When Alibaba Group’s (NYSE:BABA) pre-earnings rally proved ill-timed, it renewed a sell-off in China stocks. Bloomberg’s report that China wanted DiDi Global (NYSE:DIDI) to delist from the North American stock exchange worsened the selling. Bearishness is so high that fluffy stories failed to reverse the sentiment.
For example, Baidu (NASDAQ:BIDU) officially launched a Robotaxi Service in Beijing. After over a year of punitive regulations imposed on technology firms, North American investors are wary of China stocks. At times, the Chinese Government pauses on introducing new regulations. That leads to speculators buying China-listed stocks.
The most recent speculation on China stocks ended abruptly when Alibaba posted weak quarterly results and lowered its growth outlook. The CCP damaged Alibaba’s growth prospects in the name of promoting its Common Prosperity framework. It wants to weaken mega-cap tech firms to protect consumers. This includes enforcing consumer data privacy, breaking up monopolies and preventing e-commerce firms from overcharging consumers. In reality, China wants more control of citizen data than the companies that collect them.
E-commerce companies will have less customer data to analyze. This restriction will weaken the returns from sales promotions. In addition, they face higher costs in complying with new government regulations.
After Alibaba’s post-earnings drop, six more China stocks have gone on sale. That brings our China stocks on sale up to seven:
- KE Holdings (NYSE:BEKE)
- Bilibili (NASDAQ:BILI)
- Futu Holdings (NASDAQ:FUTU)
- Pinduoduo (NASDAQ:PDD)
- Tencent Holdings (OTCMKTS:TCEHY)
- Vipshop Holdings (NYSE:VIPS)
The average growth score of the seven stocks is 75/100. Alibaba and Vipshop both score 98/100 despite reporting disappointing results.
China Stocks on Sale: Alibaba Group Holding (BABA)
Last year, the CCP halted Alibaba’s plans to seek an initial public offering of Ant Group, its giant fintech unit. This sent red flags for investors. The stock failed to break above its year-long downtrend. Investors could wait for China to approve an Ant IPO before buying BABA stock.
Ant’s valuations will sink steadily as its growth uncertainties weaken. Furthermore, China’s zero-covid policy is disrupting the consumer market. Brief lockdowns will hurt electronic transaction and consumption volumes. Alibaba included the disruption in its guidance for the fiscal year 2022. It lowered its revenue growth forecast to 20% to 23% year-over-year. Analysts expected growth of 23.54%.
Alibaba has strong financial metrics that scream “sale.” The price-to-earnings is in the high teens. The debt/equity ratio is negligible. Yet, the impact of announced regulations could hurt 2023 growth. China could arbitrarily add new regulations. This uncertainty could weaken the share price further.
Investors who are optimistic that Alibaba will easily endure the tighter rules will like this stock today. It currently sits at prices not seen in many years.
KE Holdings (BEKE)
KE Holdings (pronounced “Beike”) is an integrated platform for housing transactions and services in China. The posted revenue fell by 11.9% year-over-year, with a loss of 23 cents a share. Its gross transaction value fell by 20.9% Y/Y.
KE’s agent count grew by 7.9% to 515,486 and the store count grew by 20.2% Y/Y to 53,946. Its mobile monthly active users (MAUs) was 46.1 million, down from 47.9 million last year. On its conference call, executives did not discuss EverGrande’s eventual bankruptcy. Instead, it addressed the largest-ever regulatory packages on its conference call.
China introduced restrictions on such policies, including property purchasing, land auctions and irrational price cuts. The Chinese government wants people to buy homes for living purposes, not for speculation. This aligns with the Common Prosperity mandate. Accordingly, KE said property market sales froze in the third quarter.
Chairman and Chief Executive Stanley Yongdong Peng said that the “cash is king” season in Q3 is a positive development. He thinks policy issuance will peak from here. Housing markets will benefit from the de-leveraging. In the long-term, GTV will recover after dropping by over 10% Y/Y in 2022.
China Stocks on Sale: Bilibili (BILI)
Bilibili issued a $1.4 billion convertible senior notes offering on Nov. 18. The day before, it posted strong quarterly revenue. Neither event helped BILI stock.
Bilibili, which supplies video for young generations in China, posted net revenue, growing by 61% Y/Y to $808 million. Average MAUs reached 267.2 million, up by 35% Y/Y. Daily Average Users (DAUs) rose by 35% to 72.1 million. The average monthly paying users (MPUs) grew by 59% Y/Y, to 23.9 million. Its revenue guidance is within the consensus estimate.
