Chinese stocks have underperformed US stocks over the last decade to a staggering degree. It’s a reminder that popular, consensus trades are often wrong.
Leading up to and in the ensuing years after the Great Recession, many believed that Chinese stocks would continue outperforming US stocks after very strong outperformance from the early 90s to 2007 as the country’s economy modernized and embraced capitalistic practices. This turned out to be false, and these 2007 levels have yet to be exceeded for the Shanghai Stock Exchange despite years of strong GDP growth.
In recent years, the country’s economy has faced serious challenges including an over-indebted real estate sector, an aggressive crackdown on tech companies, an inefficient banking system leading to bad debts across the system, and repercussions from its aggressive zero-COVID policy.
Just like the optimistic headlines of 2007 marked a generational top for the market, investors should keep an open mind that these bleak headlines could mark a buying opportunity. Here are 3 Chinese stocks that could prove to be great contrarian trade opportunities:
Finvolution Group (FINV)
FINV operates a fintech platform that provides financial services to underbanked consumers. Its primary revenue stream is from making loans to consumers. As of the start of the year, it had around 110 million registered users.
Like so many Chinese tech stocks, it’s experienced major underperformance due to regulators cracking down on user privacy and enforcing tech companies to follow banking regulations. Although Finvolution was not directly affected, it did suffer as a result of the uncertainty around the sector.
As a result, the stock is down by 56% over the past year. Despite a tough operating environment, the company has continued to show solid performance as evidenced by its recent earnings report which showed better than expected loan growth and lower costs. Following the report, the stock was upgraded by Citigroup.
The stock is also very cheap with a forward P/E of 3 and more than 50% of its market cap in cash. It also has 26% profit margins and a 4.7% dividend yield. In recent weeks, the stock has been an outperformer and is offering an attractive, low-risk entry in a bearish market environment.
The POWR Ratings are also bullish on FINV and rate it a B which equates to a Buy. In terms of component grades, it’s not surprising that it’s graded a B for Value given that its multiples are very low. The stock has a Sentiment Grade of B as 3 out of 3 Wall Street analysts covering the stock give it a Buy rating with an average price target of $5.35, implying 18% upside.
NTES develops and operates mobile and PC games, communities, and eCommerce platforms. Its titles include some of the most popular games in China such as the Westward Journey series, Ghost, and partnering with Activision Blizzard to deliver Chinese-versions of Blizzard games to its users.
NTES became a public company in 2000. Since then, the video game industry has gone from a $20 billion industry to be worth over $200 billion. NTES has ridden this wave to become one of the most valuable video game companies in the world. It’s looking to maintain its standing as one of the leading gaming companies in China with new products including a VR-based, open-world, role-playing game that is highly anticipated by the gaming community.
Over the last ten years, NTES’s revenue has gone from $1.3 million to $13.7 billion. Next year, the company is exhibited to post 13% growth. It also has about 25% of its market cap in cash, and the company has been steadily growing its dividend.
The POWR Ratings are quite constructive on NTES as it has a B rating which equates to a Buy. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s annual gain of 8.0%. The stock is also strong in terms of component grades including a B for Value and a A for Sentiment. Click here to see NTES’s complete POWR Ratings.
BABA is the largest e-commerce company in China. It started out as a humble B2B business directory that was available online with its first big success in helping Western businesses connect with Chinese manufacturers.
From there, the company has slowly expanded into many different areas such as B2C e-commerce, food delivery, logistics, cloud computing, AI, and more. Until 2020, the company’s rise had been uninterrupted, and it seemed destined to climb the ranks into the trillion dollar club along with the other ‘FANG’ stocks.
The culmination was the ANT IPO at the peak of the IPO frenzy for growth and fintech stocks as it was expected to be one of the largest IPOs in history. Of course, this turned out to be more of a climax rather than a crowning as Chinese regulators decided to make an example of the company and deemed ANT a financial institution rather than a tech company which essentially made its business less profitable and prone to heavier regulation and capital requirements.
This also marked a period of harsh crackdowns on all sorts of business practices as the Chinese government looked to curb the power and influence of these companies. Due to Alibaba’s size and aggression, it was affected by inquiries, penalties, and new laws related to privacy and market power.
As a result, Alibaba’s stock price has collapsed, making it one of the cheapest stocks in the market even if its long-term growth prospects remain intact. The biggest sign of this is the government’s easing back on its regulatory pressure and even approving the Ant IPO in Shanghai and Hong Kong.
In terms of the POWR Ratings, BABA has an overall rating of C, which translates to Neutral. Its outlook remains cloud especially due to the uncertainty around the Chinese economy in regards to its handling of the corinavirus and handling of tech companies. Click here to learn more about how the POWR Ratings assesses BABA.
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REVISED: 2023 Stock Market Outlook (includes top 7 picks)
FINV shares . Year-to-date, FINV has declined -3.80%, versus a -22.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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|Ticker||POWR Rating||Industry Rank||Rank in Industry|
|FINV||Get Rating||Get Rating||Get Rating|
|BABA||Get Rating||Get Rating||Get Rating|
|NTES||Get Rating||Get Rating||Get Rating|