Chinese stocks have done reasonably well in 2017, with the Shanghai Composite Index up about 10%. Yet that's lower than the 15% return of the S&P 500, and when compared with emerging markets overall and the MSCI EM Index's 25%-plus return, China's stock market has underperformed.
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However, it's been a strong year for stocks of Chinese companies listed in the United States through American depository shares (ADS). High-profile Chinese companies such as Alibaba (NYSE: BABA) and JD.com (NASDAQ: JD) have provided investors year-to-date returns of 106% and 52% as of this writing. Even better, shares of social-media live-streaming platform provider YY (NASDAQ: YY) have blown both out of the water. Below, you'll find what you need to know about this company.
YY has a long runway for growth
Like Alibaba and JD.com, YY benefits from demographic tailwinds. About 731 million Chinese citizens -- more than half of the total population -- had Internet access as of year-end 2016. That figure has rapidly increased, growing by approximately 19% per year since 2005. Not only are more Chinese citizens gaining Internet access, but the ranks of the middle class with disposable income are swelling. The Brookings Institute estimates middle-class consumption in the Middle Kingdom will grow 8.5% per year until 2030.
As the leading live-streaming mobile and PC provider, YY benefits from both increased Internet penetration rates and disposable income from a rising middle class. The company currently has 73 million mobile live streaming monthly active users, a 37% year-over-year increase. Look for user growth to continue from its host of online-dating, music, gaming, and sports sites.
YY had a strong quarter
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YY's run appears to be mostly supported by the financials. In the recently reported third quarter, the company increased net revenue 48% from last year's quarter and net income per ADS by 52%, and the pace of that growth has been quite a bit higher than those who follow the stock closely had anticipated. The company expects strong top-line growth to continue, issuing projections for sales to grow in the fourth quarter by between 36% and 41%.
YY is relatively cheap
Unlike its Chinese peers Alibaba and JD.com, YY is cheaply valued, with shares currently trading at a forward earnings multiple of about 15 times what investors expect YY to earn in 2018. That's attractive in comparison to the S&P 500's corresponding forward multiple of about 20. Meanwhile, Alibaba and JD.com trade at much more expensive valuations of 36 and 42 times forward earnings estimates, respectively.
It's not often you find a company growing its top and bottom lines approximately 50% while trading at multiples lower than the overall market. If you're an investor in Alibaba and JD.com and are looking for more ways to profit from the demographic shift in China, put YY on your due-diligence list before Wall Street catches wind of the name.
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