Most U.S.-listed China stocks have been annihilated in the current market downturn. Some have pulled back to levels where the valuations look downright cheap vis-à-vis their fundamentals. The selloff has not spared even high-profile names that have years of track records delivering on investor expectations.
What’s ailing the Chinese stocks? Needless to mention, the market-wide downturn set in motion by fears of a rate hike by the U.S. Federal Reserve and the geopolitical tensions surrounding the war in Eastern Europe have had their impact. Also weighing down on the stocks are some China-specific risks.
Investors Flee China Stocks in Droves
First on the list of concerns, the Chinese government isn’t too pleased with the way some homegrown big techs have grown in power and clout. China had its task cut out. Use power and crack the regulatory whip to keep their growing influence in check or face the risk of allowing them to get out of your hand. It’s not rocket science to know which option China went with.
Second, delisting risk has been hanging like a Damocles sword on the U.S.-listed China stocks. The Sino-U.S. relationship is growing frostier with the passing of each day. China has been working on tightly regulating companies that have used the variable interest entities (VIE) route to list overseas.
These companies are also facing backlash from the other end. The U.S. Securities Exchange Comission (SEC) has mandated that Chinese companies listed on the U.S. exchanges should disclose their ownership and provide evidence of their auditing inspections.
Unlike most nations, China does not allow the U.S. Public Accounting Oversight Board to inspect Chinese auditors, which in turn audit the accounts of Chinese companies.
The selloff seen on March 10 was in reaction to the SEC releasing a list of five U.S.-listed Chinese companies not adhering to the Holding Foreign Companies Accountable Act. The Act, passed in December 2020, vests the SEC with the power of initiating delisting procedures against companies that do not make available their audits to the regulator for three consecutive years.
Third, the domestic economy in China is cooling off. The nation’s GDP growth in 2022 is expected to slow down to an anemic pace of 5.5%, according to government estimates. This compares to the 8.1% growth accomplished in 2021.
Does that mean investors should avoid these stocks like plague?
China Stocks Down But Not Out
Several Chinese stocks boast of tested business models, strong execution, efficient executive suites and enviable market opportunities. While it is true that delisting threat isn’t an empty call any more, some of the high-profile companies have insured themselves against this risk by pursuing a secondary listing closer to home.
China’s policymakers have shown intent to kickstart economic growth by perking up fiscal spending and implementing tax cuts, among other things, to reinvigorate the economy.
Some of the Chinese stocks are bargain buys following their selloffs. For those preferring to err on the side of caution, it could payoff to take a waiting game approach rather than to dump the stocks.
- Alibaba (NYSE:BABA)
- NIO (NYSE:NIO)
- Tencent (OTCMKTS:TCEHY)
- Bilibili (NASDAQ:BILI)
- JD.com (NASDAQ:JD)
- NetEase (NASDAQ:NTES)
- BYD (OTCMKTS:BYDDF)
China Stocks Trading for Cheap: Alibaba (BABA)
Alibaba stock has hit a rough patch since it peaked in late October 2020, and it is currently trading at a record low. The peak-trough decline has been a steep 71%. Alibaba shares don’t deserve such a sound thrashing. The company has a thriving e-commerce business and a promising Cloud unit.
Alibaba’s core e-commerce growth, though found stuttering amid the soft patch, holds a lot of promise. While the domestic market has slowed due to economic softness, the company has turned elsewhere to reinvigorate its core business. In an investor presentation in December 2021, Alibaba said it expects its Lazada southeast Asian ecommerce business to achieve gross merchandise value of $100 billion in the long run.
Following the release of Alibaba’s third-quarter 2022 results, Baird analyst Colin Sebastian said the company seems to have set its sights firmly on long-term growth, without bothering much about near-term noises around macroeconomics, competition and a tough regulatory environment.
The analyst sees “significant value” in Alibaba’s ecommerce and cloud-services platforms.
The average analysts’ price target for Alibaba stock is $173.30, suggesting roughly 124% upside.
Chinese EV startup Nio has tumbled to a multi-month low of $14.28, dragged by the China selloff. After hitting a high of $66.99 on Jan. 11, 2021, NIO stock has moved downhill. The weakness came despite the EV maker weathering supply chain disruptions with minimal impact. The Shanghai-based company delivered 91,429 electric vehicles (EV) in 2021 despite having to stall production for a few days early in the year, while warning of a shortfall due to production line revamps in October.
Nio’s fundamental picture is definitely improving. Deliveries of at least three new products will begin this year – a high-end EV sedan, named ET7, a midsize sedan model named ET5 and a new SUV named ES7. The company is also stepping on the gas on its international expansion.
Thanks to these catalysts, Nio is on track to increase sales volume to 150,000 units in 2022, Credit Suisse analyst Bin Wang estimates.
Nio’s secondary listing in the Hong Kong stock exchange earlier this week also removes another overhang, especially amid intensifying delisting fears.
