The severity of Beijing’s recent regulatory crackdown has sent a ripple effect across the Chinese tech sector. And while many curbs have already been imposed, analysts feel more are yet to come. Accordingly, the rapid decline we’ve seen in Chinese stocks and their prices serves as an intriguing divergent force among investors.
Bears may simply look at this regulatory environment and say “not for me.” Makes sense.
However, bulls on the Chinese economy and Chinese equities in general may see this volatility as an excellent investment opportunity. After all, the impressive declines seen across the entire Chinese technology sector is either one heck of a discount, or represents a pretty sharp knife that’s dropping very fast.
I’ve been quite bullish on Chinese equities of late, despite the noise surrounding these regulatory curbs. Overall, I don’t think the end of capitalism with Chinese characteristics is imminent. Nor do I believe the Chinese government is set on killing its “golden goose,” which takes the form of its technology sector.
Rather, I believe that China is ripping the band aid off with its regulatory crackdown in a bid to stabilize policy in a short amount of time, with the end goal of leaving the sector alone and watching it grow being the next phase in this story. Unfortunately, this regulatory crackdown has been quite protracted and painful for investors.
That said, those bullish on the underlying business fundamentals of Chinese tech companies ought to consider these seven stocks. These are among the biggest losers in the large capitalization tech space. However, these are also some of the best bargains in the market right now. They are:
- Alibaba Group Holdings (NYSE:BABA)
- JD.com (NASDAQ:JD)
- Baidu (NASDAQ:BIDU)
- Pinduoduo (NASDAQ:PDD)
- Tencent Holdings (OTCMKTS:TCEHY)
- Nio (NYSE:NIO)
- Didi (NYSE:DIDI)
Now, let’s dive in and take a closer look at each one.
Chinese Stocks to Buy: Alibaba (BABA)
China’s largest tech conglomerate Alibaba specializes in e-commerce and retail. Indeed, this absolute behemoth (market cap of more than $400 billion) is often referred to as the “Amazon of China.” Sounds like an attractive company to invest in, no?
Well, it has been. Since its initial public offering (IPO) on the Nasdaq in 2014, shares of BABA stock have performed relatively well. That is, up until the end of last year when the Chinese government started cracking down on big tech.
The Chinese government imposed a massive $2.8 billion fine for alleged market dominance. Chinese authorities claimed the Jack Ma-led company abused its market position for several years. The government also stalled Ant Group’s blockbuster $37 billion IPO back in 2020.
At the time of the initial news of the scuttling of the Ant Group IPO, Alibaba stock was trading well in excess of $300 per share. Today, investors are able to nab BABA stock around the $150 level.
Half price deals anyone?
The thing is, many investors don’t necessarily feel this is a bargain. That’s because Alibaba has been targeted by regulators directly, and in a harsher way than many other companies. Accordingly, given the Chinese government’s lack of interest in having monopoly-style companies controlling the economy, some investors feel more pain is likely on the horizon.
That said, Alibaba’s size is one of its biggest strengths. The company serves 1.13 billion (with a b) annual active consumers around the globe. That’s incredible. This company has also become the world’s third-largest IaaS (Internet as a Service) provider.
Overall, given the company’s current valuation and historical performance, BABA stock appears to be a great pick.
Another Chinese tech company often compared to Amazon is JD.com. Indeed, I think JD’s business model is actually more similar to Amazon’s than that of Alibaba. That’s because this company is more logistics-focused, with much more infrastructure than its capital-light peer. But that’s neither here nor there.
JD’s business model is relatively simple — it’s an e-commerce provider with an expansive network covering approximately 99% of the Chinese population. That’s a lot of people.
One of the reasons many investors have stuck with JD over other tech stocks on this list is how low-profile this company has flown of late. In fact, JD.com hasn’t faced any significant or direct regulatory curb as of yet. Sure, one could make the argument that sector-specific regulations affect JD as much as its peers. However, this is a company that’s escaped major fines, restructurings, etc.
Accordingly, JD’s stock price has held up better than its peers on a relative basis. This performance has also been supported by very positive financial results posted in the first and second quarters of this year.
In the second quarter, JD posted revenue of $39.3 billion, reflecting an impressive 38% jump over the year-ago period. In its previous quarter, JD’s revenue was $31 billion. The number of annual active users touched 531.9 million for 12 months period ending June 30. These numbers are stellar.
At roughly $76 per share, JD stock has declined approximately 30% from its peak. That’s a nice discount, but nowhere near as steep a decline as many of JD’s peers have seen. Accordingly, it appears many investors view this Chinese stock one of the safer of the bunch.
For investors seeking a top-notch Chinese growth stock with excellent fundamentals, robust growth potential and an impressive valuation — JD.com is a great pick.
Chinese Stocks to Buy: Baidu (BIDU)
Baidu, China’s largest search engine, is often considered the “Google of China.” This company has posted impressive top and bottom-line results in the second quarter. However, BIDU stock dropped right after the release of Q2 results due to soft guidance for the upcoming quarter.
Baidu’s guidance for Q3 shows that the company may show decelerating growth over the near-term. Various reasons are responsible for this slowing growth. However, a tightening regulatory environment certainly doesn’t help. These obvious overhangs have caused BIDU stock to drop by 56% from its peak to current levels.
