The Covid-19 pandemic has only further complicated already-rocky U.S.-China relations marked by the past two years of trade wars. Although relations between the two countries seem at a low point right now, it’d be hard to know how they may develop in the months ahead.
As the most populous country on earth, China offers plenty of growth opportunities for U.S. businesses and investors alike. Today we’ll discuss seven Chinese stocks to buy.
Most investors typically invest in shares of domestic companies, a phenomenon known as the “home bias.” U.S. stocks make up more than 54% of the public equity market cap worldwide. Next in line are Japan (7.7%), the U.K (5.1%). and China (4%). Put another way, there is a whole world out there that also deserves our attention. And China is increasingly playing a larger role. After all, it is the world’s second-largest economy behind the U.S.
The Shenzhen Composite Index, up about 32% year-to-date (YTD), is now at a level not seen since 2015. Similarly, the Shanghai Composite Index notched a new 52-week high over the summer, rising over 10% YTD.
Recent research by Jennifer Carpenter and Robert Whitelaw of New York University and Fangzhou Lu of MIT points out that:
“since the wave of market reforms that started more than a decade ago, stock prices in China have become as informative about future firm profits as they are in the US. Like other global investors, Chinese investors pay up for large stocks, growth stocks, liquid stocks, and long shots, while they discount for systematic risk. Thus, stock prices are linked to firm fundamentals through both cash flows and discount rates.”
Furthermore, investing outside the U.S., for example in China, provides a level of diversification as U.S. stocks and foreign stocks hardly ever move in perfect unison. In recent years, China has become a technology and digital entertainment hub. The growth in the earnings and spending power of Chinese consumers is also mouthwatering for many businesses.
With all that in mind, here are seven Chinese stocks to buy in the months ahead:
- China Life Insurance (NYSE:LFC)
- China Mobile (NYSE:CHL)
- Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ)
- Invesco Golden Dragon China ETF (NASDAQ:PGJ)
- JD.com (NASDAQ:JD)
- Vanguard FTSE Emerging Markets Index Fund ETF (NYSE:VWO)
- ZTO Express (NYSE:ZTO)
Given the upcoming quarterly earnings season and more importantly the U.S. Presidential elections, short-term timing may not be optimal to fully invest in Chinese stocks. However long-term investors may look to buy into the declines.
China Life Insurance (LFC)
52-Week range: $8.27 – $14.70
In terms of premiums, China Life Insurance is the largest life insurance company in China. With over 170,000 employees, it ranks number 51 on the Fortune 500 list. The company also has a controlling stake in China Life Asset Management Co. Ltd. As a result, it is also one of the country’s largest asset managers. It has been a member of the NYSE since 2003.
In late August, the company released interim results for the six month period ended 30 June. Total revenue was RMB 504 billion, an increase of 12.5% YoY. Gross written premiums were RMB 427 billion, an increase of 13.1% YoY. However, the board will not declare an interim dividend of ordinary shares.
Recent industry statistics show that, “In 2019, the premium income of China’s insurance companies amounted to around 4.3 trillion yuan, nearly three times as much as seven years ago.” Analysts concur LFC is likely to maintain steady premium income growth despite economic uncertainties ahead.
Year-to-date (YTD), LFC stock is down about 17%. As a result of the decline, its forward P/E and P/S ratios stand at 8.25 and 0.56. Investors may consider buying the dips.
China Mobile (CHL)
52-Week range: $30.12 – $44.93
The group is the leading mobile services offers mobile telecommunications services provider mainland China, with a market shares of over 60%. It is number 56 in the Fortune 500 list. The group employs close to half a million people.
In mid-August, China Mobile announced interim results. Operating revenue was RMB 389.9 billion, an increase of 0.1% YoY. Profit attributable to equity shareholders reached RMB 55.8 billion, or RMB 2.72 per share, marking a 0.5% YoY decline.
The group launched 5G services about a year ago and has been adding 5G base stations across China and Hong Kong. It has also been encouraging customers to subscribe to its 5G packages using 5G devices.
As of June 30, it had a total of 947 million mobile customers. Of this, the numbers of 4G customers and 5G package customers were 760 million and 70.20 million respectively.
Analysts typically pay special attention to mobile users as they are a crucial driving force of consumer spending in the country. China has the most mobile users in the world. And the mobile market is expected to grow further as China’s cellular infrastructure improves.
Since the start of the year, CHL stock is down about 22%. The current price supports a dividend yield of 6.26%. Forward P/E and P/S ratios are 8.31 and 1.23, respectively. Contrarian investors seeking value may want to put the stock on their radar.
Global X MSCI China Consumer Discretionary ETF (CHIQ)
52-Week range: $14.35-$28.35
Dividend yield: 0.59%
Expense ratio: 0.65% per year
Our next choice is an exchange-traded fund (ETF) since ETFs may offer a convenient and relatively low-cost method for investing in countries or industries that may pique investors’ interest. The Global X MSCI China Consumer Discretionary ETF provides exposure to a range of large- and mid-cap consumer companies in China. CHIQ, which holds 68 stocks, follows the MSCI China Consumer Discretionary 10/50 Index.
Internet & Direct Marketing Retail Automobiles, Diversified Consumer Services as well as Hotels, Restaurants & Leisure are the top three sectors in the fund, whose net assets are close to $280 million. Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), and Meituan Dianping (OTC:MPNGF) head the list of companies in CHIQ.
