With turmoil erupting in the world’s second-largest economy, daring contrarians may want to consider Chinese stocks to buy on discount. To be completely transparent, this narrative won’t appeal to everyone. With several of the Asian juggernaut’s top players suffering steep losses, it takes a bold market participant to roll the dice.
Still, because of the myriad headwinds, Chinese stocks facilitate a compelling discount for the high-conviction types. True, the fundamentals present an ugly backdrop. First, China’s insistence on its zero-coronavirus policy scared off investors. Second, President Xi Jinping’s historic third term implies that market reform is probably out of the question.
Naturally, the hardships took a toll on China’s consumer economy. With more people voicing displeasure, Beijing faces stiff pressure to provide workable solutions. But because of the ugliness, Chinese stocks find themselves at intriguing valuations. Below are mostly less-popular ideas backed with strong attributes that gamblers may want to consider.
|CREQF||China Rare Earth||$0.063|
Founded in 2008, Vipshop (NYSE:VIPS) operates the e-commerce website VIP.com, which specializes in online discount sales. Currently, Vipshop commands a market capitalization of $5.87 billion. On a year-to-date basis, VIPS gained a little over 5% of equity value. Also, in the trailing month, shares moved up 13%.
Overall, the performance is encouraging because up until early Nov., VIPS found itself in the red on a YTD basis. Fundamentally, the strong performance of VIPS relative to other Chinese stocks tethered to the broader retail industry reflects growing demand for discounted products. This dynamic matches what Americans are experiencing, making VIPS an intuitive market idea.
Financially, Vipshop features a very undervalued profile. At the moment, the market prices VIPS at 5.9-times forward earnings. In contrast, the industry median for forward price-earnings ratio is 14.7 times. Additionally, Vipshop enjoys a stable balance sheet, with a strong cash-to-debt ratio of nearly 8 times. This metric ranks above 86% of the company’s rivals.
Silicon Motion Technology (SIMO)
Founded in 1995, Silicon Motion Technology (NASDAQ:SIMO) isn’t exactly one of the Chinese stocks to buy from a geopolitical standpoint as it’s based in Taiwan. Still, if you’ll grant me some rope, investors may find Silicon Motion very intriguing. The company specializes in developing NAND flash controller integrated circuits for solid-state storage devices. Presently, SIMO carries a market cap of just over $2.09 billion.
Since the start of the year, SIMO slipped over 35% of equity value. Still, it might be charting a course reversal. Over the trailing month, shares gained 6%. Fundamentally, the company – like other enterprises tethered to the wider semiconductor space – encountered myriad challenges, including global supply chain disruptions. Eventually, these obstacles will likely fade, making SIMO an attractive proposition for contrarians.
In the meantime, investors should focus on the financials. Most notably, Silicon Motion features zero debt, affording the company incredible flexibility during these trying times. Also, it’s a great deal, priced at about 8-times forward earnings. In contrast, the forward PE ratio for the industry is 16.9 times.
A multinational technology and entertainment conglomerate, Tencent (OTCMKTS:TCEHY) represents one of the most popular Chinese stocks to buy. At the moment, Tencent features a market cap of 2.75 trillion HKD (translating to roughly $351.1 billion). Since the start of this year, TCEHY dropped nearly 43% of equity value.
Although a risky proposition, it’s important to note that TCEHY may have hit a bottom. Over the trailing month, shares gained almost 5% of market value. Fundamentally, Tencent offers potential cynical upside. Should economic pressures weigh down China’s consumer sentiment, households may trade down in terms of their entertainment desires. That could bode well for Tencent’s gaming division.
Financially, many market participants will note that Tencent features excellent profitability metrics. Specifically, its net margin stands at nearly 32%, ranking above 91% of the competition. Also, TCEHY is undervalued, priced at 13.2-times trailing-12-month earnings. In contrast, the median PE ratio is 17.9 times.
