Investors in China stocks have not had much to report so far in 2021. The Shenzhen Composite index is up about 8.4% and the Shanghai Composite index returned 3.6%. By comparison the S&P 500 index, which hit a record high in early November, is up 24.3% year-to-date (YTD).
Regular InvestorsPlace readers would know that the Chinese government crackdown on tech companies has significantly squeezed valuations of popular large-cap stocks such as Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU). In addition, Beijing recently expanded the reach of its regulatory overhaul.
Businesses that are feeling the heavy hand of the state now include ride-hailing firms, online delivery apps, private education providers as well as online brokers. Financial technology (fintech), gaming and real estate companies are also among the industries feeling the pressure.
Yet, the recent decline in shares of Chinese companies has created buying opportunities for those investors who can look past the near-term regulatory threats and choppiness. There are, in fact, important reasons to invest in China stocks.
First, China is the world’s second-largest economy. With a massive market of 1.4 billion people, the country boasts a thriving middle class and major entrepreneurial activity. Moreover, the correlation of Chinese and U.S. stocks is relatively low, which could be helpful for portfolio diversification. In fact, contributors at UBS (NYSE:UBS) said last month that “the worst is likely over for China equities.”
So, with that information, here is a list of seven China stocks that could gain significant traction in the coming months.
- Bilibili (NASDAQ:BILI)
- Daqo New Energy (NYSE:DQ)
- JD.com (NASDAQ:JD)
- Nio (NYSE:NIO)
- SPDR S&P China ETF (NYSEARCA:GXC)
Now, let’s dive in and take a closer look at each one.
China Stocks: Alibaba (BABA)
52-Week Range: $130.55 – $274.29
Alibaba is the largest online and e-commerce name in China with extensive international reach. Its platforms host hundreds of millions of users, operating several of China’s most-visited online marketplaces. In recent years, management has also put significant resources into cloud computing services and fintech.
The group announced third-quarter results on Nov. 18. Revenue increased 29% year-over-year (YOY) to $31.15 billion. Non-GAAP net income declined 39% YOY to $4.43 billion, or 22 cents per diluted share. Free cash flow stood at $3.45 billion. Alibaba boasts $68.8 billion in cash and equivalents.
On the results, CEO Daniel Zhang remarked, “Our global annual active consumers across the Alibaba Ecosystem reached approximately 1.24 billion, with a quarterly net increase of 62 million consumers, and we are on track to achieve our longer-term target of serving two billion consumers globally.”
The regulatory crackdown has put Alibaba’s operations under the limelight. As our readers would remember, Chinese regulators had suspended Ant Group IPO in late 2020 and issued a $2.8 billion fine for anticompetitive behavior.
However, despite the political risk, BABA stock still offers significant upside potential, given its strategic investments in the cloud and other ventures. Alibaba still dominates the Chinese e-commerce space. The company generated roughly $3.5 billion in free cash flow during a sluggish third quarter. But China’s decision to move data from private cloud operators to a state-backed cloud system next year remains a significant headwind for long-term growth.
BABA stock hovers slightly above $131, down 53% YTD. Shares recently plunged following the Q3 announcement, and the decline provides long-term investors an opportunity to buy this tech stock at a discount. Also, shares are currently trading at 15.9 times forward earnings and 2.9 times trailing sales.
52-Week Range: $135.01 – $354.82
Beijing, China-based Baidu is the largest Internet search engine in China that boasts close to an 85% share of the search space as of September 2021. In 2020, the company generated over 60% of its revenue from online marketing services related to its search engine.
Meanwhile, the company is en route to becoming one of the most important artificial intelligence (AI) names globally. For management, “The term AI covers a broad variety of developments currently taking place — from common applications like face recognition tools to automated cars, connected homes, medical devices, and robots. The company is interested in AI algorithms in their drug discovery technology, so it can significantly shorten the drug discovery cycle.”
In addition, Baidu’s Apollo segment has made the company the largest autonomous driving service worldwide. Its driverless taxis are now on the streets of Shanghai.
