China is a massive economy, and one that continues to be a major engine of global growth. It’s armed with massive amounts of domestic capital to fund major economic expansion now and for years to come. It has been a compelling place for businesses to start, develop and thrive. And in turn, it is drawing the attention of domestic and international investors looking for stocks to buy.
The Chinese stock market as measured by the China Stock Index 300 had been lagging the S&P 500 Index until this past year. Over the trailing year, the CSI 300 Index has returned (in U.S. dollar terms) 41.75%, compared to the S&P 500 Index’s return of 18.40%.
But China and its economy are not just about the domestic market. There are also numerous companies there that are based in the broader Asian region, or beyond.
I have worked in China going back to the early 1990s and have served major manufacturers and financial companies in capitalizing on the opportunities in the nation. And in November, China led a major regional trade deal that has set the stage for a massive further development of the economy and markets. I see this, along with the pending changes in the U.S. Administration, bringing less capricious economic and market policies. That’s setting up major opportunities for investors. So let’s talk about the ones to keep an eye on now.
The Biggie Deal
The biggest trade deal in the world was signed in November after more than nine years of planning and negotiations. It is called the Regional Comprehensive Economic Partnership, or RCEP, which to me calls to mind the word reciprocal. Reciprocal is how I view this treaty that involves fifteen nations representing nearly one third of the world’s population and nearly the same portion of the globe’s gross domestic product (GDP). That means more than 2.2 billion people and $26.2 trillion in a U.S. dollar equivalent amount.
RCEP has nothing to do with the U.S. Instead, it focuses on what matters to nations and leading economies of the Asia-Pacific region. It includes China, Japan, South Korea and Australia and New Zealand as the biggies of the region. And it also includes major transitioning economies, including Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand. Vietnam and even Brunei.
It will end nearly all tariffs between members on imports. This will allow input goods, resources, energy and other items to be able to freely flow across borders facilitating the benefits of Adam Smith’s economic theory of competitive advantage of nations.
And for exports beyond the trade block, it will have a unified origin that will be used in identifying goods shipped and sold throughout the rest of the globe including the European Union (EU), the United Kingdom (U.K.) and the U.S.
And it isn’t just about physical resources and goods. Electronic commerce and everything from standards and procedures to cross-border access through all of the fifteen nations will be freed up and made easier to develop, deploy and expand throughout the biggest block of the globe’s markets. And it also sets up standards for intellectual property rights to protect companies inside the pact.
RCEP members believe that the agreement will result in significant economic development amounting to the building of multiples of their current GDP over the coming decades. And it works for the members and without any meddling by the U.S., EU and other non-Asian nations and political blocks. This last point is perhaps why the traditional and financial medias in the U.S. has paid little attention or ink (electrodes) to the deal. And when it has been mentioned, it has often come with major criticisms that to me are unfounded and miss the point that RCEP is all about China and its partners and not the U.S.
The Best Stocks to Buy Now
Now, over the recent past years inside my Profitable Investing, I have been focusing on the U.S. markets for stocks and bonds, given the U.S. economic outperformance as well as ongoing trade negotiations (disputes) that has put many other economies and markets at a disadvantage.
But with pending changes in political leadership in the U.S. and with the RCEP deal, I see expanding opportunities for many companies — particularly with strong customer bases in China and its Asian RCEP partners.
All About Assets
I start this look at stocks to buy with two of my favorite asset management companies — AllianceBernstein (NYSE:AB) and BlackRock (NYSE:BLK). Both continue to be strong performers in the Chinese market, which aides the stronger stock performance in their shares in the U.S.
First up is AllianceBernstein. It’s well-situated in Asia with major offices in China, Japan, South Korea and other RCEP nations.
AB should continue to both gain intelligence for stock and fixed income investing in the region. And even more important – it should gather more assets under management (AUM). AUM is what fee income is generated from, and over the past two quarters, it has surged by 16.64%. I’ve seen a 45.65% return on AB since adding it to the portfolio of my Profitable Investing, and at a mere 2 times intrinsic value and a discount to sales along with a yield of 8.7%, it makes for a great RCEP buy under $34.95 in a taxable account.
