Chinese stocks have been in the eye of the storm. Regulatory headwinds have resulted in a sharp sell-off across sectors. On one hand, there is a case for some portfolio readjustment to avoid stocks likely to be affected the most by the regulations. On the other hand, the sell-off in Chinese stocks is a good opportunity to accumulate some quality names.
An important point to note is that the private sector is the dynamic sector of the economy. If healthy GDP growth is to be sustained, the private sector needs to flourish. Therefore, it’s very likely the regulators will iron-out differences with the private sector.
Amid the blood bath for Chinese stocks, let’s talk about four stocks that look worth adding at current levels. I believe that these stocks can be long-term value creators and are positioned to navigate the current headwinds. They are:
Chinese Stocks to Buy: XPeng (XPEV)
China’s electric vehicle industry is set for healthy growth over the next decade. By 2030, it’s expected that three out of five new cars sold in China will be electric vehicles. I therefore believe that it’s a good time to consider exposure to XPEV stock, which has been sideways for year-to-date 2021.
XPeng is attractive with the company delivering strong growth. For the first quarter of 2021, the company reported vehicle deliveries of 13,340. This was higher by 487.4% on a year-on-year basis. For the same period, the company’s revenue surged by 616% to $450.4 million.
It’s also worth noting that for Q1 2021, the company’s vehicle level margin was 10.1%. For the prior year comparable quarter, that margin was a negative 5.3%. As vehicle deliveries continue to increase at a healthy pace, XPeng is well positioned to deliver healthy margins and cash flows.
The company reported cash and equivalents of $5.5 billion for Q1 2021. This supports ample flexibility to invest in innovation and manufacturing expansion. Recently, the company introduced the world’s first mass-produced LiDAR equipped Smart EV.
Overall, XPeng seems to be ahead of peers in China when it comes to autonomous cars. Besides growth in China, the company has ambitious international expansion plans. These factors make XPEV stock worth considering.
ZTO Express (ZTO)
As a leading express delivery company in China, ZTO Express stands to benefit from sustained growth in the e-commerce industry.
According to the company, the number of parcels for express delivery was 83.4 billion in 2020. This is expected to increase at a CAGR of 17.4% to 15.8 billion parcels by 2024. As a leading industry player, ZTO Express seems well positioned to benefit.
Because of negative sentiments related to Chinese stocks, ZTO stock declined by 7% for the year. However, the stock looks attractive at current levels, And, the logistics industry does not face regulatory headwinds.
For 2020, ZTO Express reported revenue of 25.2 billion renminbi, which was higher by 14% year-over-year. For the same period, the company’s operating cash flow was 4.9 billion renminbi. The company also closed 2020 with cash and equivalents of 19.9 billion renminbi.
Positive cash flow coupled with a healthy cash buffer provides headroom for aggressive growth investments. It’s important to note that the company’s market share increased from 15.5% in 2017 to 20.4% in 2020. With China’s express delivery industry becoming more consolidated, acquisition driven growth also seems likely.
Chinese Stocks to Buy: Xiaomi Corporation (XIACF)
Electronics company Xiaomi is another attractive name among Chinese stocks that’s worth adding to the portfolio. XIACF stock has been an outperformer, surging 74.2% in the last 12 months. A further rally seems likely after some consolidation.
For Q1 2021, Xiaomi reported 54.7% growth in revenue to 76.9 billion renminbi. The company’s adjusted net profit also surged by 163.8% to 6.1 billion renminbi.
In terms of smartphone market share, the company already holds the third position and is just behind Samsung (OTCMKTS:SSNLF) and Apple (NASDAQ:AAPL). Importantly, the company’s premium smartphone market share increased from 5.5% in Q1 2020 to 16.1% in Q1 2021. This is likely to have a positive impact on margins and cash flow.
Entry into electric vehicles is another reason to be bullish on Xiaomi. Over the next 10 years, the company expects to invest $10 billion in the EV business. Furthermore, Xiaomi has also diversified into the smart home segment. Current products include video entertainment, wearables, appliances, home security and speakers.
There is ample scope for growth for the company in China and internationally with its diversified approach and focus on innovation. It’s worth noting that for Q1 2021, the company derived 48.7% of revenue from overseas.
XIACF stock a potential candidate for a positive breakout, even as a majority of Chinese stocks struggle with regulatory headwinds.
Miniso (MNSO)
MNSO stock has trended sharply lower (46%) in the last six months. However, it seems that the worst is over for the stock. With healthy top-line growth and gradual improvement in margins, MNSO stock is positioned for a reversal.
For Q3 2021, Miniso reported revenue of 2.2 billion renminbi, which was higher by 37% on a YOY basis. Importantly, the company’s gross margin improved to 28.1% in the quarter from 24.4% in Q4 2020. The company’s adjusted net margin of 6.7% was also the highest in the last four quarters.
An important point to note is the company’s e-commerce revenue growth for Q3 2021 was 86% on a YOY basis. Miniso has been investing in ramping-up omni-channel capabilities. This is likely to boost growth and help in improving margins.
Further, Miniso is also betting big on a sub-brand. Top Toy already has 25 stores in 15 cities. With 2,500 SKUs, the store has a wide offering for kids and young adults.
Miniso has strong presence in China with 2,812 stores. Additionally, the company has 1,775 stores in international markets. With aggressive store expansion coupled with e-commerce growth, I am bullish on MNSO stock for the medium to long term.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