The search giant released Q3 results on Nov. 17. Revenue increased 13% YOY to $4.95 billion. Non-GAAP net income fell 27% to $790 million, or $2.28 earnings per diluted share, down from $1.09 billion, or $3.19 earnings per diluted share, in the prior-year quarter. Baidu’s adjusted net income exceeded estimates by 27 cents. Cash and equivalents ended the period at $30.2 billion.
After the announcement, CEO Robin Li commented, “Baidu is bringing innovation across the consumer, enterprise and public sector with our commitment to AI. Our AI Cloud is helping businesses better serve customers and move faster with greater efficiency. “
About two-thirds of Baidu’s quarterly revenue came from its online marketing business. Its AI cloud platform, which serves 8% of the country’s cloud infrastructure market, constituted the remaining 34% of its revenue.
BIDU stock currently trades around $151 per share, down 30% this year. It has also fell hard earlier this month, and the recent dip provides an opportunity to buy BIDU stock shares at moderate valuation. Forward price-earnings (P/E) and price-sales (P/S) ratios stand at 16.6 times and 2.9 times, respectively.
China Stocks: Bilibili (BILI)
52-Week Range: $58.56 – $157.66
Online entertainment group Bilibili generates revenue from mobile games, e-commerce, online advertising, as well as live broadcasting. Close to 30% of revenue comes from the mobile gaming business. Several years ago, over 70% of the revenue came from that segment.
In other words, management has been expanding into other segments. Now, over a third of sales come from value-added services (VAS), such as subscriptions from live streamers and revenue from virtual gift sales. And ad sales bring in about a fifth of revenue. Finally, over 10% come form e-commerce related sales.
Bilibili announced Q3 results on Nov. 17. Revenue rose 61% YOY to $808 million. However, adjusted net loss widened to $252 million, or 65 cents per diluted share. A year ago, the numbers had been a loss of $151 million, or 40 cents per diluted share. Understandably, investors were concerned. Cash and equivalents ended the period at $3.8 billion.
“We are proud to announce another stellar quarter of quality growth. During our peak summer season, user growth surged, engagement levels reached an all-time high, and we continued to expand our topline,” CEO Rui Chen remarked.
Monthly active users (MAUs) soared 35%, while mobile MAUs increased 36% YOY during the quarter. Users spent an average of 88 minutes per day on Bilibili, a record for the platform. Management anticipates fourth-quarter revenue of $890 million to $910 million, representing more than 50% YOY increase.
Bilibili recently announced a new debt offering of $1.4 billion in convertible senior notes, adding to the negative investor sentiment regarding widening losses.
BILI stock is just below $70 per share, down 21.5% YTD. In early February, it had hit a record high of $157.66. Despite the recent decline, shares are trading at 9.3 times trailing sales. Thus, interested readers could regard the $65 level as a better entry point.
Daqo New Energy (DQ)
52-Week Range: $37.02 – $130.33
Our next stock, Daqo New Energy manufactures and sells polysilicon to photovoltaic (PV) product manufacturers in the solar power space. Recent research highlights, “Solar photovoltaic power is gaining momentum as a solution to intertwined air pollution and climate challenges in China, driven by declining capital costs and increasing technical efficiencies.” Therefore, investors pay attention to alternative energy names, such as Daqo.
The group released Q3 results on Oct. 28. Revenue increased 367% YOY to $586 million. Non-GAAP net income came in at $294.7 million, or $3.98 per basic share, compared to $25.2 million, or 35 cents per basic share, in the prior-year quarter. Cash and equivalents ended the quarter at $661 million.
After the announcement, CEO Longgen Zhang remarked, “We are very excited to report an excellent quarter with record-high production volume and net profit in the company’s history.”
Polysilicon has more than doubled in price during the past year, contributing to Daqo’s bottom-line. The group’s Phase 4B project is forecast to increase the production capacity significantly.
Daqo has an 80% stake in its subsidiary Xinjiang Daqo New Energy, which has recently listed in China. Analysts expect Daqo to benefit from its subsidiary’s ongoing operations as well as potential growth.
DQ stock currently hovers at $58, up 1.2% YTD and 28% over the past year. Shares look cheap, trading at 4.2 times forward earnings and 2.9 times trailing sales. Interested readers could consider buying for the long-run around these levels.