Second is BlackRock, one of the biggest asset managers in the world. The company is the go-to for exchange-traded funds (ETFs) as well as active funds. And of course, it runs trillions of government money, and not just in the U.S. as it runs Chinese sovereign investment funds and does very well with the leadership in Beijing. AUM keeps climbing — especially over the past two quarters — but that’s just the ongoing trend. Over the past five years, it averages 11.54% gains annually (CAGR).
BLK is a bit more pricey than AB at 3 times intrinsic value. And the yield is less at only 2.20%. But it keeps proving itself with a return since added of 111.78%. It remains a buy under a raised price of $795.00 in a tax-free account.
Next is technology stocks to buy. And China remains at the center of technology development, deployment and adoption of all of the latest in technology. Two companies that are embedded in China and the RCEP members include Ericsson (NASDAQ:ERIC) and Digital Realty Trust (NYSE:DLR). Both have been strong performers for investors both recently and are set up to deliver more with the major tailwinds of China and RCEP member growth.
Ericsson is the leader in fifth generation (5G) equipment, including patents. And with China and South Korea leading 5G deployment, ERIC should continue to gain equipment and maintenance sales. And this includes the patents that are used by Huawei (private) in China. And RCEP should further codify intellectual property rights for this company.
ERIC has done well so far since being added to Profitable Investing — returning 37.30%. And its rising sales should be further amplified for RCEP markets. It should be bought under $13.50 in a taxable account.
Joining ERIC is Digital Realty Trust — the leader in data centers throughout the U.S. and very much in RCEP nations. With facilities in China, Japan, South Korea, Australia and other RCEP markets, data flows and storage are already humming along securely — generating lots of lease and fee income.
And that income keeps climbing with gains over the trailing five years, averaging 16.27% on a CAGR basis. This in turn feeds a tax-advantaged dividend yielding 3.10%. And yet the stock is still a cheap real estate investment trust (REIT) that is only valued at 2.5 times its intrinsic value made of all of those hard-to-replicate data centers and licenses. It has returned 43.38% since being added to Profitable Investing and remains a buy under $142.25 in a taxable account.
With China and RCEP nations having a third of the world’s population, that means that there are many billions of mouths to feed. I want to draw your attention to two behind-the-scenes companies that make the actual food show up in stores and kitchens throughout RCEP. They include FMC Corporation (NYSE:FMC) and Zoetis (NYSE:ZTS).
Both of these impressive stocks to buy have been delivering triple-digit returns for investors over the past years.
FMC Corporation is the global leader in agricultural technology for crop protection and yield enhancement. It has a century-plus of history of pesticide and herbicide developments and patents on some of the first machines to deploy them.
Unlike many of its lesser peers, FMC is well-regarded and received in Asia, especially in China. China is a tough market when it comes to agriculture, as it is very concerned over food safety. And with RCEP, it will further enable FMC to broaden its reach. Revenue keeps climbing, especially post its refocus solely on ag, running at 7.6% over the past year. And the stock has returned 58.63% since being added to the Profitable Investing portfolio. It is a buy under a raised price of $124.00 in a tax-free account.
Joining FMC is Zoetis, which provides for the safety of livestock for food production throughout Asia. It has generated a return during its more brief holding period inside Profitable Investing of 60.02%. And it is a buy under a price of $169.50 in a tax-free account.
RCEP Is All About Logistics
Trade is not just about making stuff for export, but the actual shipment, storage and tracking all of that stuff. And the leader in logistics, including the world’s greatest collections of warehouses and trade facilities inside the RCEP partner markets, is Prologis (NYSE:PLD).
Prologis continues to be as successful a stock as it is in the logistics markets.
Prologis has facilities throughout China, Japan and Singapore. And China is where PLD really shines. It has facilities throughout the nation in and near all of the major manufacturing and shipping cities and provinces, from Guangzhou in the Southeast to Tianjin and the major industrial hub of Wuhan along the Yangtze river and out to the technology mecca of Chengdu.
