This week, Evergrande Group in China (OTC: EGRN.F) has become a household name for investors – and not in a good way. The Chinese real estate giant sparked a panic in the market on Monday saying that a potential default on its $ 300 billion debt could have repercussions on the global economy.
By midweek, those fears subsided somewhat, but China Evergrande is still a business on the brink. Investors who have received another reminder of the risk of buying Chinese stocks are understandably reluctant to jump head first after Monday’s scare.
China is going through a period of transition and investors are right to be cautious. But there will almost certainly be a lot of winners who come out of this uncertainty. Here’s why these three crazy people support NIO (NYSE: NIO), JD.com (NASDAQ: JD), and Baidu (NASDAQ: BIDU) as long-term survivors as the plot twists continue outside of China.
The “Tesla of China” is in a regulatory sweet spot
Lou whiteman (NIO): Evergrande is our focus today, but it’s been a tough year for Chinese equities in general. First, there was the troubled IPO of Didi Global, which led to discussing which Chinese companies, if any, would be able to register overseas. More recently, there has been a crackdown on sectors including video game companies and education providers.
What they and Evergrande all have in common is an ongoing behind-the-scenes battle between the pro-business side of the Chinese Communist Party, a group that wants to see “China Inc. on a global scale, and the regulatory side more. restrictive of leadership. My bet is that the eventual compromise will involve choosing the winners, and the Chinese companies which both have the potential to expand internationally but which are not heavy on technology or data and have no impact. on the development of Chinese society will be those who will have the most leeway to grow.
Electric vehicle (EV) makers seem to be a natural champion for China, and Nio is probably one of them. Thanks to its charismatic entrepreneurial CEO and lineup of luxury electric vehicles, the company has long been dubbed “the Tesla of China,” and we’re finally starting to see signs that the company is living up to this hype. .
Nio delivered 21,896 vehicles in the second quarter, more than double the total for the second quarter of 2020. Although the chip shortage affecting all automakers threatens to slow the expansion in the near term, Nio’s deal with its partner of manufacturing gives it the capacity to eventually produce up to 240,000 units. annually.
Nio is not yet profitable, and trading at 12 times the sales is not cheap. But the company has $ 7 billion in cash on its balance sheet to weather any downside and continue its expansion into China and international markets starting with Norway this fall. And the company has established itself as a lifestyle brand more than a car manufacturer, offering Nio Clubhouses where customers can hang out and sell a range of designer accessories, clothing and food.
I think Chinese consumers, like their American counterparts, will favor local brands, assuming that these brands can offer a level of quality and reliability that matches what foreign competitors offer. Nio has the brand, and with perks like a lifetime warranty and free roadside assistance, the company is doing what it can to build loyalty.
China has pledged to go electric, and Nio appears to be the top pick to be among the domestic winners. The company has the track record to survive any corporate debt crackdown, and vehicles are a good way for China to expand globally without disclosing valuable domestic data or breaking foreign privacy laws. . Nio appears to be the right company at the right time as China goes through its growing pains.
This e-commerce giant is also a leader in logistics
Rich Duprey (JD.com): E-commerce giant JD.com provides a platform for third-party sellers to sell merchandise rather than selling merchandise itself. The pandemic, however, has accelerated the shift of consumer spending to online merchants; Just like in the United States, e-commerce in China is extremely competitive, fueling investments in the logistics side of the business.
Earlier this year, it sold part of its stake in JD Logistics, its rapidly growing transportation and warehousing business. Revenue jumped 54% in the first half of 2021 compared to the same period last year, and now its property management unit – JD Property – has just acquired a majority stake in China Logistics Property Holding, a freight forwarder Chinese local and a global logistics transport company. .
The need for warehouses, transportation assets and logistics operations is a necessary consequence of the growth of e-commerce, and this is what separates JD.com from its rivals. Ali Baba, for example, relies on third-party suppliers, but only those in which it has an interest.
Efficient order fulfillment is essential. Similar to Amazon.com, JD.com, through its logistics arm, is able to offer next day and same day delivery options. It was in fact able to deliver around 90% of its total orders the same day or the next day in 2020.
Beyond the competitive nature of e-commerce, the other major concern for investors regarding investing in Chinese stocks is Beijing’s crackdown on tech stocks. JD.com, however, claims that one of the main concerns of regulators is the protection of personal data. Sharing such information is a problem for advertising-focused tech stocks, but not for JD, who claims to have always protected personal data.
There will always be friction between capitalist-oriented companies doing business in a communist country, and Beijing has at times proven to be arbitrary with its decrees. As investors weigh the risks associated with putting money on the line in China, JD.com is a solid company helping to meet the needs of the country’s rising middle class consumers.
With its warehouse, transportation and logistics operations, essential components of its e-commerce business, JD.com is uniquely positioned to grow with the Chinese economy.
Tech giant Baidu is a valuable stock
Rich Smith (Baidu): Like most companies in China, Baidu shares have been hit by the bad news from Evergrande. Like most companies in China, Baidu shares have also restored kinda when investors decided the news from Evergrande might not be that bad. And yet, Baidu is yet to come out of the hole.
Baidu, you see, has its own problems. As one of the country’s largest tech conglomerates, it finds itself squarely in the crosshairs of Chinese regulators as they crack down on technology. “Thanks” to the Chinese crackdown, Baidu stock has lost more than half of its market capitalization in the past six to seven months.
But I think it was an overreaction.
Consider: As China’s largest search engine, Baidu has an annual revenue stream of $ 18.3 billion and makes huge profit margins on that revenue – 37.2% in the past 12 months, generating net income of $ 6.8 billion. But after its liquidation, the stock only sold for $ 54.4 billion, or just $ 42 billion net of cash.
By my calculations, investors are valuing Baidu shares at just 6.2 times rolling earnings, which looks awfully cheap for a company that has increased sales and operating profit to over 10%, compound , over the past five years. True, with Baidu continuing to spend heavily ($ 3.3 billion per year) on research and development of new technologies, Baidu’s net income could not grow so quickly – around 6.6% per year. But even that number translates to a price / earnings / growth (PEG) ratio of less than 1.0 on Baidu stock.
It seems to me that investors value Baidu stocks as if they never expected them to rise again despite the likelihood that Baidu’s investments in technologies such as autonomous driving will generally be seen as investments. growth. It seems to me that they value Baidu as if the government crackdown on technology would never end either.
An investment in Baidu now is both a bet on growth and a bet that at some point the Chinese government will stop shooting itself (and its tech industry) in the foot. This is when an investment in Baidu will pay off.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.