How bad has it gotten for Chinese stocks?
Well, ARK Invest portfolio manager Cathie Wood recently lowered her biggest exchange-traded fund’s (ETF) holdings in Chinese stocks to 0.2% of the portfolio (as of Aug. 9), down from approximately 8% in February. ARK Innovation ETF (NYSE:ARKK) currently has $25.5 billion in assets.
That’s a considerable retreat. And while Wood is adamant that there will be opportunities to invest in Chinese innovators in the future, now does not appear to be the time.
“So is China now uninvestable?” The South China Morning Post reported Wood saying in an Aug. 10 webinar. “Well, I would say in any of the areas that we are looking at right now, the multiple structure, the valuation structure of those companies is down and probably not going to come back very quickly, may even go down more.”
Wood stated that she will keep an open mind about China, but it’s hard to know when that will turn into actual buying. I guess we’ll find out in the weeks, months and quarters to come.
In the meantime, here are 10 Chinese stocks to buy on the dip. To qualify for this selection, these picks had to have market capitalizations of at least $2 billion (with one exception) and be down more than 40% in 2021 or 10% over the past month through Aug. 13.
- Tencent Music Entertainment (NYSE:TME)
- Autohome (NYSE:ATHM)
- Yatsen (NYSE:YSG)
- Miniso (NYSE:MNSO)
- RLX Technology (NYSE:RLX)
- Lufax (NYSE:LU)
- KE Holdings (NYSE:BEKE)
- Full Truck Alliance (NYSE:YMM)
- Didi Global (NYSE:DIDI)
- OneConnect Financial Technology (NYSE:OCFT)
Chinese Stocks to Buy: Tencent Music Entertainment (TME)
Year-to-date (YTD) total return: -49%
One-month total return: -20%
Both TME and Tencent Holdings (OTCMKTS:TCEHY) — which owns 55.1% of the music platform — are holdings in the SPDR S&P China ETF (NYSEARCA:GXC). GXC tracks the performance of the S&P China BMI Index, the investable universe of Chinese stocks available to foreign investors. It has $1.8 billion in net assets.
TME stock is down this year because the Chinese government has cracked down on the company’s abusive business practices to control the online streaming industry. The company controls more than 80% of music streaming rights in the country.
At the heart of the matter were the company’s exclusive deals with artists to control the industry. The State Administration for Market Regulation (SAMR) said it could no longer do so.
Back in June, InvestorPlace contributor Ian Bezek suggested that Tencent Music’s stock got crushed by the Archegos Capital collapse. Now, the government’s crackdown on exclusive rights has exacerbated the correction.
However, the beauty of regulation is that it forces you to be better. Tencent Music currently trades at a reasonable 7.52 times sales and has healthy free cash flow (FCF).
YTD total return: -60%
One-month total return: -35%
It has not been a good year in the markets for China’s leading automotive information platform. Nevertheless, the company’s goal is to capture a large segment of the country’s car-buying population by producing quality content that improves the car-buying experience.
Autohome is held by the Invesco China Technology ETF (NYSEARCA:CQQQ). The stock has a weighting of 1.6% of the ETF’s $1.86 billion in net assets. Specifically, this ETF invests in China-based tech stocks.
In early August, BofA Securities downgraded ATHM stock from “buy” to “underperform” while also cutting its target price by 61%, from $117 to $46. Miranda Zhuang, the analyst covering the stock, believes auto sales will slow in China. In addition, Zhuang sees competition heating up for the company. According to Markets Insider, the analyst stated the following in a note to clients:
Autohome has a solid FCF yield, landing it in value territory. Of course, you could wait to see if this one falls further. But if you hold f0r 24 to 36 months or longer, I don’t think you’ll end up on the wrong end of the stick.
Chinese Stocks to Buy: Yatsen (YSG)
YTD total return: –63%
One-month total return: –28%
I must admit, some of the names I’ve included on this list aren’t top-of-mind stocks. Therefore, I recommend you do more due diligence before buying any of them. That said, when a stock loses 60% of its value in a year, my curiosity gets the best of me.
So, why is YSG stock getting pummeled so badly in 2021?
First, if you’re unfamiliar with the company, it owns several cosmetics and skincare brands, including Perfect Diary, Little Ondine, Abby’s Choice and most recently Galenic, a French skincare brand it acquired in November 2020.
