In recent years, Chinese stocks have been drenched in volatility. Many prominent names have not been spared. Investors should also be aware of the guidance Chinese companies provide regarding compliance with the SEC’s Holding Foreign Company Accountability Act (HFCAA).
That said, China is the world’s second largest economy, and investors may be pondering whether it’s time to add exposure to Chinese equities.
While consumer spending is a concern in China, the growth of its middle class has accelerated significantly in recent decades. Despite progress, China still has plenty of room to expand when it comes to the growing number of internet users, which could benefit Chinese tech companies.
China announced last year that it had reached over 1 billion internet users. Still, about 30% of the population are not Internet users. It is also widely believed that China’s middle class has grown to exceed her 500 million people, the total population of the United States.
Let’s take a look at two Chinese tech stocks that could take advantage of this growth and dive into the value they offer investors at current levels.
Alibaba Baba
Alibaba is China’s leading e-commerce giant and one of the most recognizable companies in the world. His three business segments of Alibaba, his Alibaba.com, Taobao, and Tmall, account for more than half of China’s online retail sales.
Despite this market share dominance, BABA is trading 55% away from its 52-week high. Year-to-date, BABA is down -31%, trailing the S&P 500 at -21%. Alibaba’s peer group similarly fell -61%.
Image Source: Sachs Investment Research
BABA has an expected P/E of 10.7x. Alibaba trades at a discount of 22.9 times the industry average. BABA is also trading well below its five-year high of 51.3X and median of 32.9X.
Alibaba is now trading at a more reasonable valuation than before. After his IPO in 2014, Wall Street was initially willing to pay a premium to BABA. BABA’s growth prospects are very interesting and investors have historically paid for the stock.
Much of BABA’s decline rests on concerns that Chinese stocks will be delisted from US stock exchanges. Alibaba, due to its growth and unprofessionalism, should be a company expected to comply with the SEC. Estimate revisions have also trended significantly higher over the last 60 days.
Earnings are expected to decline 8% in 2022, but are expected to rise 9% in fiscal 2023 to reach $8.33 per share. Top-line growth is expected to grow 2% this year and another 13% to $154.64 billion in fiscal 2023. Alibaba also beat earnings estimates last quarter by 16% to $1.75 a share.
BABA currently holds Zacks Rank #3 (Hold), placing its Internet Commerce industry in the bottom 37% of over 250 Zacks industries. At current levels, a long-term investor may want to hold onto his BABA for growth prospects.
BABA is expected to see 9% EPS growth over the next five years. BABA also has an ‘A’ overall VGM score for him, and the company stands to benefit from his lucrative ‘Singles’ Day’ in China in November. Additionally, Zacks has an average price target of $158.69, suggesting he is up 94% from current levels.
JD.com JD
JD is another e-commerce stock investors might want to consider given its exposure to the internet and China’s growing middle class. JD currently holds the #1 Zacks rank (strong buy) and earnings estimates are rising.
JD operates as an online direct sales company in China. JD.com offers a wide variety of products including digital goods, consumer electronics, auto accessories, personal care products, apparel and luxury goods.
Year-to-date, JD is down -24%, just below the benchmark. But over the past five years, JD has risen a respectable 30%. JD is trading 42% off his 52-week high, and a rise in earnings revisions could put the stock back on an upward trajectory.
Image Source: Sachs Investment Research
JD.com achieved its first financial surplus in 2017, and its earnings have begun to confirm that the company is an elite player in China’s e-commerce space. This caused the stock price to rise significantly as shown in the chart above.
Trading at around $53 per share, JD has an expected P/E of 25.1x. This is close to the industry average of 22.9x. This is also well below the extreme high of 1,135.5X and the median of 68.8X over the past five years. Much of JD.com’s poor performance, which trades at a much more reasonable valuation, surrounds fears of SEC sanctions. That said, JD’s earnings revision continues to climb.
Zacks estimates that earnings are expected to grow 27% to $2.15 per share in 2022. A further 24% profit growth is expected in fiscal 2023. Top-line growth also indicates that the company is beginning to battle the global effects of inflation. Sales are expected to grow 6% this year and another 15% to $182.36 billion in FY23.
JD’s VGM score is ‘A’ overall, and Zacks’ average price target is up 63% from its current level. JD.com is also benefiting from Singles Day in China, where he posted a record $48.7 billion in sales at last year’s event.
Conclusion
China’s upcoming Singles Day could be a catalyst for Chinese tech stocks. As a holiday that unmarried Chinese people celebrate to indulge in shopping, retailers offer lucrative deals to generate more sales. Similar to Black Friday and Cyber Monday, Singles Day has become the world’s biggest online shopping day for him. Alibaba and his JD.com hit a record $139 billion in sales on Singles Day last year. Both companies should be expected to comply with the SEC, despite concerns about the delisting of Chinese stocks.
China’s booming middle class and internet users are reasons why investors are considering these two tech giants. Despite the negative impact of Covid-19, more Chinese have been able to get used to e-commerce platforms during quarantine.
Reward risk is also becoming more favorable for investors to take advantage of long-term growth in Chinese tech stocks.
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