Chinese consumer stocks continue to face a relentless price decline that’s hurting profits. As a result, consumer companies in the MSCI China Index have lost an estimated $157 billion since the end of September.
While that’s scary for those companies’ shareholders, it provides an opportunity for risk-tolerant investors willing to jump under a falling knife in search of outsized returns on the rebound of consumer stocks.
Will it happen in 2024? Asset managers in China believe that deflation will hurt many of these companies. Not everyone is convinced that the Chinese consumer will rebound in 2024. However, for those that do, these three companies, with decent margins, will recover quite nicely.
Tsingtao Brewery (TSGTY)
Tsingtao Brewery (OTCMKTS:TSGTY) is the seventh-largest holding of the Global X MSCI China Consumer Staples ETF (NYSEARCA:CHIS).
The company is China’s oldest brewery, starting in 1903 as a state-owned company. It went public in July 1993. It has a leading position in the Chinese beer market, operating 57 domestic breweries and two associated and joint-investment breweries in 20 provinces, municipalities, and autonomous regions in China.
Tsingtao is its best-known international beer, served in more than 100 countries worldwide. Its revenue in 2022 was 32.2 billion Chinese yuan ($4.48 billion), up 21% from 2018. Its net profit in 2022 was 3.71 billion ($520 million), up 161% from 2018.
Despite its revenue and income growth over the past five years, its shares have gained just 29%, considerably less than the 82% return for the S&P 500. In the past year, its stock dropped 45%, partly due to a scandalous video that got out last October that showed a man peeing into a beer tank at one of its Chinese breweries.
Its stock is oversold.
BYD (BYDDY)
BYD (OTCMKTS:BYDDY) is the fourth-largest holding in the Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIC).
The company had a breakout year in 2023, although you wouldn’t know it from its share price, down 16% over the past year. In Q4 2023, BYD’s battery-electric vehicle (BEV) sales were 526,409, exceeding Tesla’s (NASDAQ:TSLA) and growing its own 22% from the third quarter.
Not only is BYD China’s largest automaker, it’s also the world’s 10th largest by volume. It is currently building a new EV plant in Thailand that will open in the summer, with three others in Brazil, Hungary and Indonesia.
Despite selling significant BYD stock in 2023, Berkshire Hathaway (NYSE:BRK.B) still owns $2.18 billion of its shares, representing an 8.0% interest.
The company entered 2024 with shares short, accounting for 5.5% of its free float on the Hong Kong stock exchange. Detractors feel China’s weak economy and increasing EV domestic competition could continue pushing its share price lower.
Year-to-date, BYDDY is down nearly 8%. Expect a rebound in 2024.
Yum China Holdings (YUMC)
Yum China Holdings (NYSE:YUMC) is the eighth-largest holding of CHIC.
I’ve written about the restaurant operator several times in recent months. CEO Joey Wat held valuable leadership skills that would help the owner of more than 12,600 KFC and Pizza Hut restaurants in China—the remaining 1,400 are franchised—expand its restaurant footprint across the country, reaching 20,000 stores by 2026.
As I said in late December, analysts really like its stock, with 28 analysts out of 31 rating it Overweight or Buy, with a target price of $60.10. Down more than 18% so far in 2024, it’s lost 43% over the past year.
How undervalued is it?
Its trailing 12-month free cash flow of $750 million is 96% of its net income. I would like to see a cash conversion ratio (free cash flow divided by net income) of more than 100%. Close enough. I also want to see cash and marketable securities higher than total debt. As of Q3 2023, it had $3.13 billion in cash and marketable securities compared to $2.44 billion in total debt for a net cash position of $690 million.
Trading at 1.4x sales, it’s cheaper than it’s been since spinning off from Yum Brands (NYSE:YUM) in November 2016.
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.