While many investors will cite risks related to tense U.S.-China relations and the possibility of accounting fraud, Chinese stocks have been some of the better performers in the market lately and deserve a look. After all, China is the world’s second-largest economy and the country seems to be recovering well from the COVID-19 outbreak. There’s also the potential of a Joe Biden presidency come November, which the market would likely view as a good thing for Chinese companies.
While there are undoubtedly added risks of investing in China-based equities, there are also plenty of benefits to consider. They offer a nice opportunity for diversification and exposure to one of the fastest-growing emerging markets in the world. China’s increasingly consumer-led economy is developing fast and there’s a chance the country becomes the world’s largest economy in the coming years. That means some of these stocks could provide double-digit returns if you can accept the additional risk. Let’s take a look at 3 Chinese stocks to consider buying now.
The first Chinese stock on our list is one of the leading e-commerce players in the country. Pinduoduo operates a rapidly growing mobile e-commerce platform that provides its users with affordable merchandise and interactive shopping options. You can pretty much find anything on Pinduoduo, including product categories like household goods, shoes, apparel, food and beverage, fresh produce, electronics, cosmetics, furniture, and much more. While the stock trades at a lofty valuation and the CEO founder recently stepped down, there’s a lot to like about how the company has grown its market share and user base over the years.
We know that e-commerce companies have been on fire this year thanks to the pandemic, and Pinduoduo is a company that is also benefitting. In Q2, the company saw Gross Merchandise Volume in the twelve-months ended June 30, 2020 increase by 79% year-over-year. The company also reported a Q2 revenue increase of 67% along with an increase in average monthly active users of 55% year-over-year to 568.8 million. Although there are risks here related to the recent leadership change and a continued struggle towards profitability, China’s strong economic expansion and widespread adaptation of online shopping make this stock worth a look.
Bilibili is another Chinese stock that investors should check out. It primarily operates as an entertainment company and provides a video platform that is very popular with younger generations in China. Bilibili has four different business segments including mobile gaming, advertising, live broadcasting, and e-commerce. It’s another company that is seeing large growth in its user base and could become the go-to entertainment platform in China at some point.
While Bilibili is still working on monetizing its user base effectively, there are positive signs like improving engagement levels that make the company’s growth prospects intriguing. In the company’s Q2 earnings report, it saw total net revenues increase by 70% year-over-year and average daily active users increase 52% year-over-year to 50.5 million. These numbers are promising signs for a company that is benefitting from trends like increased social media usage, the rise of mobile gaming, and e-commerce.
I’ve mentioned Baidu before in previous articles and continue to remain bullish on the company’s growth prospects going forward. It’s one of the largest internet companies in the world and operates China’s most popular search engine. With companies like Google (NASDAQ:GOOGL) in the crosshairs of the Department of Justice over antitrust concerns, a stock like Baidu offers a nice alternative for investors that want a piece of a massive search engine that generates revenue with auction-based advertising. Baidu is also involved in cloud services, online gaming, and artificial intelligence, which all have a ton of potential going forward.
The company trades at an attractive valuation and has made some strong progress in improving operating margins with various streamlining and cost-cutting activities. Operating margin came in at 22% in Q2, up 12% year-over-year. Baidu also reported a strong rebound in advertising revenue in Q2, as the company saw less ad-spending as a result of the pandemic earlier in the year. There’s also the fact that Baidu has a strong balance sheet and continues to invest heavily in diversifying its revenue streams, which bodes well for the company’s future.
Investing in emerging markets stocks isn’t for everyone, but if you are a more risk-tolerant investor all 3 of these Chinese stocks could be worth a look. Keep an eye on these companies in November as they each will report earnings and as we can learn the results of the U.S. presidential election, which could be a huge catalyst for Chinese stocks.
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