China was the only major economy to witness growth last year as it recovered relatively rapidly from the coronavirus pandemic due to its strict and timely precautionary measures and a series of fiscal stimulus packages. The world’s second-largest economy closed 2020 with a 10th consecutive month of expansion in its manufacturing sector. Moreover, the country’s retail sales are expected to grow 4%-5% in 2021, according to Blue Paper. The economy is expected to grow at a faster pace this year. Nomura and China International Capital Corporation expect the country’s GDP to grow 9% in 2021.
Amid trade tensions between the world’s two largest economies (U.S./China), investors have been regaining confidence in Chinese stocks. And the NYSE recently announced that it will no longer delist three Chinese telecom giants, China Telecom, China Mobile, and China Unicom. Investors’ interest in Chinese stocks based on a rosy economic outlook and the recent NYSE decision is reflected in Invesco Golden Dragon China ETF’s (PGJ) 12.9% gains over the past month, as compared to the S&P 500’s 0.7% gains over the same period.
Chinese stocks are expected to get a further boost soon because President-elect Joe Biden is expected to work on bringing back a degree of predictability and a level of normalcy to the U.S. foreign policy, which some observers believe will include a more productive relationship with China.
While some Chinese tech giants, like Alibaba Group Holding Ltd (BABA), have been struggling with strict Chinese regulatory supervision, we think t wise to buy shares of Pinduoduo Inc. (PDD), Baidu, Inc. (BIDU), Vipshop Holdings Limited (VIPS), and GDS Holdings Limited (GDS),which we think have immense growth potential.
Pinduoduo Inc. (PDD)
An e-commerce platform operator, PDD offers Pinduoduo, a mobile e-commerce platform. The company offers a range of products, including apparel, shoes, bags, mother and childcare products, food and beverage, electronic appliances, furniture and household goods, sports and fitness items, and auto accessories. The platform provides a range of online payment options including Weixin Pay, QQ Wallet, Alipay and Apple Pay.
For the third quarter ended September 30, 2020, PDD’s top line increased more than 89% year-over-year to $2.1 billion. While revenues from online marketing services and others increased 91.9% year-over-year to $1.9 billion, average monthly active users increased 50% year-over-year to 643.4 million. Its gross profit increased 92.8% year-over-year to $10.9 billion, and its EPS of $0.05 surpassed the Street estimate by 129.4%.
Analysts expect PDD’s revenue to increase 88.8% for the quarter ended December 31, 2020, 194% for the quarter ending March 31, 2021, and 55.3% in 2021. The company’s EPS is expected to increase 160% for the quarter ended December 31, 2020, 74.4% for the quarter ending March 31, 2021, and 275% in 2021. PDD’s earnings surprise history looks impressive too, with the company missing the consensus estimate in just one of the trailing four quarters.
PDD announced in December that technology has beaten farmers at growing strawberries in the inaugural Smart Agriculture Competition organized by the company, which ended on November 30. The technology teams produced 196% more strawberries by weight on average compared to traditional farmers. The company was named a pioneer in digital agriculture at a major conference in December, with its ‘cloud agriculture’ model recognized as one of the top-10 achievements in digital agriculture in the world. The stock has rallied 357.8% over the past year to close yesterday’s trading session at $187.20.
How does PDD stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
B for Industry Rank
A for Overall POWR Rating
The stock is also ranked #1 of 118 stocks in the China group.
Baidu, Inc. (BIDU)
BIDU is a Chinese language Internet search provider headquartered in Beijing, China. The company offers a Chinese language search platform on its website that enables users to find information online, including webpages, news, images, documents, and multimedia files, through links provided on its website. It also provides a platform for businesses to reach customers, which consists of three segments— search services, transaction services and iQiyi.
The company’s revenue increased 8.4% sequentially to $4.2 billion for the third quarter ended September 30, 2020. In the iQIYI segment, its subscribers hit 104.8 million in the third quarter, and membership revenue increased 7% year-over-year. Its app’s daily active users reached 206 million and its monthly active users reached 544 million in the third quarter. Non-GAAP net income increased 59.3% year-over-year to $1 billion, and its non-GAAP earnings per ADS increased 61.4% year-over-year to $3.