In its most recent quarter ended on Mar. 31, this company reported sales of $220.5 million, 42.7% higher than a year earlier. In addition, this pick of the Chinese stocks grew its direct-to-consumer customers by 11.6% to 9.6 million. Yatsen does, however, lose money. It had a non-GAAP net loss of $35.8 million in the first quarter.
As this company continues to grow, though, it will most certainly deliver both non-GAAP and GAAP profitability. Still, I would not consider buying YSG stock if you can’t afford to lose your entire investment. There is definitely risk in investing in a growing, unprofitable beauty conglomerate.
Estee Lauder (NYSE:EL) is a much safer play.
YTD total return: -48%
One-month total return: -27%
Next up on this list of Chinese stocks is MNSO. I have a Miniso store right near my house in Halifax. I’ve probably walked by it a million times, but have never bothered to go into this retailer of Japanese-inspired, inexpensive lifestyle products. To me, it seems like a smaller version of Ikea without the furniture or kitchens (although I’m sure that’s not how they’d like it described).
Anyway, in Canada alone, this company has 52 stores. It even has one in Yellowknife, the capital of the Northwest Territories.
In May, Miniso announced its Q3 2021 results that included sales of $340.3 million and an operating profit of $24.6 million. The operating profit was almost 200% higher than Q2 2021. On top of this, MNSO also finished the third quarter with 4,587 stores open worldwide, with 2,535 of those locations in China.
Lastly, this company announced its first self-service “blind box” vending machine in late July. The machine allows customers to buy nine versions of its blind box, a collection of small Miniso products. It plans to open five vending machines in Singapore as part of its test run.
FCF positive, MNSO stock currently trades at much less than its October 2020 initial public offering (IPO) price of $24.40.
Chinese Stocks to Buy: RLX Technology (RLX)
YTD total return: N/A
One-month total return: -34%
Crackdowns by the Chinese government continue to hamper stocks in all kinds of industries. RLX Technology, which produces the number one selling e-cigarette brand in China, has not been immune.
This company went public at $12 per share on Jan. 21. RLX stock gained 146% on its first day of trading. But, since then, it’s gone absolutely in the wrong direction — so much so that the class-action-lawsuit ambulance chasers have emerged to fight for the rights of their supposedly spurned investor clients.
When you invest in China, you have to go in with your eyes wide open. It does not operate in the same manner as the United States. And it’s not better or worse, just different.
Back in April, Forbes ran a piece about Kate Wang, the 39-year-old woman who became a billionaire and one of the world’s wealthiest women when RLX stock went public in January. Owning 20% of the company, she’s still worth more than $1.5 billion, but that’s a far cry from the $9.1 billion she was worth when it first went public.
In June, this company reported Q1 2021 results that included sales of $366.1 million, a 48.2% increase from Q4 2020. RLX also reported a non-GAAP net income of $93.2 million.
If you’re an aggressive investor, an entry point below $5 is a good risk-adjusted buy at this point. However, do not consider buying this pick of the Chinese stocks if you are in any way risk-averse.
YTD total return: -45%
One-month total return: -14%
Next up on this list of Chinese stocks is LU stock. When you go to Lufax’s home page, the first thing you see is that it is an affiliate of Ping An Insurance Group (OTCMKTS:PNGAY), China’s second-largest life and property & casualty insurer. Ping An owns almost 39% of Lufax (Page 173). That should give you some comfort.
The second thing I like about this business, though, is that it lends money to small business owners and salaried workers in China. So, as the country’s middle class continues to grow, the demand for lending products will surely grow as well. Plus, Lufax provides wealth-management services for the country’s middle class as well as the affluent.
However, this name’s credit-lending business still accounts for a majority of its revenue. In Q2 2021, lending accounted for most of its 14.82 billion RMB ($2.3 billion) in net income. The company’s on-balance sheet loans also accounted for 27.8% of its total loans in the quarter, up from 15.6% a year earlier.
Although it’s important to keep an eye on that figure, it does also have a positive effect. For example, in Q2, the company’s net interest income almost doubled in the quarter due to the additional loans on its balance sheet. In terms of profits, Lufax also had a net profit margin in the first six months of over 40%. That’s up significantly from the first six months of 2020.
If you don’t mind a little volatility, LU stock is an interesting play on the increasing affluence of China’s middle class.
Chinese Stocks to Buy: KE Holdings (BEKE)
YTD total return: -71%
One-month total return: -52%
Operating as Beike Zhaofang, KE Holdings is often described as China’s version of Zillow (NASDAQ:Z). And, like a lot of Chinese stocks these days, Beike is under regulatory scrutiny from SAMR. Basically, the government agency is investigating whether the company “forces real estate developers to list housing information only on its platforms.”