Investors should consider the stock after the latest dip. The “YouTube of China” has a strong user base. But the CCP’s restrictions on hours spent on gaming are spooking investors. Still, the government may find Bilibili’s content doesn’t harm young viewers. The company will strengthen its healthy content ecosystem by producing high-quality material. Furthermore, it will expand its content category. This will increase viewership and revenue.
BILI shares slumped in mid-November. The convertible senior notes offering will hurt shareholders in the near term. The firm needs the proceeds to enrich its content offerings. It has ongoing research and development, along with general corporate activities.
Futu Holdings (FUTU)
In October, the People’s Daily said that Chinese online brokers faced regulatory risks. Futu, the fintech and online brokerage, responded to the news by stating that its highest priority is protecting personal information and data.
Futu said it, “…has been strictly complying with relevant laws and regulations. Going forward, we will continue to actively cooperate with regulatory authorities to better safeguard personal information.”
In Q3/2021, Futu posted an EPS of 50 cents. Revenue grew by 83.0% Y/Y to $222.4 million. Chief Financial Officer Arthur Chen said that net asset flow from mid-October to mid-November was under 2% of total client assets. The worst is already behind Futu. In Q4, Futu may face some challenges in new client acquisitions. As China eases its rules or clarifies them, FUTU stock will rebound.
Futu is actively discussing the new regulations with regulators. It will demonstrate that it holds a high set of standards for operational compliance. Also, its investments in technology and innovation will adhere to regulations.
China Stocks on Sale: Pinduoduo (PDD)
Pinduoduo shares lost nearly 16% on Nov. 26 after it posted Q3/2021 results. Although its revenue grew by about 34% Y/Y to $3.34 billion, GAAP EPS was four cents.
Pinduoduo’s active MAUs was 741.5 million, up by 15% Y/Y. Active buyers grew by 19% to 867.3 million. PDD stock fell despite posting an operating profit of $332 million. Last year, it lost money, but its stock soared to a $212.60 all-time high.
PDD stock may find support at current levels. It ended the quarter with $15.2 billion in cash. It is more profitable than markets expected. Sentiment for the stock and sector is down because of Alibaba’s poor outlook. Still, bears did not like that revenues missed consensus estimates by $690 million. By comparison, Alibaba posted better earnings.
Pinduoduo’s user base increased, creating a new challenge for management. Chairman and CEO Chen Lei said it needs to encourage those users to try new categories. It needs to sustain user satisfaction while targeting a diversified and larger base of users. It has R&D investments that will accelerate business growth and increase active customer totals.
Tencent Holdings (TCEHY)
Regulators struck again on Nov. 25 when it added restrictions to Tencent’s new app and updates. The firm must get Chinese regulator approval after regulators found it violated data protection rules a few times this year.
Tencent said it is continuously working on user protection features, although the apps remain functional and available for download.
In the third quarter, Tencent posted a net adjusted income of 31.75 billion RMB, down by 2% Y/Y. After allowing people to opt out of ads starting on Nov. 1, Tencent’s advertising business is ready for increased consumer privacy. Fortunately, its advertising in categories like clothing, healthcare and personal goods is robust. Investors should expect ad buying to rebound. Advertisers will enjoy a recovery in return on investments.
Tencent’s business rebound will take at least a few quarters. Chief Strategy Officer James Mitchell forecasts growth in games in the low to mid-teens. Education dropped to the low single-digits. Strength in financial services (excluding insurance), plus strong demand for automobile-related advertising and healthcare will offset the weakness.
China Stocks on Sale: Vipshop Holdings (VIPS)
Vipshop is an online discount retailer for brands in China. The government’s crackdown discourages people from indulging in luxury goods. After a steady downtrend and another drop after its earnings report, value hunters will look at the stock’s P/E in the single digits as a signal of a bargain.
Vipshop posted revenue growing by 7.5% to $3.9 billion. CEO Eric Shen said the company will keep strengthening its “position as a leading discount retailer for brands and our value proposition to partners and customers to drive solid, quality and sustainable business growth.”
Gross merchandise value (GMV) rose by 5% Y/Y while gross profit of $751.4 million is similar to last year’s level. Top-line growth will continue, thanks to high-value customers raising the average revenue per user. The e-commerce platform will add more to GMV. High-value customers accounted for more than one-third of the total in the last quarter.
Vipshop’s Super Vip membership differentiates its offering from the competition. China has fierce retail competition, but Vipshop is fundamentally different from other marketplace platforms. It offers primarily discount sales for brands. As it realizes its goal of becoming China’s online outlet, the business will expand. Its stock will rise when that happens.
On the date of publication, Chris Lau 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 Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.