3 Top Chinese Stocks to Watch in February

China's stock market meltdown in 2018 could be spelling opportunity.

Nicholas Rossolillo
Nicholas Rossolillo, Chuck Saletta, and Daniel Miller
Feb 20, 2019 at 12:59PM
Technology and Telecom

What happens when a trade war and slowing economic growth meet? A stock market mini-crash. Many Chinese stocks had a terrible 2018 for just those reasons. The tariff back-and-forth between Washington, D.C., and Beijing slowed demand for goods from the world's most populous country, and the International Monetary Fund's downgrade of its Chinese 2019 economic growth forecast to 6.2% from 6.4% didn't help, either.  

Nevertheless, China is still growing, and it would appear that a truce with the U.S. is coming. Stocks of China-based companies have been rallying as a result, but many are still down double-digits from a year ago. Three worth watching right now are Tencent Holdings (NASDAQOTH:TCEHY), Baidu (NASDAQ:BIDU), and NIO (NYSE:NIO).  

Check out the latest earnings call transcripts for companies we cover.

Chinese video games are coming back, but it doesn't matter anymore

Nicholas Rossolillo (Tencent Holdings): Tencent is the video game and social media powerhouse in China. The technology conglomerate is coming off a year in which investors fretted over just about everything: trade wars, a slowing Chinese economy, a ban on new video game approvals in China, and elevated investment spending that weighed on Tencent's profit margins. As a result, shares are down 16% from their price at the start of 2018.

Shares have been rallying since the beginning of the year, though, and for good reason. China's regulators have lifted the freeze on game applications, paving the way for what used to be Tencent's bread-and-butter segment to return to growth later this year. That's good news for shareholders, but it matters less than some may think. That's because of the company's investment efforts, which have been moving at breakneck speed.

Much of that spending has been around WeChat, Tencent's one-stop app for social media, shopping, digital payments, and entertainment -- and also China's largest social platform. The company has been focusing on cloud computing as a key strategic area, and making investments in start-ups in other Asian markets such as India. The result? During the third quarter of 2018, online advertising revenue increased 47%, while revenue from the company's "other" categories soared 69%.

Those two segments should be more than enough to keep Tencent's technology empire in growth mode. With the business still headed north but shares down year over year, February is a good time to keep an eye on this Chinese stock ahead of the company's full-year 2018 report, due out at the beginning of March.

Person holding a smartphone pushing a red order button on the screen.

Image source: Getty Images.

Can you profit from lowered expectations?

Chuck Saletta (Baidu): As you may have heard, the United States' trade war with China is taking a toll on many companies with a large Chinese presence. With 2019 forecasts for Chinese growth lower than last year's targets, many stocks of companies that depend heavily on China are well off their highs. Just because their shares are down, however, doesn't mean their businesses are permanently damaged. Chinese search giant Baidu, for instance, has seen its share price fall enough that it's actually starting to look like a reasonable value for investors looking to buy a stake in a proven business.

At a recent price of $169.90, Baidu trades at around 16 times its projected earnings. With earnings expected to rise at least slightly over the next few years -- despite the risks from the trade war -- investors who buy at this level would be getting a stake in a proven powerhouse at a decent price. That makes Baidu worth at least looking at right now.

Of course, even with a dominant player like Baidu, there are risks in investing. Most notably, Baidu succeeds in China in large part thanks to its willingness to abide by government censorship and other rules that led other search engines to bow out of China entirely. If the trade war or other factors compel China to liberalize its market, Baidu will likely find itself forced to invest heavily just to keep some semblance of market share. That would certainly put a longer-term damper on its value.

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The future is now

Daniel Miller (NIO): If you're looking for a top Chinese stock to keep an eye on, few are more intriguing than NIO. The company is in the right place at the right time as a leading maker of premium electric vehicles in a country pushing for electrification as a solution to its major pollution problems. 

In fact, solving the pollution problem is one of the Chinese government's top priorities and is the reason regulations make it nearly impossible to get a license plate for a traditional combustion-engine vehicle in China. To get such a license, a car buyer in one of the country's largest cities must enter and win a lottery system with the odds of winning being lower than 1%. If that wasn't improbable enough, once a person wins the said lottery, he or she must pay a fee -- roughly $14,000 in Shanghai, for instance -- to receive the license. Now, compare that scenario to getting a new electric-vehicle license plate, which is free and open to any consumer, and you see the allure of buying electric vehicles in China.

NIO is also learning from other innovative companies such as Tesla. Case in point: NIO developed a battery-switch service, similar to Tesla's, which can replace a battery pack on a vehicle in roughly three minutes. There are only a handful of these stations currently, but they are located on the major highway connecting Beijing, Hong Kong, and Macau, and NIO plans to open up roughly 1,100 stations by 2020. By then the company also plans to have at least 1,200 mobile power-service stations, or electric vans that charge other vehicles, giving them 100 kilometers (about 62 miles) of range after only 10 minutes of charging.

Thanks to China's push for electrified vehicles, NIO is in a fortunate position to benefit as it grows its brand, vehicle sales, and technology. It's absolutely a top Chinese stock to watch not only this month, but in the years to come.