While analysts are wondering whether volatility and widespread selling are behind us, I would like to explain why I am preparing to re-examine the positive long-term outlook for three Chinese stocks: Weibo (NASDAQ:WB) JD.com (NASDAQ:JD) and Ctrip.com (NASDAQ:CTRP).
This is probably what has been underestimated for 12 months since the US-China trade wars have created considerable uncertainty for global stock markets. As a result, most Chinese stocks were under pressure in 2018 and are now much cheaper than they were a year ago.
However, despite the negative sentiment on these stocks, one thing remains true: The shares of Weibo, JD.com and Ctrip.com, as well as many ADRs (Chinese American Depositary Receipts) listed on US stock exchanges investors the opportunity consumption economy. They were all investors' darlings and were among the best values in the market until the war of words intensified, which led to the start of various tariffs between China and the United States in 2018.
Adding salt to the plague, the International Monetary Fund (IMF) recently warned that China, the world's second-largest economy, was slowing down considerably.
Even then, the broad economic implications of its policy challenges and potential cooling in China should not stand in the way of a sound and long-term investment strategy.
The coming weeks could bring more volatility in WB, JD and CTRP shares. And I do not expect to see a major change of sentiment towards Chinese equities. However, even if short-term investors should expect daily fluctuations in the prices of these Chinese stocks, with each company recording results in the next few days, these could see any further drop in prices as an opportunity to long term.
With this in mind, here is a more in-depth analysis of why you should consider buying these three Chinese stocks.
Weibo, a social media company with a popular microblogging website, is expected to release its results on February 12.
WB, who was separated from Sina Corp (NASDAQ:SINA) in 2014, opened with an IPO of $ 17 in April 2014. Ali Baba (NYSE:Baba) owns 32% of Weibo and is the second largest shareholder after WB's parent company, SINA (which holds approximately 46%).
Celebrity Chinese Internet (better known as "Wanghong") Weibo accounts and the rich multimedia features of the website help to make WB a popular and somewhat indispensable social media company in China. In addition, the World Bank's recent investments in live video broadcasting and financial technology have already begun to contribute to the bottom line.
The company's revenues come from two main segments:
- Digital advertising (nearly 80% of revenues)
- Value-added services (just over 20% of revenues)
As a leading social media company, Weibo embodies the passion of Chinese consumers for social networks. As a result, in addition to Alibaba's and Sina's advertising revenues, it increased its advertising revenues from third parties, primarily because it was the preferred website for celebrity accounts.
Weibo is still a fast-growing company, and I suppose the profit report will show that its revenue growth is still above 50%. This revenue growth is reflected in the company's net income, improving earnings per share. Its daily active users (DAU) exceed 200 million and are growing, which contributes to its revenues.
In addition, WB has a rapid ratio of 4.1, demonstrating its ability to cover short-term liquidity needs. As a result, the group would be in a strong position to withstand the headwinds of the economic downturn.
Although many analysts have expressed concerns about China's growth, the country's economic fundamentals have improved considerably in the last decade; the Internet population is still booming and money continues to pour money into Chinese companies operating in this space, factors that contribute to the long-term sustainability of the Bank's stock World.
Yet, despite this long-term strength, the World Bank's stock has had a difficult time in recent months. And this despite its dynamic and proactive management, which successfully diversifies Weibo's advertising, broadens its social influence, especially among Chinese celebrities, and increases its monetization.
Over the past year, World Bank stocks have fallen by almost 46% and the 52-week price range has been set at $ 51.15 (January 24, 2019) – $ 142.12 ( February 15, 2018).
After the tough reaction of investors to the uncertainty surrounding the threat of trade war in 2018, the Weibo stock suffered from a damaging technical picture. His long-term technical picture still seems rather weak and suggests the possibility of a more agitated action, ranging from 50 to 65 dollars.
When the company reports its results on February 12, investors will be extremely attentive to the details of the company's quarterly results, as well as to all indications regarding the health of the Chinese economy. Option markets provide an approximate move after the 12% two-way earnings of World Bank equities.
Any disappointment in the income statement could quickly return the shares below $ 60.
Weibo's actions have a solid history in a country fascinated by social media. They remain a fundamental element of long-term growth and remain one of the best stocks to invest in China. However, in the short term, the World Bank's share price may remain low, and investors should consider this in their investment decisions.
JD.com, the largest Chinese online retailer based in Beijing, is expected to release its results on March 1st.
In addition to e-commerce activities online, the group also has hundreds of warehouses and thousands of delivery stations as well as fresh food stores across China.
