5 Chinese Stocks Still Worth a 'Ni Hao'
Chinese stocks, especially in technology and tech-esque industries, have a track's worth of hurdles ahead. But nimble investors might be able to turn a few of these shares into profits.
Chinese stocks, especially in technology and tech-esque industries, have been under unprecedented pressure over the past year thanks to intense regulatory crackdowns, as well as increasing COVID cases leading to strict lockdowns.
And yet …
If you're a nimble investor and looking for stocks to buy, these and other Chinese stocks might be worth a look, given their high marks from Wall Street's analyst community. A combination of dirt-cheap valuations and recovering business prospects has many pros looking at China as a source of bounce-back potential, even if only for short bursts at a time.
For instance, China's Vice-Premier Liu He recently pledged support for his country's technology sector, but Trivium China tech analyst Linghao Bao tells CNBC that this likely signals a temporary reprieve, not a sea change in China's stance toward technology. "This is a really not a U-turn on the tech crackdown; the long-term outlook hasn't changed yet," he says. "Because Beijing has already come to the conclusion that it is a bad idea to let big tech companies to run wild because it creates unfair market competition … wealth will be concentrated at the top and it will start to influence politics."
Even then, Chinese stocks still face myriad other issues. "While an easing regulatory and policy environment offers Chinese tech stocks a reprieve, significant hurdles will limit their potential further upside," says BCA Research. "Domestic consumption remains weak, the housing market is sluggish, the online retail sector is saturated and Chinese stocks continue to face the risk of being delisted from foreign exchanges."
A long way of saying: Chinese stocks look like a high-risk (but possibly high-reward) bet in the short term. But if you want to take a swing, you can improve your chances by listening to what the pros have to say. We've used the TipRanks database to look for Chinese shares with tech- and tech-esque businesses that have earned Moderate Buy or Strong Buy ratings.
Here, then, are five Chinese stocks that might be worth a closer look.
Data is as of May 25. Stocks are listed in reverse order of the amount of upside potential implied by TipRanks-surveyed analysts' consensus price targets.
- Market value: $409.2 billion
- TipRanks consensus price target: $44.00 (3% upside potential)*
- TipRanks consensus rating: Moderate Buy
Tencent Holdings (TCEHY, $42.57) is a Chinese internet conglomerate founded in 1998. The company's businesses span communication and social services including Weixin and QQ, targeted advertising, cloud fintech and business services.
Like many Chinese communication stocks, Tencent stumbled during the first quarter of 2022. Revenues were flat year-over-year, at $21.3 billion, while adjusted net profits declined 23% to $4.1 billion – its steepest such drop since it went public in 2004. The company's mobile pay offerings were hit hard by COVID-related lockdowns.
Tencent CEO Ma Huateng, while admitting to a tough first quarter, said the company "implemented cost control initiatives and rationalised certain non-core businesses, which would enable us to achieve a more optimised cost structure going forward." Huateng added that Tencent "continued investing in strategic growth areas including enterprise software, Video Accounts and international games."
The company is likely to have a tough 2022, says JPMorgan analyst Alex Yao, though with potential upside. Yao expects that while rising COVID cases in China could have an adverse impact on Tencent's business segments (including non-gaming, cloud and fintech business), he anticipates the company's online gaming business to be resilient as Tencent has "several new games in 2Q22 pipeline."
What's more, the analyst is optimistic that the resumption of gaming license approvals in China could be "incrementally positive to Tencent's ads recovery in 2H22."
TCEHY shares have roughly halved in value from their 52-week highs in June 2021, but Yao believes they're likely to recover. The analyst believes Tencent can sustain its growth over the long term as it focuses on three strategic areas: international gaming, long-form video and software-as-a-service (SaaS). Indeed, Yao double-upgraded several Chinese stocks in May, including Tencent, to Overweight (Buy) from Underweight (Sell).
The analyst community as a whole is quite bullish on the company's stock. Using ratings of its Hong Kong-listed stock, Tencent earns 36 Strong Buys and nine Buys, versus four Holds, two Sells and no Strong Sells, according to S&P Global Market Intelligence.