Founded in 1997, NetEase (NASDAQ:NTES) is an Internet technology firm. Specifically, NetEase provides online services centered on content, community, communications, and commerce. Per its public profile, the company is one of the largest internet and video game companies in the world. Currently, NTES commands a market cap of nearly $43 billion.
Since the January opener, NTES dropped over 35% of equity value. Admittedly, it’s one of the worrying ideas among Chinese stocks. At the same time, though, shares did gain over 7% of market value, suggesting a possible comeback. As with Tencent, NetEase may enjoy a fundamental boost should Chinese consumers trade down their entertainment expenditures from costly outlets (such as vacations abroad) to at-home platforms (like video games).
For prospective investors, NetEase’s income-statement-related metrics should entice. For instance, its three-year revenue growth rate (21.4%) and net margin (19.9%) rank above sector norms. Also, NTES facilitates a discount, with shares priced at 17.2 times TTM earnings. In contrast, the industry median PE ratio is 17.9 times.
ZTO Express (ZTO)
Founded in 2002, ZTO Express (NYSE:ZTO) is one of the leading express delivery companies in China in terms of parcel volume, with a 20.4% market share in 2020. Currently, the company commands a market cap of $17.6 billion. Since the start of the year, ZTO dropped 22% of equity value. However, over the last five sessions, ZTO gained a robust 13.3%.
Admittedly, ZTO Express represents a tough call for contrarian investors. It’s quite possible that shares may be in the early stages of a comeback trail. Cynically, with Beijing still imposing strict pandemic-related measures, demand for delivery services could rise. At the same time, however, ZTO may face pressure from macroeconomic headwinds impacting consumer-related Chinese stocks.
Still, if you’re willing to take the risk, ZTO brings some intriguing financials to the table. Most prominently, the company enjoys a strong balance sheet. For instance, its equity-to-asset ratio stands at 0.74 times, ranked above nearly 89% of the competition. Also, in terms of revenue growth and net margins, ZTO ranks above sector norms.
Founded in 1998, Fanhua (NASDAQ:FANH) is the largest technology and insurance expertise-driven insurance agency group in China. Per its public profile, Fanhua connects approximately 12 million individual customers to our over 100 insurance company partners. Presently, it carries a market cap of $269.2 million. Since the start of the year, FANH dropped nearly 26% of equity value.
While FANH may not be the most exciting name among Chinese stocks, it may be one of the more stable over the long run. Fundamentally, people need core insurance products, irrespective of outside pressures. Also, insurance stocks and interest rates share a direct correlation, which may be helpful if China’s central bank decides to raise rates at some point.
Prominently, Fanhua features a robust balance sheet, highlighted by a cash-to-debt ratio of 6.2 times. In addition, its Shiller PE ratio sits at 7.3 times. In contrast, the industry median Shiller PE is 11.9 times, making FANH an attractive discount compared to other Chinese stocks.
China Rare Earth (CREQF)
Founded in 1987, China Rare Earth (OTCMKTS:CREQF) is one of the Chinese stocks to buy for extreme speculators. Per its corporate profile, China Rare Earth is a Hong Kong-based investment holding company engaged in the manufacture and sales of rare earth and refractory products. Currently, CREQF features a market cap of 1.07 billion HKD (roughly $137.8 million).
Since the start of the year, CREQF dropped nearly 48% of equity value, making it one of the riskiest Chinese stocks to buy. However, in the trailing month, shares gained over 25%. Fundamentally, the narrative for CREQF draws plenty of intrigue due to the underlying asset class. Over time, thanks to burgeoning technologies such as electric vehicles, rare earth metals represent the commodities of tomorrow.
For now, interested investors must focus on the financials. In particular, despite CREQF being one of the riskiest Chinese stocks to buy, the underlying company features an equity-to-asset ratio of 0.95 times. In comparison, the industry median is 0.83 times. Also, its Altman Z-Score stands at 5.39, reflecting very low bankruptcy risk.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
On the date of publication, Josh Enomoto 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.