Indeed, this is one of the most beaten-up Chinese tech stocks of the bunch. And that’s saying something.
What’s incredible about Baidu’s recent decline is that this company has posted some of the strongest results of its peer group. The tech giant’s revenue for the second quarter jumped 20% year-over-year (YOY) to $4.86 billion. That narrowly surpassed estimates by $50 million. However, it’s the forward-looking expectations that revenue growth will slow to 8% to 19% in the next quarter that has some investors concerned.
That said, Baidu’s earnings stability is clearly an advantage for investors. As well, this company is planning to collaborate with Ford (NYSE:F) to develop smart cars in China. Baidu also aims to expand its artificial intelligence (AI) and driverless tech ecosystem. However, the company might face some headwinds as competitor Sogou gets integrated with WeChat after its takeover by Tencent.
Pinduoduo is one of the biggest e-commerce platforms in China for agricultural products. This Chinese stock has witnessed tremendous growth in the past and will continue to grow in the near future. Accordingly, I view Pinduoduo as a perfect pick for investors seeking a high-quality growth stock at a reasonable valuation.
The company comes with impressive financials, robust fundamentals and a remarkably interesting business model. Pinduoduo’s second-quarter revenue stood at $3.57 billion, which is a stunning 89% jump from the same period last year. The company’s operating profit was $309.4 million, while Pinduoduo’s non-GAAP operating profit was $493.3 million. Active monthly users spiked 30% from Q2 of 2020 to stand at 738.5 million in the current quarter.
Moreover, Pinduoduo is a growth stock that comes with massive potential. However, the bottom line might be a cause of concern for many investors at the moment. That’s because Pinduoduo is largely buying its market share at the moment, in a bid to scale up.
That said, I think long-term growth investors ought to give this speculative growth stock a look. It’s cheap for a reason, but it may not be this cheap forever.
Chinese Stocks to Buy: Tencent (TCEHY)
Tencent is a diversified Chinese tech giant focused on the social media and entertainment space. Investors may know this stock for its globally popular apps like TikTok and WeChat. The company is also involved in the video game business. While WeChat comes with 1.24 billion users, Tencent’s music service has more than 700 million users.
This Chinese tech giant has been one of the few companies that has been badly affected by a series of Chinese regulatory curbs. Tencent has a massive 43% share in China’s video gaming market. The Chinese regulatory curbs came raining heavily on its video game sector recently. (Investors may note that limiting teenagers to two hours of video games per week during specific hours is an extremely detrimental blow to any video game-oriented company).
As a consequence, TCEHY stock has fallen hard from its peak. While the government clearly wants to curb the company’s core business, Tencent remains diversified enough that investors don’t seem to mind these curbs. That said, should Beijing move against Tencent again, more downside could be on the horizon.
Thus, I view Tencent as one of the riskier bets on this list. That said, this is a company that also has some of the best upside, in a bullish environment.
Perhaps the most highly-valued stock on this list is Nio. That’s because this is an electric vehicle (EV) maker, domiciled in China.
Like its U.S. rival Tesla (NASDAQ:TSLA), Nio has grown its dominance in the Chinese market of late. As China’s “poster child” for its EV sector, many investors expect Chinese regulatory curbs to escape Nio.
That’s not to say this stock hasn’t been hit hard by overall negative sentiment around Chinese stocks. NIO stock remains down more than 45% from its peak.
However, it’s clear that the EV market is of strategic importance to Beijing. As China looks to become a global superpower in the EV world, Nio will play a big role in this transformation. Expectations are that 70% of all passenger vehicles sold in China by 2030 will be electric vehicles.
The regulatory crackdown in China comes at a time when EV companies are battling other headwinds. A worldwide shortage of semiconductors is plaguing the industry. Additionally, Nio’s competition is ramping up its game, with price competition heating up.
That said, Nio’s production of new EV models and rollout of ground-breaking battery swapping locations is impressive. This company remains one of the best bets in the global EV race for supremacy. Accordingly, investors looking to bet on EV makers have a great option in NIO stock right now.
Chinese Stocks to Buy: Didi (DIDI)
Often thought of as the “Uber of China,” Didi is a popular Chinese ride-hailing app that is present in China and 16 other countries. This company has an extensive network of services across 4,000 cities, towns and counties. With 493 million active annual users and about 15 million drivers, the app carries out more than 41 million daily transactions on average.
Beijing has hit Didi hard with a series of regulatory curbs. These actions came after Didi raised money in a U.S. IPO without first clearing this IPO with Chinese security regulators. Needless to say, the Chinese government did not appreciate this.
Accordingly, the CCP accused the company of breaching its privacy law and forced it to stop enrolling new customers. The company’s app was also removed from the nation’s app store.
Didi went public on June 29 with a share price of $14. As of now, the company shares have lost approximately 41% of its IPO price.
Of course, the ride-hailing market in China is massive. This is a company with impressive growth potential, and one that investors are looking at, especially at these levels.
However, given the regulatory scrutiny on DIDI stock right now, it’s hard to make a concrete bet on this company one way or another. At this price, DIDI stock is a steal. However, the question is – can DIDI stock get any cheaper? I guess we’ll have to wait and see.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.