China’s economy has been struggling recently. After a tumultuous period battling the Covid-19 pandemic, the government abruptly abandoned its zero-Covid policy in December 2022 and reoriented the economy towards reopening. Unfortunately, China’s rebound has largely underperformed expectations. There’s been a pullback in consumer spending and bank lending. Chinese exports have also sputtered, but this is mostly the result of an overall slowdown in Western economies that buy Chinese goods. Without decisive policy measures to stimulate demand from the Communist Party of China (CPC), the world’s second-largest economy could be headed for a period of deflation, which would have ripple effects across the world.
Despite these obvious headwinds, there are still plenty of companies with good business models and cheap valuations that could benefit from China’s economic reopening and the reprioritization of economic growth by the authorities. Here are three undervalued Chinese stocks that equity investors should buy in August.
Baidu (BIDU)
Baidu (NASDAQ:BIDU) is the largest search engine and online advertising platform in China, with over 1.2 billion monthly active users and a market share of over 70%. The company operates via two business units: Baidu Core and iQIYI. The former includes search-based advertising sales, cloud offerings and autonomous driving initiatives. The latter is an online entertainment service which includes both original and licensed video content. The company also announced its generative AI competitor to ChatGPT: ErnieBot.
In recent years, Baidu’s share price has been negatively impacted by the regulatory crackdown on the internet sector, resulting in limited ability to acquired and invest in other companies. However, Baidu has been able to maintain its revenue growth and profitability while increasing its research and development spending. The company has also been expanding its presence in overseas markets including Southeast Asia, Japan, and Brazil.
The internet giant has recently benefitted from the recovery of online advertising and consumer spending as China eased its Covid-19 restrictions. In May, Baidu posted a better-than-expected Q1 earnings print off the back of the post-covid recovery. Shares are up more than 20% year-to-date and enterprise valuation is trading cheaply at 7.8x forward EBITDA. Innovation and diversification into new sectors such as cloud computing, artificial intelligence, and electric vehicles, which have huge growth potential and competitive advantages, could catapult Baidu into new valuation heights.
JD.com (JD)
JD.com (NASDAQ:JD) is one of the largest e-commerce platforms in China, with over 580 million active customers and a wide range of products and services. The company operates a substantial logistics network, which covers 99% of China’s population and delivers over 90% of orders on the same or next day. JD.com also has a diversified revenue stream from its cloud computing, health care, fintech, and social e-commerce segments.
JD.com’s stock price was also dragged down by the regulatory crackdown on the internet sector. However, JD.com has been relatively less affected by the antitrust probes and data security issues, as it focuses more on customer service and quality than on market dominance and user traffic. The company has also been proactive in complying with the regulators’ requirements and improving its corporate governance.
Shares in JD. com have vastly underperformed this year mostly due to a potential price war with competitors and a murky growth outlook. There were reports the company would spend around $1.5 billion to keep prices on its platform low, and investors remain skeptical about this strategy, as it could negatively impact the company’s margins in the short run. China’s slowed recovery has also made investors skittish on JD’s near-term growth prospects. However, for patient investors, this could be a great opportunity to invest. Shares are trading at only 7.2x forward EBITDA. China’s recovery may appear sluggish, but as the economy recovers so will JD’s ecommerce business.
BYD Company (BYDDY)
BYD Co. (OTCMKTS:BYDDY) has earned another spot on one of my lists — and for good reason. The EV maker has garnered a number of achievements recently. In tandem with having an undisputed market position in China, the EV maker has also become the world’s top EV maker this year. BYD has diversified its business into not only manufacturing electric vehicles but also supplying the batteries that power them. The automaker became a key player in the battery market, ousting LG as the world’s number 2 EV battery supplier.
BYD’s stock price has performed well year-to-date with shares having risen more than 30%. The rally has been a result of the company consistently growing its sales volume and market share in both domestic and international markets, thanks to its technological innovation, product quality, and brand reputation. The company has also been improving its profitability and cash flow generation, trading relatively cheaply compared to peers like Tesla (NASDAQ:TSLA). Investors who decide to bet on BYD now could stand to benefit from the strong, secular tailwinds in the broader EV industry.
On the date of publication, Tyrik Torres 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.