China Stocks: JD.com (JD)
52-Week Range: $61.65 – $108.29
In terms of transaction volume, JD.com is China’s second-largest e-commerce company behind Alibaba. It has benefited from Chinese consumers’ growing appetite for online shopping. JD.com’s active customer count is now well over 550 million. Management has also been investing in the use of drones to deliver products, especially in rural parts of the country.
The e-commerce giant reported solid Q3 results on Nov.18. Net revenue was up 25.5% YOY to $33.9 billion. Non-GAAP net income declined to $783 million, or 25 cents per diluted share, down from $876 million in the prior-year quarter. Cash and equivalents ended the quarter at $14.6 billion.
After the announcement, President Lei Xu remarked, “With resilient business operations and core competencies in technology and supply chain, JD has built a unique business model, enabling us to have better control across the entire business process.”
JD stock currently hovers at $87 territory, about flat YTD. UBS recently raised the price target for JD stock from $95 to $110, highlighting the integrated supply chain. JD shares are trading at 40.3 times forward earnings and 1.0 times trailing sales.
52-Week Range: $30.71 – $66.99
As one of the first is a Chinese electric vehicle (EV) startups, Nio is widely followed by investors worldwide. The car manufacturer currently offers three models: the ES8, the ES6, and the crossover EC6.
In October, Nio delivered, “218 ES8s, the Company’s six-seater or seven-seater flagship premium smart electric SUV, 2,528 ES6s, the Company’s five-seater high-performance premium smart electric SUV, and 921 EC6s, the Company’s five-seater premium smart electric coupe SUV. As of October 31, 2021, cumulative deliveries of the ES8, ES6 and EC6 reached 145,703 vehicles.”
On Nov. 9, Nio issued better-than-expected Q3 results. Revenue increased 117% YOY to $1.52 billion. Non-GAAP net loss narrowed to $88.4 million, or 6 cents per diluted share, down from $156 million in the prior-year quarter. Cash and equivalents ended the period at $7.3 billion.
On these metrics, William Bin Li remarked, “We achieved another all-time high quarterly delivery of 24,439 for the third quarter of 2021, representing a solid growth of 100.2% year-over-year.”
Analysts now anticipate Nio’s EV sales to surpass 150,000 before the year finishes. Management recently announced that it would expand its Hefei plant capacity to 240,000 vehicles a year. In addition, the EV group started ES8 SUV deliveries to Norway — giving it access to the growing European market.
Recent metrics highlight, “China led the EV market during the first half of 2021, as the share of EVs grew to 9.3%, nearly 2% higher than the European share. In terms of total numbers, sales in China reached 900,000 units, nearly double the number of European sales.”
The company also offers a battery-as-a-service (BaaS) subscription plan. At swap stations, customers can replace used batteries with fully charged ones. Understandably, this new revenue stream could become a key competitive advantage in the quarters ahead.
NIO stock hovers slightly above $40, down almost 18% YTD. However, as production capacity increases and Nio enters new markets, shares could easily see higher valuations. They are currently trading at just 11.9 times trailing sales.
China Stocks: SPDR S&P China ETF (GXC)
52-Week Range: $106.42 – $156.29
Dividend Yield: 0.9%
Expense Ratio: 0.59% per year
Our final discussion is on an exchange-traded fund (ETF), namely the SPDR S&P China ETF. The fund offers exposure to a wide range of China stocks, including both “China A Shares” and firms that trade as American Depositary Receipts (ADRs) stateside.
GXC currently has 896 holdings and track the returns of the S&P China BMI Index. The fund was first listed in March 2007.
Within the ETF, The Consumer Discretionary sector has the highest portion with 28.33%, followed by communication services and financials names with 16.98% and 13.46%, respectively. The top 10 stocks account for around 35% of net assets of $1.73 billion.
Among the leading names in the rosterare the social media giant Tencent (OTCMKTS:TCEHY); Alibaba; JD.com; China Construction Bank (OTCMKTS:CICHY); and food delivery portal Meituan (OTCMKTS:MPNGY).
The fund is down more than 17% YTD. Trailing P/E and price-to-book (P/B) ratios stand at 11.8 times and 1.67 times, respectively. Interested investors in this member of the best China stocks could consider investing around $105.
On the date of publication, Tezcan Gecgil 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.
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.