The Tencent American depositary receipts (ADRs) – TCEHY shares, which U.S. investors have access to – have just two analysts covering it, with one Buy and one Hold. But that low amount of traffic is typical of international companies whose primary listings are outside of the U.S.; based on Hong Kong shares' ratings, Wall Street is quite high on this Chinese communications giant. Hear what else the pros have to say about TCEHY on TipRanks.
* Similarly, while TCEHY shares have just 3% indicated upside based on the tiny number of analysts covering it, they have 18% indicated upside based on analysts covering the higher-volume Hong Kong shares.
- Market value: $8.3 billion
- TipRanks consensus price target: $38.29 (99% upside potential)
- TipRanks consensus rating: Moderate Buy
Bilibili (BILI, $19.27) was initially launched as a website in 2009 in China and, according to the company, has "evolved from a content community inspired by anime, comics and games (ACG) into a full-spectrum video community covering a wide array of interests" including games, lifestyle, entertainment and anime.
And like other Chinese stocks, Bilibili also has evolved from a higher-priced stock into a much lower-pried stock, with shares off nearly 60% year-to-date and more than 80% over the past 12 months.
The company's woes might not be over yet, either.
"We expect delays/cancellations of ad budgets after mid/late March, when major cities including Shanghai started strict COVID-19 mobility restrictions that depressed consumer sentiment and disrupted e-commerce logistics," a UBS analyst team (Buy) said in early May. "According to [management], Bilibili's major e-commerce warehouse in Kunshan, a city near Shanghai, has been locked down, and a significant number of orders cannot be fulfilled."
JPMorgan's Yao, who upgraded the stock to Neutral from Underweight to May, says e-commerce and advertising revenues could slow during the first half of 2022 "due to logistic difficulties and weaker advertiser demand." However, COVID-related lockdowns could benefit BILI thanks to "higher stay-at-home entertainment demand."
Also likely to dampen BILI's first-half results was the aforementioned Chinese gaming regulation, which was meant to limit time spent on gaming by children 18 and younger. Yao expects this will result in a fall in time spent by users on Bilibili's platform and a drop in value added services revenues.
Wall Street analysts are cautiously optimistic, with a consensus Moderate Buy rating among eight pros who have sounded off over the past three months – five call BILI a Hold, three say it's a Buy. However, there's nothing cautious about their consensus price target of $38.29, which implies a near doubler over the next 12 months. See the full rundown of analyst ratings for BILI on TipRanks.
- Market value: $12.6 billion
- TipRanks consensus price target: $28.50 (46% upside potential)
- TipRanks consensus rating: Strong Buy
Trip.com Group (TCOM, $19.57) is a global travel platform whose portfolio of brands includes Ctrip, Qunar, Skyscanner and its namesake Trip.com.
Many travel-related companies have been hammered by the COVID-19 pandemic, and Trip.com is no different – off 40% from the February market peak, though its troubles hardly came in a straight line. TCOM shares recovered all of their COVID losses before the end of 2020 and surged into early 2021 before dropping like a rock. The stock has lost more than 55% of its value since its March 2021 peak.
There are some silver linings. For one, short-haul travel has proven extremely popular in China. Trip.com said on its Q4 2021 earnings call in March that "strong performance for short-haul travel extended into the early Chinese New Year holiday, with local hotel reservations increasing by more than 20% year-over-year."
TCOM has also improved its content strategy to drive up its content conversion rate, which doubled in the month of February this year as compared to the same period last year.
Deutsche Bank analyst Leo Chiang, who rates TCOM at Buy, notes the company's "improved operational efficiency" and believes the firm is "well positioned to benefit from the industry's recovery and even gain market share." He adds that Trip.com's international brands, Skyscanner and Trip.com, will gain traction and benefit from a global travel recovery.
Chiang did lower his revenue forecasts for fiscal 2022 and 2023 (by 17% and 6%, respectively) to reflect the threat of the Omicron COVID variant in China, and he lowered his price target to $31 per share, from $34 previously. But he remains bullish on the stock, and his new 12-month target still implies almost 60% upside.
Chiang is in good company. TCOM is a Strong Buy-rated Chinese stock featured here, thanks to nine Buys and just two Holds among analysts who have released notes on the stock over the past three months. Check out other analysts' price targets and analysis for TCOM at TipRanks.