Revenue was surging even before RCEP, with the trailing year seeing gains of 18.8%. And I see a lot more in the pipeline for this logistics leader in the REIT market. Yielding 2.30% and valued on the cheap side again for a REIT at only 2.31 times its intrinsic value it is a core investment in RCEP under $104.90 in a taxable account.
Asia continues to be one of the greatest sources for technology as noted earlier in this report. Sure, the U.S. has some brainiacs in and around Palo Alto — but without core specialties and development capabilities along with foundries and factories, little would show up in your pocket or desktop.
There are two local Asian leaders that are based in South Korea and Japan – but have massive operating business facilities inside China. They include Samsung Electronics (SSNLF,005930 Korea) and TDK (OTCMKTS:TTDKY).
Both of these companies are flat out the innovation leaders in multiple technologies that are critical for China and the RCEP region. And both have done well for U.S. investors.
Samsung Electronics is a company that I keep recommending . While it is based in South Korea, it has foundries, factories and all sorts of other facilities around the RCEP member nations as well as around the globe. And in China, it is the very-well respected company with abundant facilities throughout the nation.
The company and its products are ubiquitous. It has its branded products everywhere, from around the kitchen to smartphones to tablets and laptops and televisions. And even other branded products, including from Apple (NASDAQ:AAPL), can include Samsung components.
Its facilities are dominant throughout not just Korea but China and nearly every other RCEP member nation. So, easier trade will be a massive boon to the company. And having a unified origin documentation will make it also much easier for global market sales beyond Asia. Then there’s the intellectual property protections of the deal — again major savings in legal battles are in the works.
The stock is a pain for some to buy in the U.S. market. Some brokerages make you call in the order rather than clicking through on online sites. And then they level a fee for the call and potentially an added fee for trading on a foreign exchange. It is worth it. Since it was added to the Profitable Investing portfolio, it has returned 84.90%, including its dividend yielding 2.20% which is pretty high for a high-tech stock.
But the compelling bit is how cheap the stock is valued. At barely more than its intrinsic value and trailing sales value — the stock is one of the biggest bargains of the major tech stocks on the globe.
It is a buy in a taxable account under a further raised price of $85.
TDK is a recently added stock to the portfolio. But it is already proving its worth with a return so far of 46.57%. This Tokyo-based company known for its classic tape-recording products has long transformed itself into a cutting edge and must have technology company. It leads the markets with batteries and battery technology that makes everything from smartphones to electric cars hum along. And its sensors and processors make those same phones and cars work, including autonomous cars.
And it also has all of the must have inductors and capacitors to make electric motors actually turn and move. So, take any technology product and TDK is what is inside or powering it to work.
RCEP will make TDK’s foundries and factories work and trade to flow all the more efficiently. And this will add to the operating efficiency adding to its already positive operating margin.
And like for Samsung, TDK’s stock is very, very cheap at less than 2 times intrinsic value and barely more than 1 times what it sold over the trailing year. Bargain, made more so with RCEP and is a buy under a price of $146.00 in a taxable account.
China Commerce Chief
Those who think that the U.S. is the most advanced when it comes to technology need to plan a post-Covid-19 trip to China. In China, cash is long gone. Virtually everything is done electronically especially via smartphones. Shopping is all done via phone and online. Payment systems are seamless linking bank accounts, credit lines and everything else all centrally.
Communications are all done through unified systems, including social media. And media is all done through subscription simply and unified for both videos and games. Everyone that you would get to know is on the network and easily accessible.
WeChat got well known in the U.S. for being used by everyone who has personal or professional ties and connections in China. WeChat is the core hub for communications, payments, investments, insurance and so much else that its hard to fathom not having it inside China or in the region or even in the U.S. if you deal with anyone in China.
It is owned by Tencent (OTCMKTS:TCEHY) which is one of the biggest technology companies in the world headquartered in Shenzhen.
I have been eager to bring Chinese companies — and specifically Tencent — into the Profitable Investing portfolio for some time. But I hesitated, as I saw plenty of event risks for even the more financially and reporting responsible companies in China, plus the added risk of restrictions on share listing and trading in the U.S.
With the changes now and pending in U.S. politics and the major changes in China and its trade and financial relations in Asia with RCEP, it is now time to buy Tencent. The company is genuinely ubiquitous in China and is used by all who interact with China, particularly in the RCEP member markets.
