Concern over the direction of China’s economy is leading even the best Chinese stocks listed in New York, like PDD Holdings (NASDAQ:PDD) stock, lower this morning.
PDD is Pinduoduo. It owns Temu, the shopping site Americans have been buying from relentlessly. Shares dropped 8% on Jan. 29 and another 3.5% overnight. The stock was due to open today near $125 per share.
That’s still a rich valuation, a market capitalization of $172 billion on expected 2023 sales of $28 billion at current exchange rates. But nearly one-quarter of those sales, $6.5 billion, are hitting net income.
That’s unheard-of profitability for a retailer.
Temu Too Much?
Temu and privately-held Shein are part of a new trend in China. Influencers sell concepts to consumers, and the online store orders them on demand. It’s a lifeline for Chinese exporters who are otherwise stuck with unsold capacity, but the middleman makes all the money.
Temu is spending heavily on ads, mostly over the Internet. It is preparing to open its market to American and European sellers.
The stock should be going to the moon. But so far in 2024, it’s down 11%.
The reason is the collapse of Evergrande, China’s largest real estate developer. Its situation is hopeless, but the bankruptcy filing in Hong Kong may meet resistance within China itself. That puts in question all Chinese debt, so investors are fleeing.
To that, add the general business environment in China. Growth is weak there, and deflation is real. Those wanting lower prices in the U.S. must understand that inflation may cut your paycheck, but deflation will eliminate your job.
PDD Stock: What Happens Next?
Smart investors should be looking for an entry point on PDD. Pay careful attention to any sign of a meaningful change in government policy. An economic collapse in China would be very bad for its government and the world. That’s why I don’t expect one.
As of this writing, Dana Blankenhorn did not hold (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.
