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All Contents © 2018The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| June 20, 2018
Chinese stocks, while hardly the under-covered investment opportunity they were more than a decade ago, still have intriguing growth prospects. They still offer exposure to China’s enormous market – according to PricewaterhouseCoopers, China could be the largest economy in the world with about 20% of world GDP by 2050. And they still can leverage the country’s expanding middle class and booming Internet presence.
China has several companies that operate essentially parallel to big U.S. stocks, especially in the technology sector. However, many of these companies have evolved into massive hybrid beats, catering to their users in both the online and offline space.
Several of these stocks are trading on the cheap thanks to ongoing trade-war fears between the U.S. and China. However, Goldman Sachs (GS) CEO Lloyd Blankfein calls Trump’s threat of slamming tariffs on another $200 billion of Chinese imports a negotiating tactic. “That’s what you would do if it was a negotiating position, and you wanted to remind your counterparty just how much firepower you had to bring to the negotiation,” he said.
With this in mind, we used TipRanks’ unique market data to pinpoint five trending Chinese stocks with big Wall Street support.
The following is a look at these stocks, analysts’ average price targets and an explanation as to why Wall Street is so bullish right now. Here’s a look at these five “Strong Buy” stocks from the “Middle Kingdom.”
Data is as of June 19, 2018.
Market value: $91.7 billion
TipRanks consensus price target: $296.75 (13% upside potential)
TipRanks consensus rating: Moderate Buy*
Baidu (BIDU, $262.11), also known as the “Google of China,” is a Chinese search operator that also offers everything from maps to cloud services to artificial intelligence. And it’s undervalued, top Oppenheimer analyst Jason Helfstein (view Helfstein’s TipRanks profile) recently said.
The valuation is particularly compelling among Chinese stocks when you compare it to the stock’s impressive core growth rate. Helfstein lauded BIDU’s valuation of 11 times estimates for 2019 core EBITDA – too low for China’s leading search engine, and too low for a company that’s estimated to grow at 25% annually between 2017 and 2020.
He reiterated his “Buy” rating on BIDU on May 21 with a $295 price target, believing that the market overreacted to news in May that COO Qi Lu was leaving the company, especially given that Baidu still has a disciplined budget system in place.
Baidu also is investing heavily in a several new technologies, including AI, the cloud, self-driving cars and online video. According to Helfstein, Baidu is in prime position to benefit from the growth of internet advertising in China. “We think key drivers include increasing number of paid clicks, higher conversion rates, and higher cost-per-click (CPC)” he writes. The penetration of smartphones in China provides another strong revenue stream for BIDU as it starts to monetize mobile search separately.
* BIDU garners a consensus “Strong Buy” from TipRanks-designated “Top” advisers.
Market value: $528.9 billion
TipRanks consensus price target: $246.07 (20% upside potential)
TipRanks consensus rating: Strong Buy
E-commerce giant Alibaba (BABA, $204.43) is consistently one of the Street’s favorite Chinese stocks. Indeed, our data shows that BABA has received only buy ratings from Wall Street analysts for more than 10 months. And the latest opinion from the Street is that the future will be just as bright.
Five-star Susquehanna analyst Shyam Patil (view Patil’s TipRanks profile) has just boosted his BABA price target from $220 all the way to $305. This suggests robust upside potential of almost 50%.
“Our checks suggest that Alibaba continues to take share in the China e-commerce market and the significant new user additions in F2018 should provide a tailwind to growth through (fiscal) 2019,” Patil writes. He continued: “Alibaba has numerous levers in the pipeline to drive continued strong advertising revenue growth, but we expect the company to remain measured in its approach, as it appears focused on sustainable growth and careful not to over-monetize.”
Patil says three big growth drivers for the stock include 1) predictive search, 2) Taobao shopping and 3) TMall’s Weitao social-media channel. This is a shopping-news social media app that allows merchants to reach out to users via text, video and interactive campaigns.
Patil was excited about the stock ahead of China’s big 618 online shopping festival, which took place on June 18. This is the second biggest shopping festival in China after Single’s Day and was created to celebrate the founding of BABA rival JD.com (JD), which just received a $550 million investment from Alphabet (GOOGL).