The company organizes its operations and investments in several external companies including JD.com (online commerce) and many others into six core platforms.
It starts with communications. WeChat forms a major base for Tencent. It is joined by QQ, which is an app that runs on all operating systems around the world and expands online services of Tencent including payments.
Next up is its gaming platform. Mobile and online games are already huge around the globe — that’s why I added Activision Blizzard (NASDAQ:ATVI) to the model portfolio with its offerings. But Tencent has its own platform and games. It it the largest gaming company globally by revenue generated by its gaming offerings.
Media is next with video, news and literature. And then there’s music, where Tencent rules streaming and owned music under Tencent Music Entertainment (NYSE:TME). Again, Tencent is the regional number one for this platform and also has global reach.
As for its FinTech division, Tencent provides everything from wallets to banking and credit facilities including insurance and investments. Again, if sensing a theme here – it is the largest in China.
Then there’s Tencent’s version of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) which provides the nation’s leading browser complete with all of the ad revenue that has made Google work so well beyond China. And it also is a leader in locking down its customer’s smartphones, tablets and PCs with its class-leading security.
Cloud technology rounds out the platform. And with games, media, financial transactions and accounts and everything else that works in the cloud — Tencent rules this market that beyond China is similar to Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).
So, when looking at Tencent, you get the leader in communications, financial transactions and products, browser and data security, media and entertainment all in one company. And this company gets along very, very well with Beijing, which is important for Chinese companies and investors in Chinese companies.
And it also comes with venture capital and investment funds that have current major holdings in many of the bold-faced technology and commerce companies in China and the region. It not only provides capital and takes equity stakes, it also nurtures and provides preferential access to its platforms for company developments. Tencent shareholders benefit from this both in current revenue generation and longer-term appreciation in these investments.
And in ESG (environmental, social & governance), Tencent continues to address the environment, which is rapidly becoming a primary goal of the Chinese government. It is also focused on local communities and constituents. And Tencent works on its governance not just in China — but with global financial and government regulators and continues to (outside of the recent spat over WeChat in the U.S.) be well-received by authorities beyond China.
WeChat About Profits
Revenue for Tencent makes for a great conversation. Sales growth over just the trailing five years is averaging growth by 34.70% annually (CAGR).
And with such scale from its platforms, margins are very, very fat at 29.5% on an operating basis. This works to drive shareholder wealth with a return on shareholder’s equity of 24.9%.
It would be great just to focus on the revenue and profits, but Tencent is focused on building value. Each of its platforms, including the core WeChat and related services, has major barriers to competitors. Even Alibaba (NYSE:BABA), as good as it is, still trails Tencent on many fronts. These continue to have bigger business values. And as noted, its investments also continue to build in value.
And this shows up in the intrinsic value of Tencent. This is the meltdown value of the assets net liabilities, also known as book value. And over just the trailing five years, Tencent has built up the intrinsic/book value for shareholders on an average annual basis of 38.59%. Think about this. If the company’s intrinsic value rises by this significant amount — along with the current revenue and profits — it makes for a compelling case to buy and own it.
And for investors in Tencent, the return has been proof of the capability of the company. It has returned 1,506%, which is near triple the return of the go-go technology market index of the U.S. over the trailing 10 years.
You will be buying a stock that is highly valued at 8.27 times intrinsic value and 10.40 times trailing sales. But both of those values are a snapshot of trailing intrinsic and revenues – both should continue to prove to expand. And when compared to the price to book of the S&P Information Technology Index – it is at a discount. And on a price to trailing sales it is comparable.
The dividend, yes it has a dividend that is paid – but isn’t much as the company retains and reinvests it with a good track record.
It is a buy as it is now as I have it in the Profitable Investing portfolio in a taxable account under $85.
About Neil George:
On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
As the editor of Profitable Investing, Neil George helps long-term investors achieve their growth & income goals with less risk. With 30+ years of experience in the financial markets, Neil recommends undiscovered and underappreciated companies that offer subscribers double-digit yields now and triple-digit returns over time.