Several reports say the U.S. is planning to add eight more Chinese firms, including the country’s largest commercial drone maker, to its investment blacklist before year’s end. U.S. investors are barred from taking stakes in companies on the list, which currently comprises about 60 firms. The report prompted a selloff in Chinese stocks listed in the U.S., many of which are already down 30% or more on the year.
Several U.S. analysts have downgraded Chinese stocks in recent weeks over growing fears that they could be delisted from American exchanges. David Loevinger, managing director for emerging markets sovereign research at TCW Group, recently said on CNBC that it’s essentially “game over” for U.S.-listed Chinese companies given the ongoing tensions between Beijing and Washington, D.C.
With the threat of Chinese stocks being banned or delisted in the U.S., let’s look at three securities investors may want to excise from their portfolios:
Chinese Stocks: Baidu (BIDU)
With a popular search engine and focus on Internet-related services, Baidu is often referred to as the “Google of China.” However, Baidu and Google parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) differ in one important way: the trajectory of their stock.
Alphabet’s share price is up 67% this year while Baidu’s shares are down 35%. Much of the decline at Baidu can be attributed to the Chinese government’s ongoing crackdown on large technology companies. The moves have sent a chill through the entire sector and made investors risk-averse when it comes to owning shares of China’s biggest tech company.
However, BIDU stock has also been hurt by poor financial results. For this year’s third quarter, the Beijing-based company reported a net loss of 16.56 billion Yuan ($2.57 billion) compared to a net profit of 13.68 billion Yuan ($2.15 billion) a year earlier. Ouch!
Baidu, which seems to have a hand in all aspects of tech, is struggling with an unprofitable cloud computing unit and a streaming service that has failed to take off with consumers. The company’s heavy investments in the development of a self-driving car is also draining revenue and hurting the company’s bottom line.
Add this to the regulatory uncertainty surrounding all of China’s publicly listed companies, and it might be time to sell Baidu shares.
Alibaba (BABA)
The Amazon (NASDAQ:AMZN) of China has been hurt more than most Chinese companies this year. Singled out by the government and regulators, Alibaba had its planned initial public offering (IPO) of its Ant Group subsidiary, which operates China’s largest digital payment platform known as Alipay, canceled.
It was then hit with a record $2.8 billion antitrust fine and ordered to pay $15.5 billion into a “common prosperity” fund to benefit all of China. These punitive actions have weighed heavily on BABA stock, which has fallen nearly 47% year-to-date (YTD) to about $120. The share price is now 56% below its 52-week high of $274.29.
Like Baidu, Alibaba has also struggled under the weight of high expectations and poor results. For the third quarter, it reported revenue and earnings that missed Wall Street forecasts, pushing its share price further down.
Specifically, the e-commerce giant reported sales growth of 29% from a year ago to $31.1 billion in the third quarter. However, Wall Street was looking for Q3 revenue of $32.1 billion. Earnings per share dropped 38% compared to the prior year and also failed to meet expectations.
Making matters worse, Alibaba forecast its sales for its current fiscal year will rise between 20% and 23% from 2020. Analysts expected growth of 28%. The stock cratered on the results.
Chinese Stocks: Yum China (YUMC)
Now we turn our attention to the biggest fast food company in China. As of Q4 2020, Shanghai-based Yum China operates more than 10,000 restaurants in 1,500 cities. Within the nation of 1.4 billion people, Yum China operates several subsidiary brands, including KFC, Taco Bell and Pizza Hut.
While Yum Brands hasn’t been singled out for abuse and punishment the way Alibaba has, the company has still suffered this year under Beijing’s crackdown on publicly traded companies. YUMC stock is down nearly 16% YTD to about $48.50 per share, including a 12% decline over the past month.
Operational issues and poor earnings have also impacted Yum China. The company’s stock really nosedived after it said its adjusted operating profit would take a 50% to 60% hit in the third quarter. The company stated the spread of the delta variant in China led to restaurant closures and “sharply reduced sales.”
This was also before the potentially highly-contagious omicron variant of the coronavirus surfaced. The delta variant alone caused more than 500 of Yum China’s restaurants to close or offer only takeaway and delivery service this fall. Ongoing issues related to the pandemic within China are expected to weigh on Yum’s results heading into the New Year.
On the date of publication, Joel Baglole held long positions in BIDU and BABA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
