Analyzing Three of the Best China Stocks

Capison Pang

The three best China stocks to buy now include a consumer financial technology startup, a giant in the internet retailer space and a corporation that operates a fast-growing online entertainment platform.

During the past few decades, the growth of the Chinese economy has catapulted the country from one of the poorest nations on Earth in the mid-20th century into the world’s leading global exporter and second-largest economy by gross domestic product (GDP). China’s average annual GDP growth of nearly 10% for the past four decades has created some of the world’s largest private and public corporations.

With the country still categorized as an emerging market, many Chinese companies have an unprecedented opportunity to tap into what is expected to be the world’s largest economy per GDP by 2032. As a result, stocks on this list have high potential upside.

However, investing in Chinese stocks also brings about many unique regulatory hurdles and risks compared to American companies that require extensive research to navigate due to China’s one-party state and developing economy. Still, the immense growth potential of China means that picking the right stocks can bring potential returns that are well worth the risk.

Here are the three best China stocks to buy now.

Valuation Metrics of the 3 Best China Stocks to Buy Now

Three critical metrics to keep in mind when evaluating the value of certain stocks are price-to-earnings (P/E), price-to-sales (P/S) and enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA). All three ratios measure the valuation of a company compared to its underlying sales and earnings.

P/E and P/S both measure the current share price of a company compared to the amount of net income and sales, respectively, a corporation is generating annually per share. Generally, the lower the P/E and P/S ratios, the better the value for a stock.

EV/EBITDA is more complicated and indicates a company’s enterprise value or its worth to its shareholders and debtholders relative to how much operating income (EBITDA) the corporation produces each year.

3 Best China Stocks to Buy Now: #3

JD.com (NASDAQ:JD)

Beijing-based JD.com (NASDAQ:JD) is an online retailer and the second largest in China after Alibaba. The company, founded in June 1998, sells various electronic and merchandise products such as appliances, furniture and laptops, from various manufacturers and distributors through its e-commerce platform. JD also owns and operates one of the largest distribution networks in China and provides a multitude of prepaid phone and game cards, ticketing, online travel and transaction and billing services.

For the first time this year, e-commerce sales in China are expected to account for more than 50% of total retail sales in the country, increasing from 34.1% in 2019 to a projected 52.1% in 2021. For comparison, e-commerce in the United States accounts for approximately only 15.0% of total retail sales. With the Chinese economy projected to overtake the United States in terms of overall GDP in the next 10 years and online retail market share expected to continue increasing, Chinese online retailers could prove to be an excellent long-term investment. E-commerce is forecast to account for 58.1% of total retail in the country by 2024.

Most investors are no strangers to Alibaba Group (NYSE:BABA), the second-largest privately held corporation in China with a $581.9 billion market capitalization (market cap) and a favorite of many Chinese centric investors. The stock was included in more than 160 hedge fund portfolios at the end of 2020 and ranked among the top five most commonly held hedge fund stocks. However, fewer investors have heard of Alibaba’s “little cousin” and industry rival JD.com. Despite being smaller than the Chinese internet retail giant, JD.com’s $114.9 billion market cap is nothing to scoff at, and with better company financials, JD is a better value than even BABA.

Despite experiencing 27.5% average annual sales growth during the past three years that falls short of the 37.0% for Alibaba, JD.com boasts a much higher three-year return rate of 77.9%. then Alibaba’s 4.4%.

However, JD’s real advantage lies with its valuation (EV) and share price compared to its earnings and sales generation. JD.com’s P/E, P/S and EV/EBITDA ratios all trump industry and Alibaba values, implying a much better bang for the buck. With P/E and P/S ratios of 14.1 and 0.9, compared to industry averages of 57.9 and 3.9, respectively, investors are paying much less for sales and net income. Alibaba’s P/E and P/S ratios are 24.9 and 5.2. JD.com is also expected to outgrow its rival next year with a projected sales growth rate of 22.4% for 2022, outpacing both the industry average growth rate of 18.8% and Alibaba’s growth rate of 20.8% for 2022.

Aside from normal competition, governments and regulatory agencies also pose a threat to Chinese technology companies. Although the Chinese technology sector, including JD, has seen some volatility over the past few months, primarily due to Chinese government crackdowns and threats of delistings from United States exchanges, fears have been vastly overstated. Howard Wang, head of Greater China equities at JPMorgan Asset Management, commented in May 2021 that “declines in Chinese tech shares — due to the regulatory risks or investors rotating out of growth stocks — appear overdone and have resulted in pretty decent value in some Chinese tech stocks.”

JD is currently up 23.8% over the past year. With shares down by 44.9% from their all-time high in mid-February 2021, there is no better time to buy than now. The company’s stock price is charted below alongside a 50-day moving average to better display change.

Chart provided by Stock Rover.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $96.40, 28.7% higher than its latest closing price of $74.90. With analysts projecting a 27.8% growth in sales for 2021, JD received a “Strong Buy” recommendation from Stock Rover and a place among our three best China stocks to buy now.

3 Best China Stocks to Buy Now: #2

Bilibili (NASDAQ:BILI)

Bilibili (NASDAQ:BILI), founded in January 2010 and headquartered in Shanghai, China, is an online entertainment services company specializing in the development and marketing of anime, comics and games (ACG). The company, which currently claims an $85.4 billion market cap and is also known as B Site in China, runs a video-sharing platform that includes videos, live streams and games covering a wide range of genres. Bilibili also generates revenue from e-commerce and online advertising alongside its ACG content.

