I have always maintained the view that in any market or economic condition, there are pockets of value. This can be in different industries, regions or asset classes. Chinese stocks have been under-performers in 2021. Relative to the United States and Europe, Chinese markets have under-performed by 40%.
I believe that there is a strong case for considering exposure to some Chinese stocks at current levels. It’s difficult to predict an exact time for reversal. There can be further price or time correction. However, considering the valuations, it seems very likely that the downside risk is capped and the upside potential is meaningful.
It’s worth noting that regulatory concerns have been a key reason for Chinese stocks remaining depressed. However, it’s the private sector of the economy that’s the dynamic sector or the sector that triggers GDP growth. The government and the private sector will ultimately iron out differences. The discounted valuation therefore presents a good opportunity to accumulate.
Let’s briefly discuss four Chinese stocks that are worth buying at current levels.
Chinese Stocks to Buy: Nio (NIO)
At current levels near $30 a share, Nio stock is probably among the most attractive Chinese stocks. The correction in Nio stock in the last 12 months has been due to profit booking, chip shortage and equity dilution. However, the worst seems to be over and with big growth plans in 2022, the stock is poised for a reversal.
Nio is expected to launch three new models during the year. The delivery of ET7 is expected to begin in March. Further, the ET5 is scheduled for deliveries from September 2022. The new models will ensure that delivery growth remains robust in 2022 and 2023.
It’s also worth noting that Nio is pursuing aggressive international expansion. The company plans to have presence in 25 countries by 2025. The focus is likely to continue to be on China and Europe. Catering to the incremental demand, Nio is already expanding its manufacturing capacity.
From a financial perspective, the company reported cash and equivalents of $7.3 billion as of Q3 2021. With the recent at-the-market offering, the company has a cash buffer of over $9.0 billion. This allows Nio the flexibility to invest in innovation and expand its marketing and sales efforts.
Overall, I would not be surprised if NIO stock doubles from current levels in the next 12-18 months.
Alibaba Group (BABA)
The best time to buy a stock is when fear is the dominant sentiment. This still holds true for Alibaba Group stock. Recently, Warren Buffett’s sidekick, Charlie Munger, boosted his stake in BABA stock. This is an indication of the point that value investors are boosting exposure at current levels.
It’s likely that regulatory headwinds will sustain for the technology sector in China. However, BABA stock seems to have discounted the concerns. As a matter of fact, the stock is already higher by 20% from December 2021 lows.
Alibaba has also been delivering strong numbers. For the September quarter, the company reported total revenue growth of 29%. Growth has remained healthy in the core ecommerce and cloud business. Further, it’s very likely that the cloud business EBITDA margin will expand. This will boost cash flows in the coming quarters.
From a financial perspective, Alibaba reported cash and equivalents of $68.8 billion as of September 2021. With sustained free cash flows, Alibaba has ample financial flexibility to invest in emerging businesses.
Within the e-commerce segment, the following point is worth noting; the company’s China commerce business witnessed 30% year-on-year growth. However, international commerce growth was 34%. I believe that international commerce growth will continue to outpace China’s e-commerce growth. The key reason is Alibaba’s presence in Southeast Asia, which is a another high-growth market.
Overall, BABA stock is likely to consolidate and trend higher in 2022 as regulatory headwinds ease on a relative basis.
Chinese Stocks to Buy: JD.com (JD)
JD.com stock is another China name that has under-performed in the last 12 months. However, on a relative basis, JD stock has outperformed BABA stock. JD.com remain in a high-growth trajectory and the stock looks attractive for exposure at current levels.
For Q3 2021, JD.com reported revenue growth of 26% on a YoY basis. Further, for the first nine months of 2021, the company reported free cash flow of 28.5 billion renminbi ($4.49 billion). Strong cash flows provide flexibility for organic and acquisition driven growth.
One factor that sets JD.com apart from peers is a robust logistics network. The company’s geographic coverage is across all counties and districts in China. Fulfillment capabilities allow the company to aggressively expand into lower tier cities.
Additionally, JD.com is also expanding omni-channel sales presence. In September 2021, the company opened its first JD Mall. These factors will ensure that the company’s core commerce growth remains healthy.
Coming back to the logistics segment, JD Logistics recently launched an air cargo route between East China and London. With expansion in the international transportation network, the company has ambitious growth plans for this segment.
Overall, JD.com has been delivering healthy cash flows and the company is spreading its wings. JD.com already has presence in e-commerce, brick-and-mortar, healthcare, logistics and real estate. JD stock is worth holding in the long-term portfolio.
XPeng stock is another name among Chinese stocks that’s worth holding in the long-term portfolio.
The biggest catalyst for XPEV stock is innovation. In October 2021, XPeng indicated that its ready to launch flying cars in 2024. The cars can also be driven on roads. This is just an example of the vision for the Guangzhou-based maker.
In terms of core business growth, XPeng reported vehicle deliveries of 98,155 vehicles in 2021. On a YoY basis, deliveries increased by 263%. It seems likely that robust delivery growth will sustain through 2022.
XPeng plans to launch its model G9 in Q3 2022. The car will “feature XPeng’s Xpilot semi-autonomous driving system, lidar technology and Nvidia chips.” With XPeng already expanding into Europe, the G9 model is likely to provide the necessary growth traction.
From a financial perspective, XPeng reported cash and equivalents of $7.0 billion as of Q3 2021. Financial flexibility will help in pursuing international expansion and increased investment in research and development. At the same time, as deliveries increase, the company is positioned for sustained growth in vehicle margin.
Overall, XPEV stock looks positioned for a break-out rally in 2022. With multi-year tailwinds for the electric vehicle segment, the stock is worth holding for the long-term.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
This article provides for information only; neither is it intended or construed to be investment advice, nor does it represents the opinion of, counsel from, or recommendations - without a warranty of any kind. Any investment is at your own risk.