If we look at the timeline for tensions between U.S. and China in the last few decades, there have been phases of escalation and de-escalation. Currently, tensions between these two countries are rising and could potentially worsen.
At the same time, the novel coronavirus has stalled global GDP growth. If tensions persist, GDP growth will continue to be negatively impacted. According to The Brookings Institution, the trade war between the two countries has “more pain than gain” for America.
But I personally believe that tensions will gradually de-escalate. Escalation is a lose-lose scenario. However, amidst uncertainty, it makes sense to remain cautiously optimistic when it comes to investing in Chinese stocks. In particular, Chinese e-commerce stocks have been hot in trade.
While I remain bullish on the long-term outlook for Chinese e-commerce stocks, I would book partial profits. At the same time, any deep correction would be an opportunity to accumulate these stocks.
This column will discuss four Chinese e-commerce stocks worth keeping on your the radar.
Chinese E-Commerce Stocks: Alibaba (BABA)
BABA stock is perhaps the most attractive e-commerce stocks besides Amazon (NASDAQ:AMZN). It is worth noting that the tensions between the U.S. and China have hardly impacted the stock’s momentum. For the current year, BABA stock has moved higher by 23% and looks good for more upside in the coming quarters.
In the core commerce business, I see several positives for Alibaba. First, the company stands to gain from continued growth within China as e-commerce penetrates beyond major cities. Second, Alibaba is also well positioned to benefit from e-commerce growth in Southeast Asia. Third, with the novel coronavirus, the demand for online food and grocery orders has increased. The company’s Freshippo business stands to gain from this trend.
In addition, the company’s public and hybrid cloud business has been growing at a stellar pace. There remains ample scope for growth and cash flow from this segment. The cloud business already has a leading position in the Asia-Pacific region.
I want to add here that the company has a business segment known as “Innovation Initiatives.” For the March quarter, this segment reported 90% revenue growth on a year-over-year basis to $323 million. With robust financial flexibility, Alibaba has the headroom to invest in innovation-driven growth.
I see Alibaba as a more diversified company in terms of regional exposure and business segments in the next five years. In terms of regional expansion, making inroads in Europe could seriously change the game.
Overall, BABA stock has remained strong, and if we go by the language of the markets, its likely that U.S-China tensions will de-escalate.
JD stock surged after reporting numbers for the second quarter of 2020. Further, Goldman Sachs has raised the stock’s price target to $85. This implies a potential upside of 21% from current levels.
Among the several highlights, the company’s annual active customer accounts increased by 29.9% to 417.4 million as of Q2 2020. The strong year-over-year growth indicates a growing online shopping preference. With the company having potentially the best logistics network in China, there is ample scope for growth in semi-urban and rural areas.
I also like the fact that the company’s gross margin has been expanding gradually. In the coming years, this would imply higher operating and free cash flows. For the trailing 12 months, the company has already reported free cash flow of 22.7 billion yuan.
An interesting point to note related to U.S.-China tensions is that JD stock was listed on the Hong Kong Stock Exchange in June 2020. Companies like Alibaba and NetEase (NASDAQ:NTES) have also listed on this exchange. This could potentially be a precautionary measure by Chinese companies in the worst-case scenario. However, I don’t see that coming.
Chinese E-Commerce Stocks: Pinduoduo (PDD)
PDD stock has been an outperformer among Chinese e-commerce stocks, having surged 150% in 2020. While it makes sense to avoid the stock after a big rally, PDD stock is also worth keeping on your radar if there is a meaningful correction.
Among reasons to be positive, the company’s active buyers and annual spending per active buyer has been consistently trending higher. In addition, the company has a robust cash buffer of 32.5 billion yuan, which gives headroom for aggressive growth.
A key reason for caution is that the company is still posting operating losses. This is understandable as the company is still in an early growth stage. However, if operating losses sustain, it makes sense to remain invested in companies with robust cash flow like Alibaba and JD.com instead of PDD stock.
Overall, Pinduoduo might not be the first choice among Chinese e-commerce stocks. However, it’s a stock worth keeping on your radar for the day it posts an operating profit.
Vipshop Holdings (VIPS)
VIPS stock has also been trending higher in the current year and is worth keeping on your investment radar. However, I would avoid any fresh exposure to the stock at current levels.
The reason for highlighting Vipshop Holdings is the fact that the company is different from other e-commerce companies. Vipshop operates in a discount retail market and is a preferred discount channel for some big brands.
However, the company’s top-line growth has failed to gain traction. For fiscal 2018, the company’s top-line growth was 16% and it declined by 10% in fiscal 2019. Further, for Q1 2020, top-line growth declined by 12% as compared to Q1 2019.
This is a concern at a time when other e-commerce companies are reporting stellar growth. Therefore, the differentiated business model is the only reason to keep the stock on your radar. I would recommend exposure only if top-line growth starts to pick up.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.