Top ten holdings account for about half of the fund. These businesses are likely to keep providing access to a growing Chinese middle class. As income and spending levels across the country increase, their earnings growth will support higher stock prices.
So far in the year, CHIQ is up around 47%. In case of a potential profit-taking, long-term investors may consider buying the fund, especially if it goes toward $22.5.
Invesco Golden Dragon China ETF (PGJ)
52-Week range: $30-$55.85
Dividend yield: 0.25%
Expense ratio: 0.70%
The next discussion also centers around an ETF. The Invesco Golden Dragon China ETF provides exposure to companies which drive most of their revenues from China. The fund concentrates on Chinese companies companies listed on U.S. exchanges. PGJ, which has 63 holdings, tracks the NASDAQ Golden Dragon China Index.
The top three holdings are TAL Education Group (NYSE:TAL), Baidu (NASDAQ:BIDU), NetEase (NASDAQ:NTES). In terms of sectoral allocation, Consumer Discretionary heads the list with almost 44%. Next are Communication Services (36.79%) and Information Technology (6.94%). The fund allows for diversification across multiple sectors.
In 2020, the fund has returned about 23%. Given the volatility in broader markets, PGJ may come under pressure short-term. Its trailing P/E ratio 18.35 and P/B ratio of 7.17 make the fund expensive at the current price level.
We’d buy between $45-$47.5. Such a short-term decline would still mean that the longer-term uptrend remains intact.
52-Week Range: $27.47 – $86.58
Many companies are chasing Chinese consumers as there are close to 1.5 billion Chinese residents. Our next company, JD.com, could be a valuable portfolio addition to track the growth in the spending levels across the country. The Chinese e-commerce giant is both a member of the Fortune Global 500 and one of the most valuable Chinese companies.
JD.com also has hundreds of warehouses and thousands of delivery stations as well as fresh food stores across China. The group is fast becoming a leading supply chain-based technology and service provider. According to research by the China Center for Economic Research, “the most popular products sold online at JD are cell phones, followed by food and beverages, makeup and cosmetics, digital products, and lifestyle and travel goods.”
In Q2 2020, revenue went up by 33.8% YoY, especially on strong growth in its third party logistic business. The Covid-19 outbreak meant has growth in online shopping revenue, while consumers but more necessities online.
Revenue in China’s e-commerce market is projected to go over $1 trillion in 2020. And online shopping represents over a third of China’s total retail market. By comparison, e-commerce in the U.S. represents about 12% of the nation’s total retail sales.
YTD, the shares have more than doubled. In fact, JD stock made a new high in early September. We believe it will continue to make new highs in the coming quarters, too. Therefore, it deserves a place on your shopping list.
Vanguard FTSE Emerging Markets Index Fund ETF (VWO)
52-Week range: $29.96-45.92
Dividend yield: 4.07%
Expense ratio: 0.10%
The next ETF we’ll discuss concentrates on emerging markets, which generally have strong long-term growth prospects. Therefore, it may be more appropriate for market participants would like to diversify across a range of countries, including China. The Vanguard FTSE Emerging Markets Index Fund ETF provides exposure to companies located in emerging market countries, such as China, Brazil, Taiwan, India, South Africa and others.
VWO, which has 5218 holdings, tracks the FTSE Emerging Markets All Cap China A Inclusion Index. The top sectors in this well-diversified fund are Financials, Technology, Consumer Services, Industrials, and Consumer Goods.
The top ten holdings make up about 28% of total net assets, close to $90 billion. Alibaba, Tencent Holdings (OTC:TCEHY), and Taiwan Semiconductor Manufacturing (NYSE:TSM) are the top three companies in the fund.
So far in the year, the fund is down about 4.1%. However, since the lows of late March, VWO is up close to 50%, so some profit-taking could be seen ahead. Long-term investors can find better value in the fund around the $40-level or below.
ZTO Express (ZTO)
52-Week Range: $19.63 – $38.99
Our final stock comes from the logistics space. In terms of parcel volume and profit growth, ZTO is one of the largest express delivery companies in China Its history goes back to 2002. The group listed on the New York Stock Exchange in Oct. 2016.
Management describes the delivery operator as “both a key enabler and a direct beneficiary of China’s fast-growing e-commerce market.” It controls close to a fifth of the express delivery market in the country and aims to reach a fourth by 2022. InvestorPlace’s Louis Navellier compared it to FedEx (NYSE:FDX) or UPS (NYSE:UPS) in the U.S.
In mid-August, the group announced second-quarter financial results. Revenues were RMB 6.4 billion (US$906.2 million), an increase of 18.0% YoY. Adjusted net income went up by 5.6% to go over RMB 1.4 billion. It expanded parcel volume market share by 1.6% to 21.5%. Parcel volume was 4,595 million, an increase of 47.9% from 3,107 million in the second quarter of 2019. The company’s cash flow generation is strong and balance sheet is healthy. And the group has has plenty of liquidity.
CEO Meisong Lai, Founder commented, “Benefited from a strong e-commerce-driven consumption rebound subsequent to the COVID-19 containment in China, the Chinese express delivery industry generated more than 5.7 billion incremental parcels year over year during the second quarter. According to the State Post Bureau, the express industry grew 36.7%, a quarterly record high since the first quarter of 2017. ZTO grew volume 47.9% and expanded our volume market share by 1.6 points to reach 21.5%.
YTD, the shares are up over 28%. Therefore, some profit-taking may be likely in the coming weeks. However, for the long-run, we regard it as a reliable Chinese stock to invest in.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.