Chinese tech stocks have a reputation for being pricey and volatile stocks. But if we look closer at this market, we'll notice that several high-growth plays are still trading at surprisingly low multiples.
This lack of investor enthusiasm can likely be attributed to sparse media coverage, distrust of U.S.-listed Chinese companies after numerous fraudulent reverse-merger plays, and uncertainties about future economic relations between the U.S. and China.
Beijing, China. Image source: Getty Images.
But looking ahead, I believe that two potentially undervalued plays -- YY (YY -1.32%) and Yirendai (YRD -0.41%) -- shouldn't be ignored.
YY
YY Is a Chinese social network, powered by family of apps, which enables users to share photos and stream live videos. Broadcasters stream a wide variety of videos -- ranging from karaoke to tutorial videos -- to earn virtual cash from viewers. That virtual cash, which is split between YY and the broadcasters, can be converted into real money.
YY also streams its content through Huya, a video website which also features Twitch-like gaming streams. Revenue from YY's live streaming business rose 42% annually to 2.22 billion yuan ($319.5 million) last quarter, which accounted for 89% of its top line. YY also owns a portfolio of online games, a gaming news portal site, an online education platform, and other smaller internet properties.
YY's ME Android app. Image source: Google Play.
Revenue from YY's online games, education platform, and paid memberships all fell annually last quarter, but those declines were offset by its live streaming growth -- which boosted its total revenues by 31% to 2.48 billion yuan ($357.8 million). YY is also highly profitable -- its non-GAAP net income rose 42% to 598.6 million yuan ($86.2 million), and its GAAP net income rose 59% to 572.3 million yuan ($82.4 million).
Analysts expect YY's revenue and non-GAAP earnings to respectively rise 28% and 15% this year. Those are pretty solid growth numbers for a stock that trades at just 13 times forward earnings.
Yirendai
Yirendai is basically China's version of LendingClub (LC 3.81%), a peer-to-peer (P2P) lender which directly connects investors to lenders while cutting banks out of the loop. This is a very hot market -- research firm Yingcan estimated that China's P2P industry brokered about 982 billion yuan ($142 billion) in loans in 2015 -- nearly quadruple the amount brokered in 2014.
But it's also a risky industry. Last August, Chinese regulators claimed that about three quarters of all online P2P lenders had problematic loans, and started capping loans from a single site at 200,000 yuan ($29,000) and limiting maximum P2P loans at one million yuan ($145,000) per individual. P2P lenders were also barred from taking public deposits and selling wealth-management products. Yirendai ranks its lenders' credit-worthiness with a letter ranking. Nearly 88% of loans last quarter were made to grade D borrowers -- which is definitely a red flag.
But despite those headwinds and risks, Yirendai's growth remains remarkable. Total revenues rose 102% annually to 6.67 billion yuan ($967 million) last quarter, and its net income surged 356% to 379.8 million yuan ($55 million). Wall Street expects Yirendai's revenue and earnings to respectively rise 54% and 21% this year -- which makes its trailing P/E of 9 look very cheap.
But mind the risks...
YY and Yirendai both look cheap relative to their growth, but investors should be well aware of the risks. YY faces a lot of competition in the Chinese live streaming video market, with many leading social networks -- like Weibo, Tencent's WeChat, and Momo -- all attracting broadcasters and viewers with the same business model.
The CAC (Cyberspace Administration of China) also repeatedly cracked down on these live streaming apps, claiming that they violate "socialist core values" while causing a "negative impact" on younger users.
As for Yirendai, its core business could collapse if its low-grade lenders start defaulting or the government introduces more regulations. Lending Club's collapse over the past two years has also raised tough questions about the sustainability of the P2P lending business model.
Therefore, investors should carefully weigh these risks and rewards before buying either stock. But if YY and Yirendai can address the biggest concerns about their core businesses, their stocks could climb much higher over the next few years.
