If you're an investor, there are plenty of reasons to be concerned about China in the near term. Economic growth has slowed; trade talks between the U.S. and China have been slow to bear fruit; concerns about the global economy could have ripple effects that play havoc with Chinese stocks.
Yet the long-term prospects remain incredible. Even as China's economic growth slows and the country begins a gradual shift from up-and-comer to global stalwart, its middle class is likely to expand for decades to come, making right now one of the best times to identify top Chinese stocks to buy.
To jump-start your research, some of our top Motley Fool contributors have identified three Chinese stocks they're watching right now: e-commerce brand partner and platform provider Baozun (NASDAQ: BZUN), search giant Baidu (NASDAQ: BIDU), and online retail giant JD.com (NASDAQ: JD). Keep reading to learn why they have already shortlisted these three companies, and why it's time for you to start paying closer attention, too.
This leading Chinese e-commerce brand partner looks very compelling
Jason Hall (Baozun): Shares of Baozun are up more than 300% from their 2015 IPO price -- simply amazing returns for anyone who bought early. However, for investors who took a stake more recently in this small yet increasingly important Chinese e-commerce platform developer and partner, the returns aren't so satisfying. After peaking almost exactly one year ago, Baozun's stock price is down about 34% from the all-time high even after having rallied over the past few months from the late-2018 bottom.
So why should investors be paying attention to Baozun right now? In short, the company is becoming much more than just an e-commerce solutions provider for Chinese merchants, having attracted dozens of the biggest brands from around the world as a key partner in China. And while the company is having to spend heavily to meet the needs of a growing list of clients both big and small, those investments are starting to pay off.
In the first quarter, total revenue was up 40%, but services revenue increased a remarkable 45% and surpassed 50% of sales. On the Q1 earnings call, CFO Robin Lu said that new brand partners were responsible for Baozun's incremental growth in the quarter.
For me, Baozun is buy-worthy today; it generated less than $200 million in revenue last quarter, and with a market cap of $2.6 billion is still a small company. Moreover, the vast majority of its potential is tied to China directly, and that should lessen the long-term risks of a protracted trade war between that country and the U.S.
However, for investors not as familiar with it, now is an excellent time to do your research and learn more about the company. I'm confident many of you will decide it's worth adding to your portfolio, too.
The Google of China is becoming a deep value play
Leo Sun (Baidu): Baidu owns the leading search engine in China, but its stock recently plunged to a multiyear low after it reported its first loss since its IPO. Its revenue rose 15% annually during the quarter, but most of that growth came from its money-losing streaming unit iQiyi (NASDAQ: IQ) instead of its core advertising business, which reported just 3% growth.
Baidu's total operating expenses surged 53% annually, due to higher content acquisition costs for iQiyi, investments in side bets like AI and autonomous driving, and a costly TV ad campaign during Chinese New Year. They all caused its adjusted operating margin to drop from 26% a year ago to just 2%.
Baidu expects its revenue to stay flat year over year during the second quarter (or 1% to 6% after excluding upcoming divestments). That growth is anemic compared with its double-digit sales growth over the past two years.
On the bright side, Baidu's ecosystem continues to grow. Its virtual assistant DuerOS reached an installed base of 275 million devices, representing 279% growth from a year earlier. Daily active users on Baidu's main app rose 28% to 174 million, and its short video app Haokan -- which aims to challenge ByteDance's TikTok in short videos -- reached 22 million daily active users.
I'm not saying that it's the ideal time to buy Baidu, but the stock trades at a historically low valuation of 11 times forward earnings. Therefore, Baidu's stock could quickly rebound if its core advertising business recovers, trade tensions wane, or it monetizes newer investments like smart speakers, driverless cars, and the Baidu app's Mini Programs.
Grab this e-commerce leader before growth accelerates
Steve Symington (JD.com): When JD.com announced its first-quarter 2019 results last month, it was surprising at first to see the Chinese e-commerce leader's earnings more than quadruple from the same year-ago period, even as revenue growth decelerated to a modest 12.5%. Even CEO Richard Liu admitted during the subsequent conference call that the company's bottom line was "a little bit high," crediting technology innovation and economies of scale within its growing retail and logistics operations.
He also insisted JD would "never ever stop investing in its long-term future," an indication that shareholders should expect the company to reinvest those outsized earnings to drive revenue growth and take market share in these early stages of the Chinese e-commerce industry.
That said, investors should know there's risk related to a potential adverse outcome from outstanding civil litigation against Liu related to an alleged sexual assault last year in Minnesota. Liu, for his part, has repeatedly denied the allegations, and prosecutors declined to press criminal charges last year due to "profound evidentiary problems."
Still, the promise of this business is about more than just one man. And with shares down more than 10% on the heels of last month's report largely due to broader macroeconomic and trade tensions in China, JD stock could reward patient investors willing to watch its long-term growth story unfold.
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Jason Hall owns shares of Baozun and iQiyi. Leo Sun owns shares of Baidu and JD.com. Steve Symington owns shares of iQiyi. The Motley Fool owns shares of and recommends Baidu, Baozun, and JD.com. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.