At the end of 2023, the Chinese stock market is exhibiting extreme underperformance. Compared to emerging markets (EMs), they are trading at all-time lows. At the same time, EM equities are trading at 50-year lows against US equities, per Bank of America Global Investment Strategy research.
This is not surprising. Not only did the indebted Evergrande Group property developer file for bankruptcy in the US court, but Country Garden reported similar issues of skipping debt payments. The latter is China’s largest real estate developer, taking in the ripple effects from Evergrande as the second largest.
Because Chinese households’ wealth is heavily tied to real estate, up to 80% of it, the crisis has had a domino effect on China’s entire economy. On December 5th, Moody’s warned about China’s credit rating, lowering the nation’s A1 debt outlook from “stable” to “negative.”
According to Oxford Economics lead analyst Louise Loo, appearing on Squawk Box, it would take at least four years for the real estate crisis in China to unwind:
“However one slices the data, the existing excess supply in the market is likely to take at least another four years to unwind, absent a meaningful pickup in demand,”
In turn, Chinese stocks are getting repriced. The iShares MSCI China ETF (MCHI), tracking the performance of mid-cap and large Chinese companies, is down 17% year-to-date. Nonetheless, some Chinese stocks are defying the repricing trend.
Following the relaxation of China’s capital rules in September, foreign investors should keep an eye on these stocks.
NetEase, Inc
NetEase Inc (NASDAQ:NTES) is a hybrid of Electronic Arts (NASDAQ:EA) and Microsoft Corporation (NASDAQ:MSFT) Azure. While generating revenue from developing and publishing video games, including in-game advertising and subscription fees, NetEase also offers cloud computing services. The latter are employed by China’s digitized economy, from government and educational institutions to businesses.
Year-to-date, NTES appreciated by 38%. In addition to online gaming and cloud computing, NetEase offers music streaming. All three segments continue to grow, having achieved a 12% year-over-year revenue increase as of the latest Q3 earnings call.
Likewise, gross profit margin improved significantly, from 56% in a year-ago quarter to 62%, leaving the company with greater profits to reinvest. NetEase drastically beat earnings per share (EPS) expectations of $1.65 at $13.3 per share.
Available as American depositary shares (NTES), ten analysts pulled by Nasdaq rate NetEase stock as a “strong buy.” The average NTES price target is $135.35 vs the current $105.80. The high estimate is $150, while the low forecast is $117, well above the present price.
VipShop Holdings
Vipshop Holdings Limited (NYSE:VIPS) is the Chinese take on Target, emphasizing discounted popular brands. Because the company directly negotiates with brands for exclusive partnerships, it bypasses costly intermediaries. This leads to the reduction of the cost of goods sold (COGS). Combined with a spread-out logistics network, VipShop is an increasingly popular choice for online shopping of affordable brands.
VipShop reported a 5.3% revenue increase in Q3 earnings, with gross profit reaching 14.9% growth year-over-year. However, the company’s operating expenses increased by 17.6% compared to 16.9% from a year ago’s quarter. This is largely due to greater marketing efforts to push the VipShop brand.
As a mid-cap company valued at $8.5 billion, VIPS is more volatile, achieving 9% year-to-date performance. This year, such ups and downs have been especially present thanks to its stock repurchase program. In March 2023, VipShop put aside $500 million for it in the next two years.
Available as American depositary shares (each representing two ordinary VIPS), 11 analysts pulled by Nasdaq rate VIPS as a “strong buy.” The average VIPS price target is $18.42 vs. the current price of $15.65. The high estimate is $20, while the low forecast is $15.5 per share.
JD.com, Inc
Heavily underperforming even MCHI, at -56% vs. – 16% YTD respectively, JD.com Inc Adr (NASDAQ:JD) is investing in weakness opportunities. As a comprehensive e-commerce platform, JD follows Amazon’s vertically integrated business model. However, JD’s main competitor comes from within China, Alibaba (NYSE:BABA).
All three companies have logistics networks for expedient shipping once online shopping is concluded. Like Amazon’s AWS, JD also provides cloud computing services while investing in robotics, the Internet of Things (IoT), and AI.
For Q3 earnings, JD.com reported a 1.7% year-over-year revenue increase. The company’s free cash flow increased from $5.4 billion to $8 billion for the same period. Due to the disparity between JD’s forward P/E ratio of 9.52 and the e-commerce average of 20.52, JD is heavily discounted.
Based on 15 analyst inputs pulled by Nasdaq, JD stock is a “strong buy.” The average JD price target is $41.44 vs. the current price of $25. The high estimate is $80, while the low forecast is $27, above the present price. JD stock is also available as American depositary shares.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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