4 Chinese stocks to buy now and 4 to avoid
Reduce the unprecedented uncertainty Chinese stocks face. Chinese stocks have had a disastrous summer. The Internet KraneShares CSI China…
Reduce the unprecedented uncertainty Chinese stocks face.
Chinese stocks have had a disastrous summer. The KraneShares CSI China Internet ETF (ticker: KWEB) has fallen 20% in the past three months, is down 29% year-to-date, and is down almost 50% from its highs 52 weeks. This is in stark contrast to the US stock indexes, which have spent the year reaching all-time highs. The reason for China’s collapse is clear: an unexpected government crackdown on key sectors. Recently, the Chinese government instituted a number of measures to regulate various industries such as for-profit education, online gaming, e-commerce, and tobacco. This week, famed investor George Soros wrote in a Wall Street Journal comment: “Pouring billions of dollars into China now is a tragic mistake. While Soros warns foreign investors could face a “wake-up call” in China, with discretion there are still opportunities for bold investors. With that in mind, here are four Chinese stocks to buy and four to avoid.
Chinese stocks to avoid: Alibaba Group Holding Ltd. (BABA)
Alibaba is the focal point of the current bullish vs. bearish debate on Chinese stocks. On the one hand, Alibaba appears to be a unique way to gain exposure to the Chinese economy. Alibaba is the leader in Chinese e-commerce and a key player in cloud computing, payments, and other emerging technology areas. It also has stakes in a wide range of growing Chinese companies. So what’s the problem? Chinese regulators are cracking down on Alibaba from all sides. Short sellers have repeatedly questioned the company’s accounts. The charismatic founder of Alibaba, Jack Ma, has disappeared from the public spotlight. And now Alibaba is to donate billions of dollars to a social contribution fund to help ease regulatory pressure. Alibaba’s stock looks cheap on paper, but that’s not a discount considering the political storm befalling it.
Chinese stocks to buy: China Eastern Airlines Corp. Ltd. (CEA)
A key part of the controversy with Chinese equities centers on variable interest entities. Chinese companies technically cannot sell shares overseas. They can get around this problem by creating Cayman Islands-based entities that hold a right to an economic interest in the underlying company in China. However, foreign investors are now worried that this structure will collapse. One way to minimize this risk is to buy public companies. These are Chinese companies where the government has a majority stake. China Eastern Airlines, for example, is 62% government-owned, giving it a good chance of avoiding crippling regulatory action. Additionally, the CEA stock remains depressed due to COVID-19 and the continued disruption to the airline industry. However, as the global economy reopens, China Eastern Airlines could make a comeback. And, in any case, he should avoid the regulatory drama that wiped out Chinese internet stocks.
Chinese stocks to avoid: Didi Global Inc. (DIDI)
Didi Global aims to become Uber Technologies Inc. (UBER) of China. Offering ridesharing services, Didi seemed like a sure winner. The company had dominated foreign competition to capture a huge market share and was poised to transform into a cash flow machine in the years to come. Didi launched its IPO at $ 14 in July. Within weeks, however, the dream turned into a nightmare. The Chinese government has announced that Didi’s app is to be removed from app stores due to privacy breaches. Additionally, Chinese government officials have stationed themselves in Didi’s offices to oversee the business. Investors still haven’t given up. The stock went from just $ 14 to $ 9. It is probably not far enough given the existential crisis of the company. Chinese for-profit education companies fell 90% on news that the government had banned their business model. Didi is just too dangerous to hold at this point, given the risk of similar erasure.
Chinese stocks to buy: Baidu (BIDU)
While Alibaba is China’s most popular tech stock, Baidu is arguably the most obvious buy-in candidate. Baidu is the leading search engine in China, holding a market position comparable to Google’s Alphabet Inc. (GOOG, GOOGL) in the US market. Like Google, Baidu has branched out into many other companies. Baidu’s other main operations include artificial intelligence, cloud computing, and autonomous vehicles. Baidu has enjoyed incredible success over the past decade. His income almost increased tenfold and more than tripled his profits during this period. Still, the stock price has been essentially stable since 2011. This makes BIDU stock look downright cheap; stocks are trading at just 9 times rolling earnings. Even if regulators limit Baidu’s profitability, its low starting valuation and broad diversification of the business should protect shareholders.