Analysts expect BIDU’s revenue to increase 12.6% for the quarter ended December 31, 2020, 25.1% for the quarter ending March 31, 2021, and 15% in 2021. The company’s EPS is expected to increase 47.6% for the quarter ending March 31, 2021, 12.3% in 2021, and at a rate of 1.4% per annum over the next five years. BIDU has an impressive earnings surprise history, with the company beating consensus EPS estimates in each of the trailing four quarters.
In December, the company announced that it had increased the aggregate value of shares that may be repurchased as part of its 2020 Share Repurchase Program, from $3 billion to $4.5 billion. BIDU announced in November that it has entered a definitive agreement with JOYY Inc. (YY). As part of the agreement, BIDU will acquire YY’s domestic video-based entertainment live streaming business in China. The stock has gained 59.9% over the past year and is currently trading 6% below its 52-week high of $227.58.
BIDU’s POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. Among the China group, it is ranked #3.
Vipshop Holdings Limited (VIPS)
A leading online discount retailer for brands in China, VIPS was founded in 2008. Known for its flash sales model, the company sells limited quantities of discounted branded products online for limited periods of time. It offers diversified product offerings from over 17,000 domestic and international brands, including apparel for women, men and children, fashion goods, cosmetics, home goods and other lifestyle products.
VIPS’ total revenue has increased 18.2% year-over-year to $3.4 billion for the third quarter ended September 30, 2020. Gross Merchandise Value (GMV) increased 21% year-over-year. The number of its active customers increased 36.6% year-over-year to 43.4 million, and total orders increased 35.4% year-over-year to 172.8 million. Its gross profit increased 15.3% year-over-year to $718.9 million.
Analysts expect VIPS’ revenue to increase 28.6% for the quarter ended December 31, 2020, 47.5% for the quarter ending March 31, 2021, and 17% in 2021. The company’s EPS is expected to increase 22.5% for the quarter ended December 31, 2020, 22.9% in 2021, and at a rate of 3% per annum in the next five years. VIPS has an impressive earnings surprise history; the company beat consensus EPS estimates in each of the trailing four quarters.
VIPS held its 2020 annual general meeting of shareholders on December 4. The company appointed Mr. David Cui as its new Chief Financial Officer on October 19, and Mr. Pengjun Lu as the Co-Chief Technology Officer on November 2. Before joining VIPS, Cui was the CFO of Huami Corporation (HMI) from August 2017 to September 2020. Over the past year, the stock rallied 94.3% to close yesterday’s trading session at $28.97, after hitting its all-time high of $29.
It is no surprise that VIPS is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. In the China group, it is ranked #6.
GDS Holdings Limited (GDS)
GDS, which began as an IT service provider in China, is now the largest carrier-neutral data center service provider in China. With an outstanding client base of more than 690 customers that represent the leading companies in China, the company is primarily focused on three verticals — Internet and cloud, financial services, and large enterprises. It also offers colocation and managed services and provides outsourced data center services.
The company’s net revenue has climbed 43% year-over-year to $224.6 million for the third quarter ended September 30, 2020. Its service revenue increased 43.8% year-over-year to $224.2 million. And gross profit increased more than 49% year-over-year to $60.2 million, yielding a gross profit margin of 26.8%. In the data center resources segment, the area of service increased 41.2% year-over-year to 279,618 sqm.
Analysts expect GDS’ revenue to increase 50.5% for the quarter ended December 31, 2020, 56.4% for the quarter ending March 31, 2021, and 41.2% in 2021. The company’s EPS is expected to increase 72.7% for the quarter ending March 31, 2021, and 60.8% in 2021. The stock has gained 83.6% over the past year and is currently trading just 1.9% below its 52-week high of $100.50.
GDS completed its secondary listing on the Hong Kong Stock Exchange on November 2. The shares began trading on the Main Board of the exchange under the stock code ‘9698’. On September 22, the company announced that it has extended a legally-binding offer to acquire 100% of the equity interests in target companies, which own a major data center in the Shunyi district of Beijing (BJ14). BJ14 is one of the largest and highest quality data center assets in the Beijing market.
GDS’ strong fundamentals are reflected in its POWR Ratings, it has a “Strong Buy” rating with an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. Within the China group, it is ranked #7.
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PDD shares were trading at $184.23 per share on Wednesday morning, down $2.97 (-1.59%). Year-to-date, PDD has gained 3.69%, versus a 0.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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