However, as Patil points out, Alibaba’s presence in electronic sales means it likely also got a boost from the 618 festival.
Market value: $10.4 billion
TipRanks consensus price target: $56.80 (11% upside potential)
Welcome to the ‘Tinder of China.’ Momo Inc. (MOMO, $51.09) is a free social search and instant messaging mobile app that specializes in match-making, especially following the February acquisition for Tantan – “China’s Tinder” – for $735 million.
The Chinese stock recently soared 15% following stellar first-quarter results. MOMO announced revenue for the quarter of $435 million – up 64% year-over-year, and easily enough to crush the Street’s consensus estimate of $396.3 million.
“Our community continued to grow in size and engagements despite the negative seasonality, thanks to the product and marketing initiatives we have been taking in recent quarters,” Momo CEO Yan Tang said. “The content ecosystem continues to improve, driving robust organic growth momentum for live streaming business.” And thanks to Tantan, MOMO is on the way to delivering upbeat second-quarter revenue of $470 million to $485 million.
UBS analyst Jerry Liu upgraded Momo from “Hold” to “Buy” following the report. He is one of four analysts who recently ramped up their MOMO price targets. Jeffries’ Karen Chan (view Chan’s TipRanks profile) now has a $60 price target (17% upside potential), up from $55 previously. She believes there is “ample room” for MOMO to expand its user base and is very bullish on the company’s strong live streaming momentum. Live-streaming is incredibly popular in China, despite its ongoing battle against with Chinese censorship.
Market value: $485.4 billion
TipRanks consensus price target: $65 (28% upside potential)
Chinese web giant Tencent (TCEHY, $50.82) is best known for hugely popular WeChat app. This app is like a pumped-up version of Facebook’s (FB) WhatsApp, enabling users to do everything from scheduling an appointment, to making visa applications and paying fines.
However, Tencent’s interests are far broader than just chat.
The company’s offerings span everything from AI to the cloud to the world’s largest mobile gaming franchises. It even has a small hand in alcohol sales. Tencent has just announced that it is partnering with distiller Pernod Ricard (PDRDY) to help it up its marketing efforts in China through sponsorship, content creation and analytics. This isn’t surprising when you consider that Tencent’s network reaches a staggering 98% of Chinese internet users. Indeed, WeChat alone counts more than 1 billion users.
“We view Tencent a core holding in the Chinese internet sector as the stock offers unique exposure to compelling opportunities in the online social and mobile areas,” Benchmark Company analyst Fawne Jiang (view Jiang’s TipRanks profile) recently wrote. “We remain positive on Tencent’s multifaceted growth drivers, which leverage its dominant position in China’s mobile gaming and social networks.”
Jiang sees mobile gaming as a core growth driver, while online advertising also has “ample upside potential.”
Meanwhile top-rated Wells Fargo analyst Ken Sena (view Sena’s TipRanks profile) spies a big opportunity for Tencent in the fast-growing video programming space. He has conducted an in-depth analysis into Tencent’s video offering, and he believes that video revenue can surge over the next five years with four times as many as subscribers.
Market value: $9.1 billion
TipRanks consensus price target: $208.33 (23% upside potential)
The best plays among Chinese stocks aren’t just tech-oriented.
Biopharma BeiGene (BGNE, $165.10) is working on the next generation of cancer treatments. It is focused specifically on molecularly targeted and immuno-oncology cancer therapeutics, and it has a deep pipeline of late-stage drug candidates. Most recently, BGNE announced that its PARP inhibitor candidate pamiparib (BGB-290) has moved into a pivotal study for ovarian cancer in China.
On the back of this announcement, top Maxim analyst Jason McCarthy (view McCarthy’s TipRanks profile) ramped up his BGNE price target from $200 to $225. He notes that none of the three existing PARP inhibitors on the market have been approved in China.
“BeiGene as a China-based company which also now has a China focused commercial sales force from Celgene has a distinct advantage, in our view, and could bring the first PARP to the China market” McCarthy writes. This drug could be priced at about $100,000 per patient (based on global market prices for existing therapies).
The pivotal study will specifically target ovarian cancer (OC) maintenance therapy – the largest OC population. In China, there are 50,000 new OC cases with the majority moving on to maintenance therapy, McCarthy writes.
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