JD's shares have been in a downtrend for more than a year, with a 52-week price range of $ 19.21 (Nov. 13, 2018) – $ 549 (Feb. 26, 2018). The downward trend occurred in the midst of a series of company-specific and global macro events.
In June 2018, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) Google has announced that it will invest $ 550 million in JD.com. The two companies said the combined synergies would enable them to collaborate in various areas related to e-commerce and technology. Under these agreements, Google received "27,106,948 newly issued JD.com Class A Common Shares" at a price equal to "US $ 40.58 per US Deposit Share". The cooperation between the two companies will probably be beneficial to them in the years to come. For now, the JD action has not brought any benefit.
On July 6, tariffs of $ 34 billion on Chinese products came into effect and the sale of Chinese shares began. In August, JD.com's second-quarter results were mixed, preventing investors from expecting the downward trend to end.
The month of September was also difficult for JD Stock because at the end of August 2018, its founder and CEO, Richard Li, who holds more than 85% of the voting rights of JD.com, was arrested in the United States as a result of allegations of sexual conduct. The disturbing titles caused a new sale of JD shares.
Sales intensified following the November 18 earnings report, after which equities reached an all-time low since June 2016.
In summary, over the past year, the JD stock has dropped more than 43% and its long term technical chart is not yet stabilized. Between the time it publishes its results on March 1st, JD's actions may have a volatile reaction.
JD.com is in fierce competition with Alibaba in the vast Chinese e-commerce market. When BABA announced its quarterly results on January 30th, the stock was up 7% during the day. As a result, we would expect a similar positive reaction from JD.com action if investors appreciate what they hear in the earnings report.
Otherwise, equities could easily decline to test the November low of $ 19.21, the November low, before the stock price is a solid base.
Over the next few weeks, the JD stock swap may be unstable, with days going up and down. and any short-term hike is likely to encounter resistance between levels of $ 25 to $ 30.
However, I think that JD.com remains one of the best stocks China has to offer and that it could easily find its place in investors' portfolios … if they are in the long run. In the next two years, I think the JD stock will easily reach the level below $ 40, which is the price paid by Google for the shares in 2018.
Ctrip.com, a travel services provider, is expected to release its results on March 13.
The travel group has long been beating profit estimates and publishing healthy financial figures in all areas. If the Chinese economy actually experiences considerable headwinds, the next earnings report could, however, indicate a slowdown in growth in the near term, which could be followed by a drop in the price of CTRP shares.
Currently, CTRP's revenues come from four main segments:
- Booking of accommodation
- Transport ticket office
- Packaged tours
- Business trip
In about a month, when the CTRP reports its results, I would not be particularly surprised by the concern about future forecasts for the business travel segment. A slowdown in the Chinese economy would likely result in lower business demand, lower margins and slower growth in Ctrip inventory revenue.
On the other hand, the Lunar New Year celebrations in February 2019 should have boosted the demand for organized tours as well as the personalized travel arrangements of the Chinese middle class, where Ctrip.com is at the center of its concerns.
I also expect the results report to show that management is pursuing different sources of revenue and is seeking to strengthen its organic growth by addressing its young clientele, primarily under the age of 35.
As China urbanizes more and more, young Chinese citizens are also starting to spend more money on domestic and international travel, a trend that Ctrip is well placed to take advantage of.
Over the past year, the stock of CTRP has fallen by almost 25% and the 52-week price range has been $ 25 (November 13, 2018) to $ 51.91 (June 15, 2018). For investors who pay close attention to short-term technical charts, the base is currently between $ 25 and $ 35, a level that is now used as a support zone. In addition, Ctrip's technical momentum indicators, describing the rate at which prices are changing over a given period, are currently in overbought territory. Although these indicators may remain over-bought long enough, short-term profit-taking is probably imminent.
The current short-term overbought chart follows several months of lower CTRP stock prices, which resulted in a long-term adverse technical picture. As a result, the stock of CTRP will have to stabilize and rebuild before a new long-term sustainable impulse occurs.
When the company reports its results on March 13, any disappointment about Ctrip's results or future prospects could quickly send the shares below $ 30. Thus, the share price of CTRP could present a short-term weakness that potential investors should anticipate.
Nevertheless, as travel demand in China increases due to demographic change, Ctrip will be in a strong position to capitalize on its current market dominance. From here two to three years, investors who buy Ctrip will probably be well rewarded. As such, it is a remarkable choice among the shares to buy for those who focus on China.
At the time of writing this article, Tezcan Gecgil did not hold any positions on any of the above titles.