The ultra-tense trade relations between the United States and China may last for years to come. The punitive taxes levied against each other may make matters worse, as will the battle at the intellectual property front. For investors who bought Chinese stocks in the last four years, those macro-level headwinds barely hurt their returns.
But there are some signs things may change. As Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business tells InvestorPlace:
“A Biden administration will lead to a much more cooperative, and less confrontational, foreign policy. International trade will increase, the economies of all countries will benefit, and the risk of a military conflict will be substantially reduced. This reduction in international confrontation will reduce the overall risk facing financial markets and result in higher equity prices.”
Investors who picked growth companies dominating the domestic market and expanding globally will fare very well. Regardless of the tensions between the two trading giants, markets will reward companies that will grow despite the macro uncertainties in the near-term.
These are 7 Chinese stocks to buy even if trade tensions persist:
- Alibaba (NYSE:BABA)
- JD.COM (NASDAQ:JD)
- Baidu (NASDAQ:BIDU)
- Tencent (OTCMKTS:TCHEY)
- IQiyi (NASDAQ:IQ)
- NetEase (NASDAQ:NTES)
- Lenovo (OTCMKTS:LNVGY)
Furthermore, valuations of China-based giants are favorable to their American counterparts. For example, e-commerce firm Amazon (NASDAQ:AMZN) is still expanding its addressable market after it entered the grocery market a few years ago. But it booked $4 billion in costs in the fourth quarter related to Covid-19. By contrast, China beat the pandemic, so its firms will not face the same costs.
Chinese Stocks To Buy: Alibaba (BABA)
Alibaba stock has more than doubled in the past half-decade. This company is the Amazon of China and more besides. Not only does it have an Amazon Web Services-style solution called Alibaba Cloud, but its Ant Group listing will unlock more of the company’s stock value.
Alibaba’s Ant Group set an initial public offering that will be the world’s biggest. Ant Financial, which Alibaba backs, will have a dual listing that gives the company $34.4 billion.
Alibaba owns one-third of Ant Group, which runs Alipay. So investors are getting a mobile payment apps firm whose market capitalization may top over $200 billion.
Alibaba itself is relatively inexpensive to own compared to Amazon. With its forward price-to-earnings ratio of around 25 times, it is less than half that of Amazon’s stock. And Alibaba shows no signs of weakness ahead. The rebounding Chinese economy assures that its core e-commerce business will keep growing.
Its media empire is also faring well. For example, in its Q1/2021 conference call, the company said that Youku’s daily active subscriber base grew by over 60% year-over-year. The growth in the Media and Entertainment segment will accelerate as China gradually re-opens its cinemas.
As shown above, Alibaba’s growth score is on par with the fast-growing American firms.
Online retailer JD.com more than quadrupled its online penetration in China from 2012 through the first half of 2020, from 6.2% to 25.2%. JD stock rose steadily over the year, almost doubling from the lows. With a compounded annual growth rate of 31% from 2016 to 2019, sales are increasing at a faster pace than that of Amazon.
And JD continues to improve its operating efficiency. By offering daily deals, more customers choose this retailer first. Once investors add the firm’s economies of scale in procurement and its cost advantages, they realize how strong the moat has become.
JD has several positive catalysts that will lift gross margins. It has a fast-growing advertising services business, improving logistics that scale as it gets bigger, and its 1P (or online direct sales) benefits from economies of scale.
As shown below, JD’s seasonal strength will resume in January 2021. If history repeats itself, the stock will return around 5% monthly over the first six months:
The company continues to lower losses from its third-party logistics services. This will lead to improved earnings in future quarters.
After a slow start on the markets, Baidu stock is gaining momentum. Investors bought shares in droves after this company posted a second-quarter EPS beat. Baidu earned $2.08 a share, despite revenue falling 1% year-on-year to $3.69 billion.
The search engine giant of China is expanding into two growth areas: artificial intelligence and apps. In Q2, CFO Herman Yu said:
“The healthy growth of Baidu App and new AI businesses have enabled Baidu Core’s adjusted EBITDA margin to reach 41% in the second quarter. We plan to continue heavy investments in technology to maximize Baidu’s future growth potential.”
Baidu posted strong in-app revenue in Q2. An AI powers its super app and the underlying marketing cloud platform. Due to strong cash flow, the firm returned $540 million to shareholders in 2020. In the last two years, it bought back $1.9 billion worth of shares.
The board of directors recently approved an increased repurchase plan in the last quarter. Baidu may now buy back up to $3 billion of shares through Dec. 31, 2020, up from $1 billion.
Ongoing intellectual property wars between the U.S. and China is proving less threatening. On October 27, the U.S. appeals court rejected an immediate ban of Tencent-owned WeChat. This chat app rivals Facebook Messenger, WhatsApp and other popular American-based instant messengers.
The three-judge panel ruled that the government did not show it would “suffer an imminent, irreparable injury during the pendency of this appeal, which is being expedited.”
Tencent continues to grow its advertising, entertainment, and messaging business. In the March 2020 quarter, it posted revenue growing 26% Y/Y.
With the pandemic waning in Asian regions, revenue will only continue to rise. Next year, that will continue as the company further invests in the gaming market and acquires firms.
After an announcement that the Securities and Exchange Commission launched a probe into the company sent shares tumbling, iQiyi stock has since recovered. The online entertainment services firm is growing revenue and will eventually turn a profit.
In the second quarter, iQiyi posted revenue of $1 billion, up 4% from last year, when it lost $181.4 million. Assuming the Covid-19 pandemic that hurt its business in the first half of 2020 is absent, investors betting on strong user growth will see IQ stock move higher in the years ahead.
Membership services revenue rose by 19% in Q2. So, as the audience consumes original content in greater volume, iQiyi’s in-house production returns will pay off.
Investors will also need to hope that China will contain the pandemic that the world is currently fighting. Still, any restrictions that lead to staying at home more often should drive its membership services revenue.
In the remote chance that China’s economy slows, iQiyi’s online revenue will weaken. Q2 revenue fell 28% Y/Y, primarily because of the challenging macroeconomic environment.
For investors seeking exposure to the mobile game market in China, NetEase is a good pick. The company posted Q2 net revenue increasing by 25.9% to $2.6 billion. Conversely, Activision (NYSE:ATVI) is not faring as well in the latest quarter.
Activision posted strong quarterly results that beat its outlook. But sharply lower cash flow outlook and a drop in monthly active users, from 428 million in the June quarter to 390 million, is a concern. NetEase has several game titles that should lift quarterly revenue. For example, some of its titles include Onmyoji: Yokai Koya, The Lord of the Rings: Rise to War, Harry Potter: Magic Awakened, For All Time, Revelation mobile game, and Ghost World Chronicle.
NetEase is also benefiting from strong momentum for NetEase Cloud Music. It also secured a multi-year licensing agreement with Universal Music Group. That would add diversity to the gaming business.
After trying, but failing to, break out above $14, Lenovo Group is a long-term hold for income investors. The stock pays a dividend that is close to 9%. In the third quarter, its PC business benefited from the rise of work from home and the stay at home trends. Rising pandemic risks worldwide should continue driving computer sales higher.
In Q3, Lenovo shipped the most PCs by unit at 19.3 million, commanding 24.3% of the market share. HP (NYSE:HPQ) took second place at 23.6% of the market, followed by Dell Technologies (NYSE:DELL) at 15.1%.
Plus, as Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD) compete aggressively for market share, Lenovo may get computer chips at lower prices. By offering higher performance at falling prices, unit sales will grow.
Income and value investors should consider holding Lenovo stock for the long term.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.