The trade war between the United States and China introduces a lot of uncertainty, and it makes investing in Chinese stocks even trickier, but there are still some good options. And if you don't want to invest in Chinese companies directly, you can invest in U.S. companies that benefit from Chinese growth. That way, you still get exposure to the fast-growing country.
Of the three Motley Fool contributors asked to pick a China-related stock to watch this month, only one chose an actual Chinese stock: Baidu (NASDAQ:BIDU). The other two opted for U.S. companies: Cheniere Energy Partners (NYSEMKT:CQP) and Skechers (NYSE:SKX). Here's why these three stocks should be on your radar.
Investing in China's changing energy needs
Tyler Crowe (Cheniere Energy Partners): Cheniere Energy Partners isn't a Chinese stock in the sense that it is a direct investment in China. Instead, it's an investment in one of the largest energy trends in China: increased use of natural gas.
It's no secret that China's energy demands have been growing by leaps and bounds lately. An economy doesn't grow as fast as China's has without considerable increases in energy use. What's equally important, though, is China's shifting energy demand. Coal has been the dominant energy source in the country, but concerns about smog in urban areas are producing a shift to using more natural gas. Between 2016 and 2017, China's imports of liquefied natural gas (LNG) increased 45%.
That voracious demand for LNG has helped Cheniere Energy Partners and its parent Cheniere Energy defy conventional wisdom about the LNG market in 2018. Concerns about oversupply from new LNG export facilities have more or less been wiped out because demand has quickly absorbed that additional supply, even though there were fears of tariffs on direct shipments of LNG from the U.S. to China.
The fundamentals of the LNG market remain strong, which bodes well for Cheniere Energy Partners as it brings its fifth processing train into service. With a current distribution yield of 6.5% -- and a good chance that will increase once these new process trains go live -- Cheniere Energy Partners is an unconventional way to invest in China's growing energy appetite.
Competitive advantages? Oh yeah!
Sean Williams (Baidu): Although I'm not trying to earn any points for originality, investors wanting to dip their toes into China's fast-growing economy might want to consider its leading internet search company, Baidu.
Just how dominant is Baidu in terms of search? According to Statcounter's December 2018 data, Baidu holds more than 70% of all search in China, with Shenma, its next-closest competitor, having just 15.5% of all search market share. As with Alphabet's Google in the U.S., being the go-to search engine comes with competitive perks, such as significant advertising pricing power, and the desire of advertisers to list on Baidu's platform because it'll reach the greatest number of eyeballs.
However, Baidu has moved far beyond just search, as is evidenced by the company's massive investments in artificial intelligence (AI) and machine learning in recent years. Arguably the company's leading AI product is its voice assistant DuerOS. As of mid-2018, DuerOS was in more than 100 appliance brands worldwide, and Baidu had more than 130 total partners for its AI product, according to Forbes. Best of all, the voice assistant has a broader reach than Amazon's Alexa and Apple's Siri, which have predominantly been geared for a North American market. That's not the case with DuerOS, which has global appeal.
If you think about it, China is also the perfect testing ground for AI and machine learning. China has more than double the number of internet users that the U.S. has, giving AI algorithms a broader data set.
As my colleague Keith Noonan describes, Baidu is also working on autonomous-driving technology within China. Though autonomous vehicles aren't yet allowed in China, Baidu is on the cusp of innovation in this space for when the government does allow driverless vehicles on its roads.
What investors get with Baidu is a company that's now valued at just 15 times forward earnings, yet can easily deliver double-digit sales growth for years to come. Even with the uncertainty that surrounds China and its government, that's a pretty fair risk-versus-reward ratio.
Growth in China
Tim Green (Skechers): I'm not a fan of Chinese stocks, especially the high-flying tech stocks. I just don't trust them, and that's a good enough reason for me to avoid them entirely. I think a better way to be exposed to China is to invest in U.S. companies that operate in China. I can't in good faith recommend any Chinese stocks, so instead I'll talk about footwear company Skechers.
Skechers' international business is powering its growth. International wholesale revenue grew by 11.8% in the third quarter, with China growing at a faster 21.9% rate. That growth doesn't come free -- Skechers has been ramping up spending to support those additional sales. During the third quarter, for example, the company increased its general and administrative expenses in China by $7.5 million to support the growth of the business. This spending has knocked down earnings in recent quarters, but it should eventually pay off in the form of stronger earnings growth.
Investing in Skechers isn't particularly expensive. The stock trades for just 13 times the average analyst estimate for 2018 earnings, and that multiple is even lower if you back out the mountain of cash on the company's balance sheet.
The trade war between the U.S. and China could cause Skechers some pain, but the company's balance sheet is strong enough to weather just about any storm. This stock is one to watch.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams has no position in any of the stocks mentioned. Timothy Green owns shares of Skechers. Tyler Crowe owns shares of AAPL. The Motley Fool owns shares of and recommends GOOGL, GOOG, AMZN, AAPL, Baidu, and Skechers. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.