Nio stock is trading at a trailing-twelve-month price-to-sales ratio of 6.72 times compared to 16.99 for market leader Tesla (NASDAQ:TSLA). The average analysts’ price target for Nio stock is $51.14, signaling more than 210% upside from current levels.
China Stocks Trading for Cheap: Tencent (TCEHY)
Shares of Chinese tech behemoth Tencent, which has diverse businesses under its fold, have been on a consolidation move since late July 2021. But the stock has fallen way off its all-time high of $99.40 reached on Feb. 12, 2021 and is currently trading at a 52-week low of $47.20.
Despite the stock’s recent lean run, Tencent occupies the 14th position in the list of the world’s most valued companies.
Tencent’s third-quarter results announced in November 2021 show that revenue climbed 13% year-over-year to $22 billion. The company has come a long way from its modest beginnings in 1998, when it had merely a free desktop instant messaging service. Now it has a wide array of businesses, including its hugely-successful WeChat messaging app, video gaming, fintech and advertising services.
WeChat and its Chinese counterpart Weixin together had a combined monthly active user (MAU) count of 1.26 billion as of September 2021. The company is a credited with being the world’s biggest video game publisher, owning some hugely popular franchises such as Clash of Clans and PUBG Mobile. It also owns stakes in game developers such as Fortnite owner Epic Games.
The diversified nature of its businesses in several high-growth areas bodes well for the company.
The average analysts’ price target of $76 suggests the stock has nearly 90 upside potential from current levels.
Bilibili stock slumped over 14% on Thursday alone, before ending at $21.68. It’s since dropped even further. This is a far cry from the $150, plus, levels at which it traded on a few sessions in February 2021.
Bilibili is an online gaming and entertainment company and is dubbed the YouTube of China. Even ahead of the China-induced selloff, Bilibili shares came under selling pressure earlier this month following its disappointing quarterly results and guidance. Average MAU climbed 35% to 271.7 million and mobile MAUs also increased 35% to 252.4 million.
Underlining confidence in the business, the company’s CEO Rui Chen said in a statement he would buy up to $10 million worth of its American Depository Shares (ADS) from the open market using his own funds. The board also authorized a $500 million buyback plan that would be operational over the next 24 months.
The stock has over 50% upside potential, helped by the company’s strategy of diversifying revenue streams away from gaming to advertising and e-commerce, according to Hedgeye analyst Felix Wang.
The average analysts’ price target of Bilibili’s shares is $41.93, suggesting over 145% upside from current levels.
China Stocks Trading for Cheap: JD.com (JD)
Alibaba’s smaller rival JD.com reported Thursday above-consensus revenue, although the growth was the slowest in a while. The net loss per share was wider than expectations. Competition, slower domestic economic growth and an inclement regulatory environment may have all conjured up to keep the topline growth in check.
The company suggested on the earnings call that its retail business faces a softer consumer spending environment in the first half of 2022. However, it expressed confidence in outgrowing the overall industry.
Despite the company-specific and external risks, the company’s risk-reward profile is attractive. JD.com stock topped out at $108.29 on Feb. 17, 2021 and has pulled back since then. It is currently trading for less than half as much.
The stock presents roughly 100% upside potential, based on average analysts’ price target of $85.64.
PC and mobile game developer NetEase is the second largest online game publisher after Tencent. The company recently reported its fourth-quarter results, which revealed topline growth of over 23%.
About 71% of the revenues came from online gaming services. Despite the Chinese government restricting the time children can play online games and curbing new game approvals, the segment saw close to 30% revenue growth.
Amid the tighter regulations in China, NetEase is planning overseas expansion. CEO William Ding said on the earnings call: “We are committed in investing in a global market. Hopefully, in the next two to three years, you’ll see some huge blockbuster titles being produced by NetEase in the global on the global stage, whether it’s self-developed by us or it’s in a partnership with some of our partner friends.”
The average analysts’ price target for NetEase shares is 129.60, suggesting roughly 81% upside.
China Stocks Trading for Cheap: BYD (BYDDF)
Chinese automaker BYD, which has transitioned faster into EVs, may have fared better than most other U.S.-listed Chinese companies. All the same, the automaker’s U.S.-listed American depositary share (ADS) is trading off its record high of $41.24 hit on Nov. 23, 2021.
The company, backed by billionaire investor Warren Buffett, sold more battery EVs (BEVs) in China in 2021 than Tesla. Taking into account both BEVs and plug-in hybrid, total new energy sales of BYD came in at 593,743 vehicles. BYD has charted out an ambitious global expansion plan, potentially increasing its total addressable market.
BYD also manufactures commercial vehicles and has a thriving EV battery manufacturing business as well.
The $30.91 average analyst target for BYD suggests the stock has 30% upside potential.
On the date of publication, Shanthi Rexaline 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.