The COVID-19 pandemic has brought a surge in demand for online entertainment, allowing the company to post a record-breaking 76.0% jump in revenue over the trailing 12 months. However, Bilibili is not a one-year phenomenon. The company has sustained industry-leading growth rates since its initial public offering (IPO) in March 2018. It enjoys a compound annual growth rate (CAGR) of 67.1% in sales and a 639.6% return rate over the past three years.

Its growth primarily has been driven by its ability to attract new customers, with the platform reaching an average of 223.5 million monthly active users in Q1 2021, a 30% increase from Q1 2020. With 86% of its users under 35, Bilbili has also been able to tap into its unique consumer base to outcompete rivals for advertising revenue. CFO Xin Fan said in late 2020 that “advertisers across different industries are turning to Bilibili to tap into the coveted young demographic.”

While other major Chinese internet companies, such as search engine Baidu, are experiencing a decline in advertising revenue, Bilibili saw advertising revenue climb by 125.5% in 2020. The company has positioned itself to profit heavily from digital advertising growth in China that is expected to skyrocket by 43.5% over the next three years to more than $150 billion in 2024.

Bilibili’s stock has climbed by 172.4% over the past 12 months and 41.8% year-to-date (YTD) on the back of multiple earnings beats. Similar to JD.com and most other Chinese stocks listed on United States exchanges, BILI has experienced a share price drop since March 2021 amid regulatory concerns from the Securities and Exchange Commission. However, as JPMorgan’s Howard Wang noted, regulation fears have been overblown and have created a value market for Chinese stocks.

BILI’s one-year returns are charted below with a 50-day moving average line.

Chart provided by Stock Rover.

What sets Bilibili apart compared to the other stocks on this list of the three best China stocks to buy now is that the company has been unable to generate a profit so far, mainly due to its high marketing and research and development costs. However, with more than $4.2 billion in cash on the balance sheet and prominent backers such as Alibaba and Tencent, the company is unlikely to falter anytime soon. Furthermore, with China’s over-the-top (OTT) video and video games market projected to increase from $38.5 billion in 2020 to $54.6 billion in 2024, Bilibili is well-positioned to see its share price rise significantly in the future. The company is forecast to continue its strong growth, with analysts predicting a 61.4% hike in revenue for 2021 and a 43.9% growth in 2022.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $152.00, 25.0% higher than its latest closing price of $121.59, earning BILI a “Strong Buy” recommendation from Stock Rover and a place among our three best China stocks to buy now.

3 Best China Stocks to Buy Now: #1

360 DigiTech Inc (NASDAQ:QFIN)

360 DigiTech Inc. (NASDAQ:QFIN), founded in July 2016 and formerly known as 360 Finance Inc., operates an online consumer finance platform, 360 Jietiao, connecting lenders and other institutions to traditionally underserved borrowers. The platform, headquartered in Shanghai, China, acts as a middleman between the two parties in exchange for a fee. The company also offers risk management services such as debt collection, loan insurance and credit assessment services.

360 DigiTech employs a team of artificial intelligence scientists and engineers to program its platform to process client transactions more efficiently than its competitors. Since its founding less than five years ago and its IPO in December 2018, the company has built a client base of more than 32 million concurrent customers, earned a market capitalization of $6.6 billion and opened partnerships with major corporations such as KFC and McDonalds. 360 DigiTech plans to engage in future relationships with JD.com and communication giants China Telecom and China Unicom.

QFIN has seen its revenue soar by 137.3% during the past two years, including a 50.0% increase over the trailing 12 months despite the COVID-19 pandemic. The company also has posted its best quarterly earnings, with earnings per share surging 589.5% from Q1 2020 to Q1 2021. However, 360 DigiTech likely has only begun to tap into its full potential. With the current addressable clientele for the company estimated to stand at approximately 160 million potential users and annual consumer spending in China expected to double in the next 10 years, the company’s results are projected to increase even further. Analysts currently are predicting a 31.9% growth in total revenue for 2021 and $1.1 billion in net income by 2023. The company’s earnings for the fiscal year 2020 were $544 million.

As a result, QFIN stock has soared by 299.7% over the past year and by 267.5% so far this year. This change, as well as a 50-day moving average line, are charted below.

Chart provided by Stock Rover.

Despite QFIN’s run over the past few months, there are still signs that the stock has room to grow considerably. The stock’s trailing 12 months P/E ratio of 9.3 is well below the industry average of 30.6. With an even lower forward 12 months P/E of 7.4, 360 DigiTech is still very much undervalued. For comparison, LendingTree (NASDAQ:TREE) trades at a forward P/E of 46.4 while American Express (NYSE:AXP) stands at 18.4.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $47.00, 9.5% higher than its latest closing price of $42.92, earning QFIN a “Strong Buy” recommendation from Stock Rover and a place among our three best China stocks to buy now.

3 Best China Stocks to Buy Now, If Government Regulators Do Not Interfere with E-Commerce

The biggest wild card that could affect the three best China stocks to buy now may be government meddling. For example, Jack Ma, arguably China’s best-known business executive, dropped from public view for about eight months and, by conservative estimates, his holdings in  Ant Group Co. fell some $70 billion during that time.

That’s the optimistic view on how Ma’s stock plummeted in value since the outspoken billionaire publicly pushed back against Beijing, causing Chinese authorities to quash Ant’s plans for an initial public offering. Ant is the financial-technology giant Ma spun out of Alibaba Group Holding Ltd. Since then, Ma has been feeling pressure from China’s President Xi Jinping and his economic right-hand man, Liu He.

The three best China stocks to buy now offer investors ways to gain exposure to one of the world’s fastest-growing economies.

Capison Pang is an editorial intern who writes for www.stockinvestor.com and www.dividendinvestor.com.

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