Top 5 Oversold Chinese Stocks to Buy Before They Rebound6 min read
Chinese stocks are oversold due to investors’ risk-aversion. Wall Street analysts remain divided. However, key metrics agree that there are still plenty of excellent Chinese stocks to buy.
Bilibili (BILI): Bilibili’s Millennial and Gen-Z conversion rate is impressive, leaving it with a robust sales pipeline.
HUYA (HUYA): Huya is a dark horse and could enter a multiyear bull run once the market’s reaction to systemic issues finds calm.
Alibaba (BABA): Investors need to remember that Alibaba is the ultimate labor and goods arbitrage facilitator out there. Additionally, the stock’s trading at a mega discount.
JD (JD): JD stock will likely receive support from the economic cycle once China’s lockdowns ease off.
Nio (NIO): Transitory supply-chain issues have caused risk aversion among investors. NIO stock could rebound once the global supply chain normalizes.
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More or less all of the market is a “buy the dip” opportunity at the moment. Investors have sold off in droves because of risk-aversion, which has left many stocks undervalued. I personally like Chinese stocks, and all of the ones listed here are American Depositary Receipts (ADRs). I’m aware that the country’s political situation is unpredictable and that new lockdowns are in place. However, there’s undoubtedly been an overreaction from most stock market participants.
Morgan Stanley’s (NYSE:MS) Lisa Shalett recently opined: “Worries over China’s growth path and monetary policy have recently hampered equity performance, but investor concerns may be overblown.”
I’m in complete agreement with Shalett. As someone who understands investors’ overreaction to the ups and downsides, I can tell you that Chinese equities will surge once investors start acting rationally. So, here are five oversold Chinese stocks to buy.
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Bilibili’s (NASDAQ:BILI) strength is its millennial and Gen-Z conversion rate. Approximately 86% of Bilibili’s user base is aged 35 or below, meaning that the company’s well geared to take advantage of the future big spenders in China. Additionally, data suggests that China’s Gen-Z spends a 99% higher per-capita value on gaming than the rest of the Chinese population, conveying a promising future consumption trendline.
Furthermore, Bilibili recently beat its fourth-quarter earnings estimate by 2 cents per share amid a 37% year-over-year increase in monthly paying users. Moreover, BILI has propped up its research & development spending by 65% during the past financial year, which could lend it the opportunity to deliver superior offerings in a competitive market.
Bilibili stock is undervalued as its normalized price-to-sales (P/S) ratio is trading at a discount worth 75.01%. In addition, BILI stock has traded down by nearly 80% during the past year, leaving it oversold and overlooked. This puts it definitely at the top of my list of Chinese stocks to buy.
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Huya (NYSE:HUYA) was once a Cathie Wood favorite. The stock was downgraded by J.P. Morgan (NYSE:JPM) in March, it’s faced a series of restrictive Chinese live-streaming regulations, and it’s on the Securities Exchange Commission’s (SEC) radar for financial reporting shortfalls. Yet, I still believe this is an underrated stock. For instance, the company’s been able to stroll past previous headwinds and beat its earnings target in seven of its past eight quarters.
Huya recently beat its fourth-quarter earnings estimate by 7 cents per share due to a 7.4% year-over-year increase in monthly active users. To boot, Huya has improved its liquidity with a 4.62% quarterly increase in cash & equivalents, subsequently adding much intrinsic value to its stock.
Lastly, Huya is undervalued, with its stock trading at a 2.32x discount to its sales. HUYA stock looks like a great deal after shedding more than half of its market value since the turn of the year.
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Alibaba (NYSE:BABA) is a sleeping giant. Of course, it’s had its problems to deal with during the past two years, and supply-chain issues remain a concern. However, you ideally want to snap it up before the tables have finally turned; otherwise, you’ll be late to market, and you’ll probably be buying the top.
The company provides its customers with labor arbitrage and absolute price exposure in the goods market that I don’t see disappearing anytime soon. Furthermore, Alibaba’s market position has surrounded BABA with a moat, which will be challenging to displace, even with political headwinds being a constant factor.
Alibaba stock is undervalued as it’s trading at a normalized price-to-sales discount of 80.50% and a normalized price-to-cash flow discount of 58.67%. I’m aware that there are inherent risks here. Yet, I believe that Alibaba is oversold at the $80 per share handle.
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Independent Research firm Hedgeye suggested earlier this month that investors should long JD (NASDAQ:JD) stock. The research provider’s central argument is that Tencent’s (OTCMKTS:TCEHY) recent JD divestment allows the latter to focus on profitability and efficiency rather than having to put synergies on a pedestal. Hedgeye could have a valid point. However, there are some other fundamental points which also need to be considered.
From a top-down vantage point. The Chinese economy is one of the few global economic forces that isn’t faced with a high inflationary environment (2.1%). Thus, it’s inevitable that the nation’s consumer base will enter an upward trough once their pandemic lockdowns get eased, in turn, giving rise to the consumer discretionary industry. JD will most likely benefit from such an event, which could see its stock price reach its fair market value.
JD stock is undervalued, with its enterprise value-to-sales ratio trading at a mere 0.41x. Additionally, the stock has shed more than a third of its value in the past year, providing a lucrative entry point to investors looking for cheap Chinese stocks to buy.
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There was a severe overreaction to Nio (NYSE:NIO) stock when its orders fell by more than 50% in April due to supply-chain issues, which saw the stock lose approximately 30% of its value ever since the announcement. Again, we need to be thinking long-term here. Nio isn’t facing any demand issues as it’s managed to apply product differentiation strategies to reach the pinnacle of the Chinese electric vehicle space. In addition, although supply-chain issues will slow down short-term growth, it’s a transitory issue, meaning that Nio could reach its equilibrium sales growth faster than most think.
I wouldn’t be recommending this stock if it wasn’t severely underrated. However, NIO stock is significantly underpriced, with its price-to-sales ratio trading at a 70.98% discount. Lastly, NIO stock is borderline oversold at a relative strength of 30.56, indicating that it’s most likely bottomed out already.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) 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.
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