Chinese companies, especially in the tech sector, have been struggling for several years already. In 2019, many investors watched the trade war between the US and China. We all remember 2020. The pandemic has thrown everyone into a panic. Subsequent Covid-19 restrictions are underway in China. 2021 was particularly tough for Chinese technology as it related to regulatory pressures, and 2022 has seen many of these risks partially resolved. Most recently, US regulators gained access to accounts of Chinese companies. This means that companies in this country can continue to be listed on US exchanges. Previously, Chinese authorities did not want these companies to be audited by US authorities. It was a problem for an investor who was worried that the Chinese company he invested in, or wanted to invest in, would be delisted from US exchanges by 2024. US exchange.
Chinese companies and the Chinese economy
First, I would like to talk about general news and macroeconomic factors. So, first of all, as I said earlier, Chinese stocks have recently avoided delisting. Last December, the US accounting regulator announced that it had been granted permission to audit the financial statements of US-listed Chinese companies. More than 100 tech companies including Alibaba (BABA), Baidu (BIDU) and JD.com (JD) will be delisted in the US in 2024 if the Listed Companies Accounting Oversight Board fails to make their accounts available faced the risk of becoming (PCAOB) Authority.
Of course, staying listed in the US is important in itself. But the benefits don’t stop there. The fact that accounts of Chinese companies will be scrutinized by US authorities should make US investors feel more comfortable buying shares in Chinese companies. I previously wrote an article about Luckin Coffee (OTCPK:LKNCY). Let me remind you that in the summer of 2020, there was a scandal involving company accounts.In my view, after that incident, US investors became more skeptical about Chinese companies and their reporting and auditing standards. I was. But that lack of trust should change after U.S. auditors finally gain access to accounts of Chinese companies.
But in my view, the good news doesn’t end there. Indeed, it is clear that China needs Internet companies. It was widely discussed that Xi Jinping’s re-election as president could mean more problems for the Chinese economy. Because in President Xi’s speech, he repeatedly stressed the need to stimulate the country’s economy. Deregulation is one of the traditional means of achieving this. Moreover, China’s tech giants make up a sizeable portion of the country’s overall economy. Measuring market capitalization reveals that tech entertainment giant Tencent (OTCPK:TCEHY) is the largest Chinese company by market capitalization. Alibaba is the third largest by market capitalization. So I think there is little incentive on the part of the Chinese authorities to further scrutinize the tech sector. Most recently, it was announced that Chinese regulators had approved a capital expansion plan for Alibaba’s financial affiliate Ant Group.
Also, Covid-19 restrictions have been removed by Chinese authorities. Clearly, this should provide a huge boost not only to the country’s economy, but also to the overall health of the tech sector.
Alibaba, Baidu, JD.com
We would like to highlight some of the biggest Chinese companies that are also popular in the US. Alibaba, Baidu and JD.com.
Alibaba is primarily an e-commerce company. BABA operates in four business units: Core Commerce, Cloud Computing, Digital Media, Innovation Initiatives and Others. This means that BABA sells products online, deals with buyers and sellers, engages in cloud technology and is also present in the entertainment sector.
I wrote a detailed article explaining BABA’s problems, the fact that it faced regulatory pressure, and the fact that its earnings per share declined as investment values fell. Not to mention the numerous lockdowns in China that also negatively impacted performance.
This can be seen from the figure below. BABA’s EPS will underperform the industry in 2022 due to declining asset values.
But there’s reason to think this too will pass, especially given BABA’s stock is undervalued. More on this later.
Baidu Inc. is a Chinese-language internet search provider. The company operates a search engine, but there are two of his segments, the Baidu Core segment and the iQIYI segment. Baidu offers online marketing services, cloud technology, smart driving, and new artificial intelligence initiatives. Meanwhile, iQIYI is an online entertainment service provider.
