Geopolitics and the ongoing economic turmoil hit Chinese stocks hard but Wall Street says not all are poised for disaster
While the world’s second-largest economy is full of economic dynamism, it has also a place full of risks. Before the COVID-19 pandemic, large Chinese technology firms were placed under heavy regulatory scrutiny after the Chinese government decided they were becoming too large and influential. Then came China’s housing bubble, which has not only dampened real estate prices across the country but has also stifled the country’s economic comeback from COVID-19.
These are just a couple of the main reasons Chinese stocks have underperformed their peers. Months, and in some cases, years of underperformance have led to a sharp collapse in Chinese equities valuations, which could provide opportunities for investors who like to think long-term or exploit a crisis.
Wall Street is also quite optimistic about many Chinese stocks. Below are three of them boasting “Strong Buy” ratings.
Say what you want, China’s “firewall” has created advantages for the country in the long run. Instead of relying on American tech companies for a search engine or social media, Chinese tech firms have built similar products and, in turn, have created a durable tech ecosystem. Baidu (NASDAQ:BIDU) is a key part of China’s tech ecosystem. From search to cloud computing services and autonomous driving, Baidu’s “core” business neatly encapsulates all of these services. Moreover, iQIYI has morphed into a very popular streaming platform in China.
Baidu’s recent achievement in autonomous driving is connected to a story with electric vehicle (EV) giant Tesla (NASDAQ:TSLA). CEO Elon Musk took a trip to China in late April, and he came back with tentative government approval for his EV company’s autonomous driving system. Tesla will be rolling out this autonomous system’s functionality with the help of Baidu. More concretely, Tesla’s autonomous driving system will leverage a key product of the Chinese tech giant: Baidu Maps.
Baidu’s Q4 2023 earnings report also contained glimmers of hope. While the company’s advertising revenue has dipped due to turmoil within China’s economy and weak consumer confidence, Baidu’s artificial intelligence (AI) investments are paying off. Baidu reported its cloud business, which now includes AI chatbot Ernie-related services experienced upper-single-digit growth.
Trading at only 10.2x forward earnings and having garnered several “Strong Buy” ratings from Wall Street firms, Baidu just looks like a steal right now.
Source: shutterstock.com/Trygve Finkelsen
China’s household technology giants were in the spotlight for many years prior to the pandemic, but regulatory crackdowns have hampered those sentiments. Nowadays, electric vehicle and battery maker BYD (OTCMKTS:BYDDY) has gained a lot of attention. While BYD did start as a battery maker selling lithium-ion batteries for consumer electronics products, the company transformed into an EV behemoth. Towards the end of 2023, BYD was able to surpass its key rival Tesla in deliveries.
Moreover, in spite of a slowdown in China’s economy, electric vehicles remain a bright spot. In the first quarter of 2024, BYD along with many of its EV peers were able to deliver solid double-digit sales and delivery growth. Unfortunately, the hyper-competitive environment in China’s EV space caused BYD to suffer on revenue growth and margins in Q1. However, BYD’s relatively low valuation coupled with its efforts to expand in Southeast Asia and the Middle East will provide secular tailwinds for years to come.
Currently, BYD boasts a resounding “Strong Buy” rating from several Wall Street firms.
Source: shutterstock.com/Markus Mainka
PDD Holdings (NASDAQ:PDD), which is the owner of e-commerce platforms Pinduoduo and Temu, makes the last entry on this list. The e-commerce platform has made a lot of headlines in recent months as it continues to siphon market share away from Alibaba (NYSE:BABA). Pinduoduo competes directly with Alibaba’s e-commerce division and allows consumers to purchase a variety of consumer products as well as agricultural produce on the platform. Temu is a discount online retailer that allows consumers to buy products and have them directly shipped from China. This platform has a growing presence across the United States, Europe and the Middle East.
PDD’s low-cost services have helped it during a time of an economic slowdown in China. For the holding company’s fourth-quarter earnings report for 2023, revenue more than doubled, increasing 123% on a year-over-year basis. Similarly, net income skyrocketed 143%.
Strength in the company’s geographically end-markets will help drive the company’s growth in the future. Out of the 43 Wall Street analysts covering PDD, 8 have given it a “Strong Buy” rating while 34 have given it a “Buy” rating and one analyst rated PDD as a “Hold.”
On the date of publication, Tyrik Torres 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.