Chinese stocks to avoid: RLX Technology Inc. (RLX)
RLX Technology is the leader of the Chinese vaping market. The company went public with high hopes in January, with the stock opening trading at $ 30. Since then, the share has lost three quarters of its value. In addition to the general malaise in the Chinese market, the government has specifically released a new regulatory environment for vaping and alternative tobacco, claiming that vapers will be processed on the same schedule as cigarettes. This threatens to be a blow to RLX. Shares of Altria Group Inc. (MO) plunged after the U.S. government put the Juul vaping company in the crosshairs and RLX could face a similar fate in China. Worse yet, RLX stock is not cheap. Even after dropping 75%, RLX shares are 200 times sliding earnings and are almost 8 times earnings. This is simply not a sufficient discount for a Chinese company under active regulatory control.
Chinese stocks to buy: China Life Insurance Co. (LFC)
Like China Eastern, China Life Insurance is a public enterprise. This offers substantial protection to foreign investors. In addition, China Life operates as a structurally important enterprise. It is, after all, the largest life insurer in China, and any disruption to it could bring down many economic dominoes. As such, the government is much less likely to shoot at a company like China Life than at independent tech companies. Beyond being a safer investment, what else is there to love about China Life? On the one hand, the business is very profitable. He earned $ 1.46 and $ 1.35 per share in 2019 and 2020, respectively. Using the current price of $ 9, that’s a price-earnings ratio of less than 7. Given China’s demographics, demand for life insurance is expected to remain robust while an improving economic climate may stimulate the returns on the company’s investments. All in all, things are looking up for LFC actions by 2022.
Chinese stocks to avoid: iQIYI (IQ)
iQIYI aspires to be Netflix Inc. (NFLX) from China. It is one of the leading online video on demand streaming platforms featuring originals, Chinese and Korean dramas, cartoons and more. Investors were excited about the concept and iQIYI’s market capitalization exceeded $ 20 billion at one point. However, things turned out for the company this year. The Chinese government has brought down the hammer on online video games. It will limit young people to playing games for just three hours a week, and it has completely suspended approvals of new online games. Investors are naturally wondering if the media crackdown will extend to online video. It comes at a terrible time. iQIYI lost more than $ 1 billion in 2017, 2018 and 2019, then $ 800 million in 2020. With its growth prospects increasingly uncertain and current operational activity far from reaching profitability, the stock of iQIYI is a serious risk at this time.
Chinese stocks to buy: Yum China Holdings Inc. (YUMC)
Yum China is a restaurant chain that operates more than 11,000 locations in China. It is a spin-off of the American restaurant group Yum Brands Inc. (YUM) and holds the license for these brands in China. Yum China’s most prominent brands are KFC and Pizza Hut, and it operates Taco Bell in China, in addition to local brands such as Little Sheep and East Dawning. Yum China is an ideal asset in uncertain times like these. The company has more than 400,000 employees, which is a good reason for the government to allow it to operate normally. As it stands, restaurants are not a particularly politically sensitive area. In addition, since Yum remains in the image, it helps to offer more transparency to foreign investors. Yum China is selling for less than 30 times earnings forward, and analysts expect the company to see both earnings and earnings growth at double-digit rates in the coming years.
4 Chinese stocks to buy, 4 to avoid:
Chinese stocks to buy:
– China Eastern Airlines Corp. Ltd. (CEA)
– Baidu (BIDU)
– China Life Insurance Co. (LFC)
– Yum China Holdings Inc. (YUMC)
Chinese stocks to avoid:
– Alibaba Group Holding Ltd. (BABA)
– Didi Global Inc. (DIDI)
– RLX Technology inc. (RLX)
– iQIYI (QI)
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4 Chinese stocks to buy now and 4 to avoid originally appeared on usnews.com