China has been playing a major role in the global economy for years, but investing in the giant nation can sometimes be a little worrying. With the trade war brewing between the United States and China, investing in the country requires even more vigilance than usual today.
According to three of our Motley Fool contributors, right now, investors should be keeping close watch on Chinese drug company BeiGene (NASDAQ:BGNE) and technology upstart Baozun (NASDAQ:BZUN) because of the potential for negative trade war impacts. Meanwhile, China National Offshore Oil Company (NYSE:CEO) is worth tracking because of the benefit it might get from a worsening of the trade spat.
Can this Chinese biotech recover?
George Budwell (BeiGene): The Chinese biotech BeiGene is definitely worth keeping close tabs on this month. Although the biotech's shares have gained an astounding 351% since their IPO on the Nasdaq stock exchange a little over three years ago, BeiGene's stock has actually been locked in a worrisome downward trend for the better part of the last 11 months. In fact, BeiGene's shares have now lost a staggering 41% from their three-year highs, thanks to concerns about its tie-up with biotech heavyweight Celgene.
Long story short, Celgene was forced to relinquish the global commercial rights to BeiGene's anti-PD-1 antibody tislelizumab following Celgene's acquisition by Bristol-Myers Squibb earlier this year. Tislelizumab, after all, was slated to be a direct competitor to Bristol's flagship cancer medication, Opdivo. The big deal is that Celgene's involvement almost guaranteed the drug's commercial success, given the biotech's worldwide reach and deep experience with regulatory agencies across the globe. That doesn't mean that BeiGene won't be able to make tislelizumab a smashing commercial success, but the company will have to take on several of the world's largest biopharmas to accomplish this rather daunting feat.
The bright side is that BeiGene did retain the commercial rights to Celgene's Abraxane, Revlimid, and Vidaza in China, and the biotech also has a rich pipeline of high-value anti-cancer medications in mid- to late-stage development. So the company does have a solid base from which to create value for shareholders over the long term. Additionally, BeiGene might end up attracting another big-time partner for tislelizumab -- perhaps one capable of putting the drug on equal footing with Opdivo or Merck's Keytruda from a marketing standpoint. That's not a surefire development in light of the fact that there are numerous PD-1 inhibitors in the clinic at the moment, but it's not out of the realm of possibility, either.
In tariff crosshairs?
That analogy works on some levels, but it isn't perfect. In reality, Baozun is more of a gateway for brands outside of China to get a foothold in the Middle Kingdom. It signs on partners that want help in reaching the growing middle class in China.
Any Chinese-listed company would be affected by the slings and arrows associated with the U.S.'s prolonged discussions on tariffs with China. Baozun is no exception. In fact, I believe the company is acutely affected by such decisions.
There's no telling exactly how tariffs might affect different product categories -- in ways that are favorable or not -- as a result of trade talks. But because Baozun is helping bring in products from outside of China, it may be affected more than others.
Of course, just about any e-commerce company in China will be affected by trade talks. And there's no telling what, if anything, might be revealed during the month of July. But with a market cap of just $3.4 billion -- versus behemoths like Alibaba and JD.com -- I think the stock could swing more on any news. There's no telling which way that swing could be, which is why I think it's worth watching in the month ahead... and beyond.
Energy is vital -- doubly so in a trade spat
Reuben Gregg Brewer (China National Offshore Oil Company): CNOOC is one of the world's largest energy companies, primarily serving its home country of China. Yes, the threat of global warming has even China taking action to reduce carbon emissions. Yes, financial results will ebb and flow with often volatile energy prices. But demand for oil and gas is likely to continue to edge higher as the country's citizens continue to move up the socioeconomic ladder. And that is a key fundamental driver here, which only gets more compelling if the still-brewing trade war means China has to rely even more on its own resources.
Meanwhile, the company has a reasonably solid balance sheet. Long-term debt came in at around 25% of the capital structure at the end of 2018. And while debt to EBITDA is toward the high end of the industry, it isn't out of line with key peers like BP and Total. It isn't as financially strong as, say, ExxonMobil, but there's little reason to expect CNOOC to suddenly fall into bankruptcy anytime soon.
Meanwhile, CNOOC trades at one of the lowest price-to-tangible-book-value ratios within its peer group. And with a 5.8% yield, your investment will generate a handsome income stream. To be fair, the dividend payment is variable, so it will go up and down over time, but all in all, CNOOC is a solid way to generate income while gaining exposure to the Chinese energy market.