New Oriental Education & Technology Group
- Market value: $1.9 billion
- TipRanks consensus price target: $16.07 (47% upside potential)
- TipRanks consensus rating: Moderate Buy
Edtech companies such as New Oriental Education & Technology Group (EDU, $10.94) in China have been a beleaguered lot after the Chinese government started cracking down on these companies in 2021. Specifically, China's state council barred for-profit firms from tutoring children in any subjects that are part of the core curriculum, and it also forbade foreign investment in for-profit educators.
The crackdown expanded this year, when, according to Bloomberg, Chinese regulators banned high school online tutoring classes over a school break in February and said edtech companies would have to "wait for clearance before resuming such courses."
New Oriental Education was forced to lay off 60,000 people in 2021, profits plunged and shares have lost more than 90% of its value since May of last year, making EDU one of the worst Chinese stocks over the past 12 months.
So … why take a chance on it?
Beijing's rules are clearly still having a colossal impact on EDU. In its fiscal Q3 2022, reported in April, revenues were off 48.4% to $614.1 million. However there were a couple green shoots. New Oriental's overseas test prep and overseas study consulting business revenue was up 15% year-over-year, and domestic test prep targeting adults and university students shot 59% higher.
"Simultaneously, we are actively exploring various new business opportunities, including non-academic tutoring, intelligent learning system and devices, study tour and research camp, educational materials and digitalized smart study solutions, as well as exam preparation courses designed for students with junior college diplomas to obtain bachelor's degrees," says Michael Yu, New Oriental's executive chairman.
JPMorgan analyst DS Kim upgraded the stock to Neutral from Underweight, saying "We still struggle to find ways to trade this name on fundamentals, as it's nearly impossible for anyone to project the scale and profitability of its 'post-AST (after-school tutoring)' businesses. Having said that, the stock is really cheap – more than cheap, actually – as it's trading at a negative enterprise value (i.e., current net cash position well above its market cap)."
The Street is cautiously optimistic here, with two Buys and two Holds among analysts that have sounded off over the past three months. But it's safe to say EDU would be the riskiest Chinese stock on this list, given the regulatory hurdles it faces. TipRanks offers up a full analyst rundown of EDU shares here.
- Market value: $48.4 billion
- TipRanks consensus price target: $63.00 (64% upside potential)
- TipRanks consensus rating: Moderate Buy
Pinduoduo (PDD, $38.31) is a niche mobile-only online marketplace that "connects agricultural producers with consumers across China."
Like the rest of the Chinese stocks listed here, PDD shares have been clobbered of late. The stock has shed 70% of its value over the past year, with 34% of those losses coming in 2022.
But Pinduoduo is coming off a particularly promising first-quarter earnings report. Q1 revenues were up 7.3% year-over-year to $3.8 billion, while net income swung to a $410.1 million profit from a net loss of $434.4 million in 2021. Both metrics easily outdid analyst estimates. Also encouraging was a 4% rise in average monthly active users.
Prior to the earnings report, a team of UBS analysts upgraded the stock to Buy from Neutral.
"We upgrade PDD as we believe the company has proven its business model is sustainable, and it can stay profitable despite a slowing macro and intense competition," UBS says. "We see balanced top- and bottom-line growth going forward, driven by [average revenue per unit] and operating leverage" amid a strategic shift from sales and marketing to research and development, respectively.
The team says this is similar to inflection points for JD.com (JD) and Meituan in 2019, "when those platforms improved margins while delivering respectable growth."
JPMorgan analyst Andre Chang double-upgraded the stock to Overweight from Underweight in May, and also juiced his 12-month price target to $55 per share (44% implied upside) from $27.
"As the stock trades more on market expectations of future revenue, we believe key to stock performance in 2022 is its revenue growth rate relative to market expectations, particularly online marketing revenue growth," Chang says. "Despite the COVID impact in the near term, we forecast PDD's online marketing revenue growth rate to sustain at teens throughout 2022 and recover to mid to high teens in [the second half of 2022]."
Seven of 11 analysts surveyed by TipRanks categorize PDD stock as a Buy. Hear what else the pros have to say about PDD on TipRanks.