Trump's Tariffs Can't Sink These 3 Chinese Stocks

MarketsMotley Fool

President Trump recently announced plans to impose $60 billion in tariffs on Chinese goods, and China retaliated with $3 billion in tariffs on US goods. This escalation of tensions stoked fears of a trade war, and sank stocks in both countries.

Some of that fear is justified. The tariffs could hurt US companies, which rely heavily on China, as well as Chinese companies, which export products to the US. However, companies which don't rely heavily on trade between the two countries -- including all-American or all-Chinese companies -- should be insulated from those headwinds.

Continue Reading Below

Today, I'll take a closer look at three high-growth Chinese stocks that remain far from the tariff blast zone -- Baidu (NASDAQ: BIDU), Tencent (NASDAQOTH: TCEHY), and NetEase (NASDAQ: NTES).

Baidu

Baidu controls about 60% of China's online search market. Its expanding ecosystem also includes portal sites, cloud services, mobile payments, and online-to-offline (O2O) services. It also owns iQiyi, one of the top video streaming sites in China, which it will soon spin off via an IPO. It's also expanding into adjacent markets like artificial intelligence, driverless cars, virtual assistants, and Internet of Things (IoT) devices.

Baidu was founded nearly two decades ago, but its growth remains robust. Analysts expect its revenue to rise 17% this year and 20% next year. However, its earnings are expected to drop 7% this year due to the divestment of its non-core businesses (like mobile games and its food delivery services), changes to its accounting methods, and higher operating expenses at iQiyi.

But after Baidu moves past those headwinds and completes its spin-off of iQiyi, analysts expect its earnings to surge 24% next year. Baidu's stock isn't expensive at 25 times forward earnings, and the company enjoys a wide moat as it remains one of the default choices for internet advertising in China.

Tencent

Tencent is the top social networking player in China and the biggest video game publisher in the world. It owns WeChat, the most popular mobile messaging app in China with 989 million monthly active users (MAUs), as well as the older messaging app QQ and the social network Qzone.

Tencent is expanding WeChat into an all-in-one "super app" for O2O services like ride hailing, deliveries, and online purchases. It links all that together with its mobile payment platform WeChat Pay. Its gaming portfolio includes hit titles like League of Legends, Clash of Clans, and Arena of Valor. Tencent also controls the top music streaming platform in China, and its video platform Tencent Video is iQiyi's closest competitor.

Tencent's stock recently stumbled due to several issues. Its fourth quarter earnings, released on March 21, were solid, but some investors were spooked by margin pressures related to the expansion of its ecosystem. South African media company Naspers, one of Tencent's top investors, then sold 2% of its shares to raise capital. Lastly, the tariff headlines exacerbated the sell-off.

Nonetheless, analysts still expect Tencent to grow its sales by 42% this year and 33% next year. Its earnings could also rise 18% this year and another 33% next year. The stock isn't cheap at 37 times forward earnings, but it remains one of the top tech plays in China.

NetEase

Tencent's most resilient rival is NetEase. NetEase's top mobile games -- which include Fantasy Westward Journey and Onmyoji -- nearly match Tencent's Arena of Valor in terms of gross revenues on iOS and Android.

Its music platform, NetEase Cloud Music, is also the second largest music streaming platform in China after Tencent Music (QQ Music, Kugou, and Kuwo), according to research firm DCCI. NetEase is notably the market leader in EDM (electronic dance music), according to iiMedia.

NetEase generates most of its revenues from mobile games, but some of its revenue still comes from older PC games, its e-commerce platform Kaola, and other online services. Wall Street expects the company's revenues to rise 29% this year and another 25% next year.

Its earnings, which were previously weighed down by a transition from higher-margin PC games to lower-margin mobile ones, are still expected to rise 11% this year and 16% next year. Those are impressive growth rates for a stock that trades at just 19 times forward earnings.

The bottom line

Investors should keep up with the recent tariff developments, but they shouldn't panic. Baidu, Tencent, and NetEase's businesses should all flourish regardless of trade conflicts between the US and China, so investors should consider any big dips to be good buying opportunities.

10 stocks we like better than NetEaseWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and NetEase wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of March 5, 2018

Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu, NetEase, and Tencent Holdings. The Motley Fool has a disclosure policy.