suggests that Momo may pay out a special dividend in the future. 2020 may be the year it does that, as cash flow increases.
Given Momo’s strong historical growth rates, it gets a scores of 91, compared to 53 for the industry.
JD.com (NASDAQ:JD) took a different approach to raising cash than both Alibaba and Baidu. It announced a $1 billion note offering. This consists of $700 million due in 2030 and $300 million due in 2050. The online retailer will use the funds for refinancing.
Completion of the debt sale signals that markets believe JD.com will still exist in 30 years.
Last quarter, JD.com reported net revenue growing by 29% year-over-year to $18.9 billion. Its services revenue grew by 47% while net product sales grew by 27%. And as its business scales, profitability will improve. JD.com calls it the “1P business model.” It described it as a self-reinforcing virtuous cycle.
“The higher sales we achieved will give us further economies of scale, in both procurement and operating efficiency, which will afford our customers even more pricing benefits, setting an even higher bar for competitors, while driving our further growth and margin expansion next year,” CFO Sidney Huang said in the company’s conference call.
JD.com has a very strong supply chain. It continues to work closely with its partners to increase efficiency. By lowering the supply chain costs, it defends its moat effectively. On the consumer side, the company invests in improving the user experience. For example, it monitors the user experience constantly.
Heavy investments through higher capital expenditures hurt cash flow in 2018. Yet those activities will pay off in 2020. The business is getting bigger and profits will come with it’s increasing size.
JD.com stock has an overall score of 89.
Its revenue growth is above many of its peers. Earnings are still behind that of Alibaba and Vipshop (NYSE:VIPS). Yet earnings will rise as investments in the business pay off and future operating costs fall.
Investors may forecast revenue growing at least 10% in a 5-year discounted cash flow model. In this scenario, JD.com stock currently trades close to its fair value of $38.05.
Tencent Holdings (TCEHY)
Tencent (OTCMKTS:TCEHY) reported growth in nearly all of its business segments except for media. A rebound in media revenue this year may give its gross profit a big lift. In the third quarter, gross profit grew by 9% from last quarter.
Tencent posted online advertising revenue growing by 12%. More companies want to advertise on its platform because of the popularity of its social network and online gaming. The bulk of Tencent’s revenue comes from value-added services like a social network, but its fintech and business services grew by 17% from last quarter.
The sheer diversity in Tencent’s businesses suggests that investors should hold this stock now and beyond 2020. Tencent’s platforms are dominate the segments that matter. This includes video, news, music, online games and mobile payment.
Tencent continued to extend its footprint from consumer internet to industrial internet. So by serving enterprise customers, other industries get assistance in the digitization process. It is also becoming more global by building from its gaming development in China. By partnering more closely with international firms, Tencent will have revenue that does not rely on China alone.
Sina Corporation (SINA)
Sina Corporation (NASDAQ:SINA) stock is stuck in a trading range. Although Q3 revenue rose slightly to $558.8 million, its advertising revenue fell by 5% to $461.1 million.
Sina is heavily discounted. It owns 46% of Weibo (NASDAQ:WB), but Weibo’s market capitalization is more than three times bigger than Sina’s market cap. Still, Sina stock may be out of favor because of its projects that lose money. Its operating loss in Q3 included a $25.5 million net loss on sales investments. Fair value changes and an impairment added to that loss.
Sina has a strong advertising mix. And as the automotive sector recovers, ad revenue should improve. That is, auto sales fell 20% last year but stronger consumer spending should reverse that decline. The financial sector and technology area is also an area of strength this year.
The sports category is an area that attracts viewers. But Sina recognizes the licensing and copyright costs are too high. To supply sports coverage but keep costs low, it will create some sports events. These basketball, football or soccer games will gain an audience and grow user traffic.
On Stock Rover, Sina has a value score of 74, the same as that of the S&P 500. Even though its gross and operating margin is higher than the index, the net margin of 5.7% is low. So, the stock has a quality score of 57, compared to 80 for the S&P 500. On Wall Street, the stock has a hold rating.
Luckin Coffee (LK)
Luckin Coffee (NASDAQ:LK) topped $51 in early January only to close at $40.83 on Jan. 24. The shutdown in Wuhan will likely hurt coffee consumption at Luckin locations. Still, consumers may still buy and drink the product at home. During the Chinese New Year festivities, chances are good that sales of drinks will increase as visitors boost demand.
Luckin ended 2019 with 4,500 domestic locations and now has more than Starbucks (NASDAQ:SBUX), which had 4,300. Yet Luckin has a market cap of around $10 billion compared to over $100 billion for Starbucks. Either way, Luckin’s success will help Starbucks’ business in the region. But the company is also an inexpensive alternative to Starbucks.
On Jan. 10, Luckin said it would sell more shares at $42. The cash raised will enable the company to invest back in the business.
Luckin said that in the third quarter it sold roughly 44.2 million items a month, up 470% year-over-year. Net revenue grew 557.6%. With the number of stores growing by over two-fold from last year, expect revenue growth rates holding strong this year. Luckin continued to invest in branding its coffee and tea products. So, the company is still in the early phases of its growth.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.