[Editor’s Note: “5 Chinese Stocks to Buy for the Second Half 2020 Rebound”was originally published in December 2019. It is regularly updated to include the most relevant information.]
For four super important reasons, it may be time to go looking for Chinese stocks to buy for a big second-half 2020 rebound.
First, while the novel coronavirus outbreak originated in China, it appears to be largely in the rear-view mirror today. Local transmission of the virus in China has been hovering around near-zero for several weeks, and daily life in China is returning to normal. This paves the path for the Chinese economy to rebound in the second half of the year.
Second, data shows that the Chinese economy is already rebounding. In March, China’s Manufacturing Purchasing Managers Index (PMI), non-manufacturing PMI, retail sales, and trade data all rebounded sharply.
Third, through cutting rates, reducing bank reserve requirements, expanding lending capacity, and initiating huge fiscal stimulus programs, China’s central bank and government have equipped the economy with sufficient firepower to rebound vigorously over the next few months as virus concerns pass.
Fourth, Chinese stocks are dirt-cheap here. Many high-flying, big-growth Chinese stocks are trading at mundane, low-growth valuations. This discrepancy implies tremendous upside potential in Chinese stocks once the Chinese economy turns a corner in the second-half of 2020.
With that in mind, here are the best Chinese stocks to buy for a big second-half 2020 rebound:
Chinese Stocks to Buy for 2020: Alibaba (BABA)
The best Chinese stock to buy for a second-half rebound is Chinese e-commerce and cloud giant Alibaba.
Yes, retail sales in China were whacked in the first two months of the year, dropping 20% year-over-year. But, online retail sales were down only 3% in January and February. That’s not that big of a drop, and it implies that the coronavirus headwind for Alibaba wasn’t all that big.
Perhaps more importantly, the coronavirus headwind now appears to be largely behind the country. Consumer discretionary spending will rebound. Online retail sales growth in China will return to its 15%-plus mark. Alibaba’s e-commerce business will get back on track.
On the cloud side of things, the coronavirus pandemic has actually boosted enterprise cloud demand in China, as companies have rushed to migrate their services online. Alibaba is the unparalleled leader in China enterprise cloud. Therefore, it seems like Alibaba’s cloud business both weathered the coronavirus storm, and is well-positioned to accelerate demand over the next few quarters.
Overall, Alibaba is positioned to get back to growing at a robust pace over the next few months. As the company does, BABA stock — which trades at a relatively cheap 24-times forward earnings multiple — will rebound.
Much like Alibaba, Chinese e-commerce company JD.com appears well positioned for a big second-half rebound.
Even though consumer spending trends in China got whacked in the first two months of the year, JD.Com management said in early March that they still expect the company’s revenues to grow by 10% or more in the first quarter of 2020. That’s pretty impressive.
More importantly, JD reported 27% revenue growth in the fourth quarter of 2019, before Covid-19 impacted consumer spending trends. In the second quarter of 2020, Chinese consumer spending trends will likely rebound close to their fourth quarter levels, in the absence of the coronavirus outbreak. If so, that means JD is on track to report 10%-plus growth in Q1, and then get back to 20%-plus growth in Q2, Q3, and Q4.
This revenue growth rebound — coupled with sustained robust margin expansion — should spark a huge profit growth reversal in the back-half of 2020, the likes of which will probably send JD stock to new 2020 highs.
Often labeled as the Tesla (NASDA:TSLA) of China, premium electric vehicle maker Nio has a pretty compelling bull thesis heading into the second half of 2020.
Before the coronavirus outbreak, Nio’s two vehicles — the ES6 and ES8 — were selling very well amid a surge in electric vehicle demand in China. Nio’s delivery trends were improving. Gross margins were improving, too. Net losses were narrowing.
In other words, everything was trending in the right direction.
Sure, the coronavirus pandemic knocked this growth narrative off course. But only temporarily. Nio recently reported that its March delivery volumes rose more than 115% from February. Of note, Tesla’s China car registrations jumped 450% in March, further demonstrating that electric vehicle demand in China is rebounding with vigor.
As the virus increasingly becomes old news in China, Chinese consumer demand for electric vehicles will only grow. As this happens, Nio’s growth trends will continue to improve, especially since the company is launching a new vehicle later this year (the EC6).
At the same time, the company’s once cash strapped balance sheet has received a huge injection of funding from Hefei’s city government, shoring up the company’s financial position and significantly reducing insolvency risks.
Net net, Nio’s sales and profit trends are set to meaningfully accelerate in the back-half of 2020. This acceleration, coupled with a newly fortified balance sheet, should propel a significant rebound in NIO stock to levels not seen since early 2019.
The bull thesis on Chinese social video platform Bilibili is pretty simple: this is a big growth company, with minimal Covid-19 exposure, that is set to keep firing on all cylinders in coming quarters.
Bilibili is an online platform. As an online platform, the company actually saw engagement go up during the first two months of the year, when Chinese consumers were cooped up inside. Many of those consumers paid up for Bilibili’s various paid products. As such, as of mid-March, management is guiding for Bilibili to sustain huge revenue growth in Q1, calling for growth of nearly 60% year-over-year.
In other words, the coronavirus had very little impact on Bilibili’s business. Yet, BILI stock has lost a third of its value on coronavirus concerns.
That doesn’t make much sense. The rationale is that sustained coronavirus hysteria will plunge China’s economy into a recession, at which point Bilibili’s users will stop paying up for the platform’s services. But, that thesis doesn’t hold water, considering China is already getting back to normal and putting the coronavirus outbreak behind it.
Big picture — Bilibili will sustain big growth for the rest of the year. As it does, investors will understand that the recent sell-off in BILI stock is overdone. They’ll buy the dip, and shares will rebound.
Last, but not least, on this list of Chinese stocks to buy for the second-half rebound is Chinese online discount retailer Vipshop.
Vipshop has staying power in the Chinese e-commerce market as the de-facto off-price leader. If there is one thing that consumers are always attracted to, it is low prices. Thus, so long as Vipshop can maintain dominance in the off-price channel, the company will forever remain an important part of the Chinese e-commerce landscape.
The Chinese e-commerce landscape fared pretty well during the coronavirus outbreak, with online retail sales only dropping 3% year-over-year in January and February. That growth rate will rebound in March, and even more-so into the summer as pent-up consumer demand turns into robust sales growth.
Ultimately, in coming quarters, Vipshop’s growth trends should improve. As go profits, so go stocks. VIPS stock is no exception. Over the next few quarters, then, reinvigorated profit growth will drive this stock way higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long JD and NIO.