Many Chinese stocks, especially those in the tech space, have come under significant pressure as a result of the crackdown by Beijing authorities. Regulators initially went after “platform companies,” saying they violated antitrust laws.
In recent weeks, they have broadened their scope to the real estate sector as well. Then August saw China’s videogame industry come under scrutiny as “under-18s will only be allowed to play games online for three hours a week. Authorities have expressed concern over gaming’s impact on society.”
And many analysts point out that there might be other industries to feel the heavy hand of the state soon.
Therefore, shares of many widely followed Chinese companies have lost significant value so far in 2021. Alibaba (NYSE:BABA) is down 26%, JinkoSolar (NYSE:JKS) dropped 17%, DiDi Global (NYSE:DIDI) fell 35% since going public in June, Meituan (OTCMKTS:MPNGY) dropped 15%, New Oriental Education & Technology (NYSE:EDU) is off 87% and Tencent (OTCMKTS:TCEHY) slipped 12%.
Returns on both the Shenzhen Composite index and the Shanghai Composite have been subdued this year. They are up 3.5% and 5.8%, respectively, underperforming the major U.S. benchmarks.
Before one gets gloomy about the state of the equity markets in China, it is important to remember that behind the U.S., China is the world’s second-largest economy. Thus, despite the question marks and worry as to what might be next in China, buy-and-hold investors realize that Chinese shares give access to the growth of the country’s economy. The World Bank projects China’s economy to grow by 8.5% this year.
Therefore, today we’ll introduce two Chinese stocks and an exchange-traded fund (ETF) for those who believe many Chinese shares offer value right now:
- Baidu (NYSE:BIDU)
- China Life Insurance (NYSE:LFC)
- Global X MSCI China Consumer Disc ETF (NYSEARCA:CHIQ)
Chinese Stocks to Buy: Baidu (BIDU)
52-week range: $116.41 – 354.82
In its early days, the tech giant Baidu was known for its internet search engine and compared to Google — parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). In the past several years, Baidu has expanded operations especially into artificial intelligence and autonomous driving. It also retains a majority stake in iQIYI (NASDAQ:IQ), the Chinese market leader in online entertainment.
Baidu issued Q2 financials on Aug. 12. Top line grew by 20% from a year ago and was 31.4 billion RMB ($4.86 billion).
Baidu’s business currently consists of two main parts, Baidu Core (which includes AI Cloud, autonomous driving, mobile usage, and more) and iQIYI.
Of the total revenue, 24 billion RMB ($3.72 billion) came from Baidu Core, up 27% from a year ago. Revenue from iQIYI was 7.6 billion RMB ($1.18 billion), up 3% from last year.
Total non-GAAP net income of 5.4 billion ($830 million) RMB translated into non-GAAP diluted earnings per of 15.41 RMB ($2.39).
For the third quarter, management expects revenues to be between 30.6 billion RMB ($4.7 billion) and 33.5 billion RMB ($5.2 billion), implying a potential growth rate of 8% to 19%.
So far in 2021, BIDU stock is down about 22%. The shares are trading at a forward price-earnings of 14.3 and price-sales ratio of 3.1. Potential buy-and-hold investors should research the company further with a view to buy between $155 and $160.
China Life Insurance (LFC)
52-week range: $8.17 – $12.39
China Life Insurance is China’s largest life insurance company in terms of premiums. With around 170,000 employees, it ranks No. 52 on the Fortune Global 500 list. Since the insurer has a controlling stake in China Life Asset Management Co. Ltd, it is one of China’s largest asset managers as well. The group was listed on the New York Stock Exchange in 2003.
On Aug. 25, China Life Insurance released interim results for the six-month period ended June 30. Total revenue was up 6.5% from a year ago, while gross written premiums were up by 3.5%. Net profits were up by 34.2% over the past year.
So far in 2021, LFC stock is down about 21%, and the current price supports a dividend yield of almost 5.7%. Trailing P/E is at 5.2x, the price-sales ratio is 0.4 and its price-book ratio is at 0.7. Potential investors could consider buying around these levels.
Chinese Stocks to Buy: Global X MSCI China Consumer Discretionary ETF (CHIQ)
52-week range: $25.56 – $43.90
Expense ratio: 0.65%, or $65 annually on an investment of $10,000
Our final choice for today is an ETF, namely the Global X MSCI China Consumer Disc ETF. It invests in large and mid-capitalization consumer discretionary Chinese firms. As the country’s middle class grows, such companies will continue to creates shareholder value thanks to higher spending levels.
CHIQ, which has 84 holdings, began trading November 2009. Motor vehicle stocks make up 26.7% of the fund, followed by internet retail (21.6%), apparel and footwear (11%), and internet software and services 8.1%).
Top holdings include food delivery platform Meituan, Alibaba, e-commerce groups JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD), and auto manufacturers Nio (NYSE:NIO) and Byd (OTCMKTS:BYDDY).
Although CHIQ returned close to 14% in the past 52 weeks, it is down about 12 in 2021. If you’re bullish on consumer-themed Chinese firms, you could consider investing around these levels.
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, Ph.D., 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 three 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.