- Alibaba (BABA): Alibaba Cloud significantly contributes to profitability, boasting a 37% market share in mainland China.
- NetEase (NTES): Online gaming group is well-positioned to maintain high revenues and margins.
- Tencent Holdings (TCEHY): Revenue from the fintech and business services segment increased 25% to $7.5 billion.
Chinese stocks recently saw significant panic selling as investors raised concerns about a range of issues. Now contrarian investors stateside are taking a closer look at undervalued Chinese stocks.
Soaring Covid-19 cases and talks of delisting Chinese equities in the U.S. have put pressure on a large number of stocks. In addition, the heavy hand of the Chinese state imposing penalties on tech companies have continued.
As a result, China’s benchmark CSI 300 Index has fallen 16% year-to-date, while the Hang Seng China Enterprises Index has declined more than 12% over the same period. As such, undervalued Chinese stocks offer compelling buying opportunities for risk-tolerant investors.
The recent Covid-19 outbreak has led to lockdowns in Shanghai and other parts of the country, posing a significant threat to economic growth. But, in March, the Chinese government announced that it would ease its crackdown on tech companies and take measures to stimulate the broader economy.
Moreover, after several regulatory reforms, Chinese authorities offered reassurances to boost investor confidence. They highlighted that the regulation of internet companies should be “standardized, transparent and predictable.”
With that information, here are three undervalued Chinese stocks that could gain traction in the coming months.
|BABA||Alibaba Group Holding Limited||$86.49|
|TCEHY||Tencent Holdings Limited||$42.66|
Undervalued Chinese Stocks: Alibaba Group Holding (BABA)
Our first undervalued Chinese stock is Alibaba (NYSE:BABA), the largest online and mobile commerce company worldwide, measured by gross merchandise volume. BABA stock plunged in 2021 following an anti-monopoly probe that led to a $2.8 billion fine.
Alibaba released Q4 results on Feb. 24. Revenue increased 10% year-over-year to $38.1 billion. Adjusted diluted earnings per share declined 25% to 33 cents as it ramped up investments in e-commerce platforms such as Taobao and Lazada. Cash and equivalents ended the period at $75.1 billion.
The company reached a total of 1.28 billion active consumers. While growth is slowing down, the e-commerce giant remains highly profitable, with an 18% profit margin. Meanwhile, the e-commerce giant recently increased the size of its stock repurchase program from $15 billion to $25 billion.
BABA stock has fallen 62% over the past year. Shares look undervalued at just 11x forward earnings and 2x trailing sales. In addition, the 12-month median price forecast for Alibaba stock stands at $162.91. If you are looking for an undervalued Chinese stock, BABA deserves further due diligence.
Next up, we have the tech name NetEase (NASDAQ:NTES), which generates roughly 70% of its revenue from its online gaming business. On Dec. 2, NetEase launched the Hong Kong initial public offering of its music business Cloud Village, raising roughly $421 million at current exchange rates.
NTES announced Q4 2021 results on Feb. 24. Revenue increased 23% from a year ago to $3.82 billion. NetEase reported an adjusted net income of 32 cents per share ($1.58 per ADS), compared with 8 cents per share (37 cents per ADS) in the prior-year quarter. Cash and equivalents ended the period at $16.2 billion.
Investors were pleased to see the online game services revenue grew 30% to $2.7 billion, with a gross margin of 64%. Analysts expect top line growth as well as high margins to continue in 2022, and possibly beyond.
NTES stock has lost 15% so far in 2022. Shares are trading at 19.3x forward earnings and 4.7x trailing sales. Meanwhile, the 12-month median price forecast for NetEase is at $129.94.
Undervalued Chinese Stocks: Tencent Holdings (TCEHY)
Today’s last Chinese stock is the tech giant Tencent Holdings (OTCMKTS:TCEHY). It has businesses and investments in a wide range of internet services, and is currently the largest video game publisher worldwide.
Tencent announced Q4 results in late March. Revenue increased 8% from a year ago to $22.6 billion, its slowest quarterly growth since its IPO in 2004. Adjusted net profit declined 25% to $3.9 billion. Cash and equivalents ended the period at $44.1 billion.
Revenue for the value-added services segment increased 7% to $11.3 billion, down from 28% a year ago. The slowdown was due to sluggish growth in its domestic gaming business.
In 2021, the Chinese government imposed online video game playtime restrictions for minors and suspended the approval of new games. However, investors are now hoping the crackdown is coming to an end, and pressures on the group might decrease soon.
TCEHY stock has declined nearly 48% over the past year. Compared to its peers, shares look undervalued at 22.8x forward earnings and 5.2x trailing sales. The 12-month median price forecast for Tencent Holdings stock stands at $65.13.
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.