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3 Top Chinese Stocks to Watch in January

By Reuben Gregg Brewer, Keith Speights, and Brian Stoffel – Updated Apr 22, 2019 at 10:43PM

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Here's a trio of Chinese companies that are worth a deep dive in January -- though not all may be buys in the end.

China is a huge news grabber in good times, and the recent trade spat with the United States has only made the country that much more headline-worthy. While the big-picture view that's dominating the news has important trickle-down implications, investors still pick stocks on a one-by-one basis, which is why January is an important month for this trio of top Chinese stocks. Here's a quick look at why you need to be watching Baidu (BIDU -1.88%), China Petroleum & Chemical Corporation (SNP), and (JD -1.15%) right now.

A beaten-down bargain

Keith Speights (Baidu Inc.): Yes, 2018 was a very tough year for Baidu. Shares of the Chinese tech company plunged 38%. But there's a lot to like about the stock.

I'd put Baidu's attractive valuation near the top of the list. The stock trades at only 16 times expected earnings. That's way below the multiple that Baidu has had in the past.

Two Chinese athletes holding a Chinese flag between them.

Image source: Getty Images.

The company also has several long-term growth catalysts. Two of the most significant are Baidu's focus on artificial intelligence (AI) and blockchain. Baidu's AI virtual assistant platform now has an installed base of 100 million devices. The company's AI self-driving car platform is also attracting a lot of attention. Baidu's launch last year of a blockchain-as-a-service platform for providing financial services should boost the company's growth prospects as well. 

But there's another reason I think investors should especially watch Baidu in January and over the next few months. Baidu stock took a beating last year, in large part due to trade tensions between the U.S. and China. The prospects for improvement in trade relations between the two countries now appear to be better than they have been in a long time. 

Baidu could still be really volatile. However, the company's future looks promising. Its stock looks like a bargain. Those two factors combine to make this Chinese tech stock one to keep your eyes on.

Check out the latest Baidu earnings call transcript.

Still a giant, growing market

Reuben Gregg Brewer (China Petroleum & Chemical Corporation): Chinese growth has been slowing, which upsets investors used to rapid expansion. However, slowing doesn't mean contracting. And China remains an important growth market for many industries, notably energy. As the country continues to grow, even if slower than before, increasing energy demand will be the norm. Which is why China Petroleum & Chemical Corporation, or SINOPEC, is interesting.

SINOPEC, focused on the Chinese market, is a diversified oil and natural gas company, with upstream (drilling) and downstream (chemicals and refining) operations. Of course, volatile oil prices often impact the energy concern's top and bottom lines. That helps explain the steep drop in the stock's price in recent months as oil prices fell. But that could be an opportunity for investors interested in China, since the company is still set to benefit from growth in its core market -- even if that growth is slower than in the past.

SNP Chart

SNP data by YCharts.

To put a different spin on that, China is the world's largest car market and SINOPEC is a key fuel supplier. Yes, car sales have fallen recently, which suggests the market is maturing, but that doesn't change the still-huge need for gasoline: Third-quarter gasoline production was up 7% year over year. And that's just one business. For example, chemicals are also seeing increasing demand as the nation industrializes, with the company's volumes advancing 12% year over year in the third quarter.   

The takeaway here is simple. If you are interested in China because of its still relatively strong growth prospects, then you should look at China Petroleum & Chemical Corporation. The oil price decline that fueled the stock's recent drop, meanwhile, simply made the shares that much more interesting.

Does JD have a rudder, or has it lost its way?

Brian Stoffel ( Inc.): When I first bought shares of -- China's second-leading e-commerce player -- there were a lot of things to like: a founder-led company where the CEO had tons of skin in the game; a growing middle class starting to use e-commerce; and, most importantly, complete control over the supply chain, right down to the last-mile delivery.

Since then, however, the picture has changed somewhat. Most alarmingly, founder Richard Liu was arrested and accused of sexual assault in Minnesota -- though those charges were later dropped. Liu has since announced he will no longer focus on the company's core business -- namely, JD Mall -- and instead focus on new ventures. Disappointing business results also prompted the company to reorganize at the end of last year, creating a chaotic picture for investors to make sense of.

That's why I'll be watching closely when the company reports earnings at the end of February. The company's network of fulfillment centers is still second to none in the country, but if demand for bigger-ticket items weakens substantially, there might not be that much leverage to extract from it. I'll be watching to see what kind of growth the company forecasts for 2019 -- and details of how this reorganization will play out in the long run.

Check out the latest earnings call transcript.

Brian Stoffel owns shares of Keith Speights has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu and The Motley Fool has a disclosure policy.

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