Similar to BABA, Baidu’s recent performance has been pretty bad. EPS and earnings history confirm this. However, BIDU has a long-term future as it holds a leading position in the Chinese online market. Baidu also has interesting growth opportunities in the robo-taxis space. The company also reported improved results for the third quarter of 2022 and the fourth quarter of 2022, and management seemed confident. China’s gradual reopening and stock price undervaluation should help the company’s share price recover.
JD.com Inc is an e-commerce business. The Company operates in two segments. The JD Retail segment is responsible for online sales and marketing. JD.com primarily specializes in the sale of electronic and consumer electronics products. The new business division provides logistics services.
JD has been facing negative earnings for several years, and its stock price continues to be under pressure.
But JD is an e-commerce giant, and it looks like it has huge growth potential. Its competitive advantages include direct control of inventory and supply his chain. The company’s stock is undervalued, especially given the fact that China is opening up.
You may be reluctant to bet on a single Chinese company. After all, company-specific risk will always exist. But there are other ways to profit from China’s tech growth. First, the funds can be evenly distributed among the largest companies based in China. Then you can choose an ETF. For example, one ETF dedicated to Chinese technology businesses is the iShares MSCI China Multisector Tech ETF (TCHI).
Let me also talk about the evaluation of the three companies.
First, let’s take a look at Alibaba’s price/earnings ratio (P/E) graph. I know it doesn’t suggest that the company’s stock is undervalued in any way.
However, earnings per share are calculated on a GAAP basis. This means that the net income measurement also includes positive or negative returns on invested assets. Alibaba has a number of heavily depreciated investments. As such, the company’s net profit has been very small over the past few years due to market declines.
But this is not the case for free cash flow. Free cash flow is the money left over after a company has paid operating expenses and capital expenditures. As you can see, it does not include stock holdings or other investments. Taking this measure, we can see that Alibaba’s trading is relatively low.
A measure of net asset value (P/B) also suggests that the company is significantly undervalued.
Baidu is currently not great in terms of revenue and P/E. In fact, for a good chunk of 2022, it was in the red, as the chart shows. PER is too high.
Baidu’s stock price and price-to-free cash flow ratio seem to make up for the complexity. It’s hovering near multi-year lows, suggesting it’s undervalued.
BIDU’s P/B ratio is also very modest, currently around 1.4, in the 1-3 range.
Now, JD’s P/E story is also offensive. Because the company has been struggling with low earnings for most of his 2022. Currently, the PER is very high.
JD’s price-to-free cash flow is at multi-year lows, but not as favorable as BIDU or BABA.
JD’s P/B is the same. It remains at its lowest level in several years, but not as low as BIDU or Alibaba.
Overall, BABA’s valuation profile is very strong compared to its two peers. At the same time, it can be said that the three Chinese companies are undervalued.
There are a number of macroeconomic risks, namely the risk of a global recession, which is clearly bearish for all stocks. Then Covid-19 cases could rise in China, forcing local authorities to reintroduce lockdowns and strain the country’s economy. It’s a medium relationship. The trade war appears to be over, but tensions over Taiwan remain. There is also the possibility that relations between the two countries will deteriorate for other reasons. For example, the United States and China clashed over Uyghur human rights and Hong Kong. These are just general macroeconomic threats.
Acquiring individual companies carries many risks in itself. Therefore, you should avoid making large investments in any single company, no matter how bright its future may be. I know it’s obvious, but many investors forget it.
Overall, recent news is very positive for Chinese companies. BABA, JD and BIDU should benefit from the fact that they are unlikely to be delisted from US exchanges. Businesses should also benefit from the end of Covid-19 restrictions and the Chinese authorities’ willingness to stimulate the Chinese economy. In my view, the most important is the risk of recession. Additionally, buying individual companies that have recently gone bankrupt is extremely risky. One way to spread the risk is to buy an index fund or his ETF. This would be a relatively safe bet for the Chinese economy.
Editor’s Note: This article describes one or more securities that are not traded on any major US exchange. Please be aware of the risks associated with these stocks.