This was back in May and the company vehemently denied these online rumors. Very little has been said since the reports surfaced. But I think it’s fair to say that almost every large business in China will feel the wrath of SAMR at some point in the coming months.
In the meantime, Beike announced on Jul. 5 that it had acquired Shengdu, a Chinese home renovation service provider, for 8 billion RMB ($1.23 billion). Shengdu has more than 20 years of experience in the home-renovation industry.
Can you say vertical integration?
Backed by Tencent (which owns more than 10% of the company), the business behind BEKE stock grows like weeds and is profitable.
Full Truck Alliance (YMM)
YTD total return: N/A
One-month total return: -30%
This next pick of the Chinese stocks has been a public company for less than two months. Still, Full Truck Alliance (FTA) is already facing lawsuits over rushing to market before satisfying the Cyberspace Administration of China’s (CAC’s) requests for a cybersecurity assessment of risks faced by its Yunmanman and Huochebang apps.
FTA was created in 2017 through the merger of the two leading digital freight platforms in China, the namesakes of the company’s two apps. Huochebang was founded in 2011, while Yunmanman was founded in 2013.
Full Truck Alliance delivered its first quarterly report as a public company on Aug. 10. For the quarter, revenues doubled year-over-year (YOY) to $173.3 million. The company also saw a non-GAAP adjusted income of $15.4 million. Finally, in Q2, FTA’s gross transaction value was $11.5 billion, 58% higher than Q2 2020.
YMM stock went public on Jun. 21 at $19 per share. It gained over 10% on its first day of trading. However, since then, it has managed to fall below $15, significantly less than its IPO price. Right now, to get back to even, YMM stock will have to rise by some 73%.
As I mentioned, though, this name is undergoing a cybersecurity review by the CAC. Until that review is completed, the two freight apps are unable to sign up new users. However, as CEO Hui Zhang said on the Q2 2021 conference call, the apps are still able to operate regularly for existing users.
Ultimately, this company believes that it will be able to return to business as usual. And in the meantime, it’s working with existing users to generate greater activity on its platform.
Of course, it’s possible that YMM stock could continue to fall. However, if you can afford to lose your entire investment, I believe the buying opportunity between $14 and $10 is a good one. Today, the stock trades around the $11 mark.
Chinese Stocks to Buy: Didi Global (DIDI)
YTD total return: N/A
One-month total return: -25%
Didi operates a ride-hailing app in China and 16 other countries and “nearly 4,000 cities, counties and towns.” Furthermore, it has 493 million annual active users and 15 million annual active drivers in the regions where it operates. Its platform executes more than 41 million average daily transactions.
DIDI stock went public on Jun. 29 at $14 per share. Currently, it has lost about 40% from its IPO price. As InvestorPlace’s Ian Bezek recently said, if the Chinese government decides Didi’s actions go against the common good of the country’s entire citizenry, it’s unlikely that the company will be given free rein to grow its business, especially in its home market.
While this one of the Chinese stocks has great potential, it’s going nowhere without the blessing of its government. As my colleague says, until that happens, Didi is a dead-stock walking.
That said, I think you can still do well long-term with DIDI while waiting for this government intervention to get sorted. However, the real money is made before the issue gets resolved. So, as Clint Eastwood would say, “Do you feel lucky, punk?”
OneConnect Financial Technology (OCFT)
YTD total return: -76%
One-month total return: -54%
Last up on this list of Chinese stocks, this technology-as-a-service platform is another affiliate of the Ping An Group. Currently, the insurance conglomerate owns 34.3% of the stock with the option to buy more. Ping An is also a strategic partner, accounting for 52.1% of its revenue.
In fact, between Ping An and Lufax (another Ping An affiliate), the two companies accounted for roughly 63% of OneConnect’s Q2 2021 revenue. On the flip side, third-party sales accounted for 37% of its Q2 revenue. Were that relationship to change, OCFT stock would most certainly take a beating from investors.
So, the risk faced by investors has been laid out. But the reward is that this company is only growing its third-party sales by low single digits each quarter. If it were to boost that into the 20s, there’s no telling where OCFT stock would trade.
This company currently loses money and probably will continue to for some time. That said, as the financial services industry goes on a global basis, so will OneConnect.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.