The Chinese consumer is finally returning to spending, albeit at a slower-than-expected rate. Eventually, once economic confidence is restored, consumers will increase their spending. Green shoots are emerging, making it an opportune time to buy Chinese retail stocks.
There are two primary reasons for upside. First, China has one of the highest e-commerce penetration worldwide, with an online shopping penetration rate of 83.8%. Due to the high penetration rate, Chinese retail stocks are some of the largest online retailers globally. Furthermore, these retailers are leveraging China’s manufacturing strength to participate in cross-border trade.
Secondly, Chinese retail stocks are trading at significant discounts to their developed market peers. While Amazon (NASDAQ:AMZN) has a forward price-to-earnings multiple of 42, these Chinese players are at single-digit and low-teens forward P/E multiples.
Eventually, this valuation gap against developed market peers will narrow or close. If these Chinese retail stocks re-rate to similar P/E multiples as their developed world peers, they will easily double from current levels.
Alibaba (BABA)
Occasionally, the market offers undervalued gems with downside protection and substantial upside. As of this writing, Alibaba (NYSE:BABA) presents such an opportunity. The largest e-commerce retailer by sales is dirt cheap at nine times forward earnings.
Indeed, Alibaba is one of the best Chinese retail stocks to buy for upside. First, it dominates its home market, China, and key markets across Southeast Asia. Its e-commerce platforms, such as Taobao and Tmall, feature an extremely wide breadth of products. As a result, they enjoy substantial network effects that drive traffic growth.
At today’s valuation, investors are pricing Alibaba for no growth. However, the company will benefit from growing e-commerce penetration. Furthermore, the retailer is investing to drive more growth. For instance, it’s integrating AI tools on its platform to improve the recommendation engine and personalize the shopping experience.
Another fundamental driver for Alibaba stock is the attractive shareholder returns. As free cash flow improves, Alibaba has returned a substantial portion to shareholders. On February 8, it announced a $25 billion buyback. Consequently, it repurchased shares worth $4.8 billion in the quarter ended March 31. The buyback activity proves that management is focused on shareholder returns going forward.
JD.com (JD)
JD.com (NASDAQ:JD) is one of the top Chinese retail stocks. Unlike Alibaba, the retailer focuses more on sales of valuable goods such as electronics. By focusing on this niche, JD.com has created a lucrative segment where it’s the leader. Indeed, the company is renowned for its high-quality goods since it sells products from established suppliers and manufacturers.
Although sales slumped in 2022 and 2023, recent financials suggest a recovery is imminent, which could boost the stock. In Q1 2024, revenues increased by 7% year-over-year (YOY), driven by robust growth in active users. JD.com’s focus on offering the best selection, speed, quality and price combination continues to attract more customers.
Despite the rebound in growth, JD.com is at a rock bottom valuation. According to Seeking Alpha, it trades at a forward non-GAAP P/E multiple of 8 compared to a 5-year average of 32. The steep discount means it’s one of the best Chinese retail stocks to buy.
Moreover, management recognizes the bargain share price and has been aggressively buying back shares. From January 1 to May 15, the company bought back 98.3 million Class A ordinary shares worth $1.3 billion, about 3.1% of ordinary shares outstanding. These buybacks are accretive at these low valuations, making JD stock a buy.
PDD Holdings (PDD)
Lastly, one of the best Chinese retail stocks to buy today is Temu’s parent, PDD Holdings (NASDAQ:PDD). This e-commerce retailer has the fastest growth rate due to its market share gains in China and internationally. As it continues to successfully challenge incumbents, the stock will soar.
In Q1 2024, PDD Holdings again showed impressive execution and profited from an improving macro to achieve a 131% revenue growth. This increase was driven by online marketing and transaction services, which grew 56% and 327%, respectively.
Looking forward, the retailer is investing heavily to support high-quality consumption. To this end, it’s broadening its high-quality supply and working with top brands across the globe. Furthermore, it’s investing in technology tools to reduce seller costs and attract more merchants to its platform.
PDD Holdings also sees a significant opportunity in its international business. So far, since launching its cross-border e-commerce platform in September 2022, it has enjoyed tremendous success. A key highlight has been the strong consumer adoption of Temu in the U.S. and Europe.
Due to its best-in-class growth, PDD Holdings is one of the Chinese retail stocks that deserves a premium multiple. At 11 times forward earnings, PDD stock is a no-brainer buy. Even better, a PEG non-GAAP multiple of 0.50 reinforces that this is an undervalued growth stock.
On the date of publication, Charles Munyi 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.
