With the major global indices hurting – in many cases hurting badly – throughout the year so far, a recent power consolidation in China was the last thing most investors wanted. Essentially, the prospects of finding upside opportunities narrowed, leaving market participants with few viable alternatives. However, certain Chinese stocks that generally fly under the radar – specifically NTES, ZTO, and VIPS – might offer contrarians a lifeline.
To be fair, the circumstances don’t initially appear positive for China-based enterprises. In recent years, Beijing implemented strict crackdowns on its burgeoning technology sector. With antitrust regulatory authorities eager to exercise their power, major enterprises such as Alibaba (NYSE:BABA) presented too risky of a proposition for most conservative investors.
Another factor to consider centers on recent political developments. As TipRanks reporter Michael Marcus mentioned, Chinese President Xi Jinping secured an unprecedented third term as his nation’s top leader.
“Stuffing his core team with yes-men and publicly humiliating his predecessor Hu Jintao by escorting him out of the Communist Party’s gathering, the market got jittery around concerns the far east giant is pivoting further away from policies which are seen as accommodating to markets, businesses and overall growth,” wrote Marcus.
Therefore, it’s not surprising that many Chinese stocks sold off. For example, BABA is down 42% year-to-date.
Still, China’s economy must keep rolling. While its consumer base may not appreciate how bigheaded enterprises such as Alibaba became, public enterprises that slip beneath the main headlines – but still provide valuable services – may enjoy some upside.
To be sure, it’s a speculative concept. Indeed, all Chinese stocks may face delisting threats. However, if you’re willing to gamble, these are the Chinese stocks to consider.
An internet technology firm, NetEase provides online services centered on content, community, communications, and commerce. Since the start of this year, shares have shed 37% of their value.
However, the underlying quantitative fundamentals should draw interest toward NTES relative to other Chinese stocks. For instance, the company features an undervalued business based on its forward price/earnings ratio of 11x. In contrast, the median forward P/E ratio for the interactive media industry is 15.5x.
On the income statement, NetEase’s three-year revenue growth rate stands at 21.4%, ranked better than 72% of its peers. On the bottom line, the company’s net margin is just under 20%, ranking higher than 82% of the industry.
Finally, NTES features a high-quality business, as reflected by its return on equity of 20% and return on assets of 11.4%. Both metrics rank at least near the industry’s top 20% level.
Is NTES a Good Stock to Buy, According to Analysts?
Turning to Wall Street, NTES stock has a Moderate Buy consensus rating based on four Buys, three Holds, and zero Sell ratings. The average NTES price target is $109.29, implying 74.8% upside potential.
Headquartered in Shanghai, ZTO Express is one of the leading express delivery companies in China in terms of parcel volume, with a 20.4% market share in 2020, according to its website. Since the beginning of this year, shares have shed more than 37% of their value.
Nevertheless, ZTO might represent an intriguing undervalued name compared to other high-profile Chinese stocks. For instance, the company’s enterprise-value-to-free-cash-flow ratio is 8.7x. However, the median level for the transportation industry is 12.5x.
As well, ZTO enjoys strong income-statement-related performance metrics. Its three-year revenue growth rate stands at 19.7%, ranked higher than 87% of the industry. Also, its book growth rate during the same period is 14.3%, better than 81% of its peers.
On the bottom line, ZTO’s net margin is just under 17%, better than almost 78% of its sector rivals. To top it off, the company features a strong balance sheet, highlighted by a sector average-beating cash-to-debt ratio of 1.9x.
Is ZTO a Good Stock to Buy, According to Analysts?
Turning to Wall Street, ZTO stock has a Strong Buy consensus rating based on four Buys, zero Holds, and zero Sell ratings. The average ZTO price target is $36.53, implying 90.26% upside potential.
Based in Guangzhou, Vipshop operates the e-commerce website VIP.com, which specializes in online discount sales. At the moment, Vipshop carries a market cap of $4.44 billion. Since the January opener, VIPS shares fell just over 3%, one of the “better” performers among Chinese stocks.
As with the top two Chinese stocks, VIPS presents a very intriguing discount for contrarian investors. Primarily, the company’s forward P/E ratio sits at a lowly 5.7x. In sharp contrast, the median level for the retail cyclical industry is 13.5x. Also, its EV-to-FCF ratio is around 4x, well below the industry median of ~14x.
As well, the company features decent income-statement-related performance metrics. Its three-year revenue growth rate pings at 14.8%, better than almost 79% of its peers. Its net margin is just above 4%, better than 60.5% of the underlying sector.
However, VIPS really comes alive thanks to its balance sheet. The company features a cash-to-debt ratio of 7.9x, soaring above the industry median of 0.5x.
Is VIPS a Good Stock to Buy, According to Analysts?
Turning to Wall Street, VIPS stock has a Moderate Buy consensus rating based on four Buys, six Holds, and zero Sell ratings. The average VIPS price target is $10.41, implying 28.4% upside potential.
Takeaway: Not All Chinese Stocks are Hopeless
Admittedly, the political changes in China, along with the nation’s recent history of crackdowns, don’t bode well for Chinese stocks. Therefore, most investors should probably stay away from the usual suspects like Alibaba. However, not every name in this segment carries the same magnitude of skepticism. For the three tickers mentioned above, a risky but rational case exists regarding their bullish prospects.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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