3 Chinese Stocks Worth Watching For Opposite Trades

Chinese equities outperform after 2 years of underperformance. Regulatory crackdowns on tech companies appear to have abated, and the government is expected to address economic concerns in the fall. Here are 3 Chinese stocks to watch: Alibaba (BABA), NetEase (NTES), and Finvolution (FINV).

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Chinese equities have underperformed US equities at a staggering rate over the past decade. It reminds us that popular, consensus trades are often wrong.

Leading up to and in subsequent years after the Great Recession, many believed that Chinese stocks would continue to outperform U.S. stocks after massively outperforming from the early 1990s to 2007 as the country’s economy modernized and embraced capitalist practices. . This turned out to be false, and despite years of strong GDP growth, these 2007 levels for the Shanghai Stock Exchange have yet to be surpassed.

In recent years, the country’s economy has faced serious challenges, including an over-indebted real estate sector, an aggressive crackdown on technology companies, an inefficient banking system leading to system-wide bad debt, and the fallout from the aggressive zero. -COVID Policy.

Just as the optimistic headlines of 2007 marked a generational peak for the market, investors should remain open to the fact that these bleak headlines could represent a buying opportunity. Here are 3 Chinese stocks that could turn out to be great contrarian trading opportunities:

Finvolution Group (FINV

FINV operates a fintech platform that provides financial services to low-bank consumers. The primary income stream is lending to consumers. At the beginning of the year, it had about 110 million registered users.

Like so many Chinese tech stocks, it has experienced major underperformance due to regulators cracking down on user privacy and forcing tech companies to follow banking rules. Although Finvolution was not directly affected, it did suffer from the uncertainty surrounding the sector.

As a result, the stock has fallen 56% in the past year. Despite a challenging business environment, the company has continued to deliver solid performance, as evidenced by its recent earnings report which showed better-than-expected credit growth and lower costs. Following the report, the share was upgraded by Citigroup.

The stock is also very cheap with a forward P/E of 3 and over 50% of its market cap in cash. It also has a profit margin of 26% and a dividend yield of 4.7%. The stock has outperformed in recent weeks and offers an attractive, low-risk entry into a bearish market environment.

The POWR ratings are also bullish on FINV, rating it as a B, which equates to a buy. In terms of component numbers, it’s not surprising that it got a B for Value, as the multiples are very low. The stock has a sentiment rating of B as 3 out of 3 Wall Street analysts covering the stock give it a buy rating with an average price target of $5.35, which represents 18% upside potential.

NetEase (NTES

NTES develops and operates mobile and PC games, communities and e-commerce platforms. The titles include some of the most popular games in China such as the Westward Journey series, Ghost, and the partnership with Activision Blizzard to provide Chinese versions of Blizzard games to its users.

NTES became a publicly traded company in 2000. Since then, the video game industry has grown from a $20 billion industry to over $200 billion. NTES has walked this wave to become one of the most valuable video game companies in the world. It aims to maintain its position as one of the leading gaming companies in China with new products, including a VR-based, open-world role-playing game that the gaming community has long awaited.

In the past decade, NTES revenue has grown from $1.3 million to $13.7 billion. Next year the company will show a growth of 13%. It also has about 25% of its market cap in cash and the company has steadily increased its dividend.

The POWR ratings are quite constructive on NTES as it has a B rating which equates to a buy. B-rated stocks have posted an average annual performance of 21.1%, which compares favorably with the S&P 500’s annual gain of 8.0%. The stock is also strong in terms of component qualities, including a B for Value and an A for Sentiment. Click here to see NTES’s full POWR ratings.

Alibaba (BABA

BABA is the largest e-commerce company in China. It started as a humble B2B business directory available online with its first major success in helping western companies connect with Chinese manufacturers.

From there, the company has slowly expanded into many different areas such as B2C e-commerce, food delivery, logistics, cloud computing, AI, and more. Until 2020, the company’s rise was uninterrupted and it seemed destined to climb the ranks of the trillion dollar club along with the other ‘FANG’ stocks.

The high point was the ANT IPO at the height of the IPO frenzy for growth and fintech stocks, as it was expected to be one of the largest IPOs in history. This, of course, turned out to be more of a climax than a crowning achievement, as Chinese regulators decided to make an example of the company and see ANT as a financial institution rather than a technology company that essentially made its business less profitable and subject to stricter regulation and capital requirements.

This also marked a period of crackdown on all kinds of business practices as the Chinese government tried to curb the power and influence of these companies. Due to Alibaba’s size and aggression, it has been hit by investigations, fines and new privacy and market power laws.

As a result, Alibaba’s stock price has collapsed, making it one of the cheapest stocks on the market, even if its long-term growth prospects remain intact. The biggest sign of this is the government’s easing of regulatory pressure and even the approval of the Ant IPO in Shanghai and Hong Kong.

In terms of the POWR ratings, BABA has an overall rating of C, which translates to Neutral. The outlook remains cloudy, mainly due to the uncertainty surrounding the Chinese economy regarding the handling of the corona virus and the treatment of tech companies. Click here to learn more about how the POWR Ratings rate BABA.

FINV shares. Year-to-date, FINV is down -3.80%, compared to a -22.73% rise in the benchmark S&P 500 index over the same period.


About the author: Jaimini Desai


Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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