The past two years were rough for Chinese stocks, due to the escalating U.S.-China trade war, rising tariffs, and China's economic slowdown. Unpredictable regulatory crackdowns from the Chinese government on growing sectors like video games, fintech, and streaming video exacerbated that pain.
Yet 2020 could be a brighter year for Chinese stocks. The U.S. and China have agreed to sign a "phase one" trade deal to de-escalate tensions, and China recently launched fresh stimulus plans to reinvigorate its sluggish economy.
As those tailwinds accelerate, investors should consider adding a few Chinese stocks to their portfolio. Let's take a closer look at my three favorite plays for the year: China Mobile (CHL), Baidu (BIDU 2.13%), and JD.com (JD 1.82%).
1. China Mobile: A great dividend play
China Mobile is the largest state-backed telco in China. Its number of wireless customers grew 3% annually to 946.5 million wireless customers last November. 4G customers accounted for 79.6% of that total, up from 76.4% a year earlier. Its total number of wireline customers also grew 22% to 187.7 million.
China Mobile's massive customer base generates stable returns, but it faced two major headwinds last year. First, the Chinese government forced China Mobile and its peers to lower their wireless fees and eliminate data roaming charges to boost mobile penetration rates. Second, China Mobile is a major component of Hong Kong's Hang Seng Index, and the region's unrest (including attacks on China Mobile's stores) weighed down the stock.
Analysts expect those issues to reduce the company's full-year earnings by 11% this year. However, its earnings are expected to rebound 2% next year. Over the long term, 5G upgrades will boost its average subscriber revenue again, and the growth of its wireline business will open up fresh bundling opportunities.
China Mobile's stock slipped nearly 20% over the past 12 months. That fear-induced sell-off reduced its multiple to just nine times earnings. The telco sets its semi-annual dividend every year based on a payout ratio of 40%-50%, and its yield has hovered between 3%-5% over the past three years -- which makes it one of the best dividend plays in China.
2. Baidu: Good growth rates for a bargain stock
Baidu, the Chinese tech giant that owns the country's largest search engine, lost about 15% of its value over the past 12 months as its core advertising business withered. The economic slowdown in China, the government crackdowns on growing sectors like fintech services, and competition from nimbler rivals like ByteDance all contributed to that decline, which resulted in two straight quarters of declining ad revenue.
Baidu partly offset those declines with rising revenue at its video streaming unit iQiyi (IQ 1.79%), but that unit's ongoing losses weighed down its earnings. That's why Wall Street expects Baidu's revenue and earnings to decline 1% and 44%, respectively, in 2019.
However, many of those storm clouds could part in 2020. An economic recovery would boost its ad revenue again as Baidu's ongoing expansion into other markets -- including smart speakers, cloud services, artificial intelligence, and connected cars -- gradually pays off. The expansion of its Mini Program ecosystem within Baidu's mobile app, which grew its daily active users 25% annually to 189 million last September, could also tether more services to its core search engine.
That's why analysts expect Baidu's revenue and earnings to rise 11% and 28%, respectively, next year -- decent growth rates for a stock that trades at less than 20 times forward earnings.
3. JD.com: Headwinds in 2019, tailwinds in 2020
JD.com is the largest direct retailer in China and the country's second-largest e-commerce company after Alibaba (BABA -1.13%). JD struggled with concerns about its slowing revenue growth, rising expenses, and a rape charge against its founder and CEO throughout 2018.
However, JD's stock rebounded nearly 70% over the past 12 months as those headwinds dissipated. JD's revenue growth accelerated over the past two quarters, its costs declined as it trimmed its workforce and more companies used its logistics services, and the charges against its CEO were dropped.
JD's annual active customers rose nearly 10% year over year to 334.4 million last quarter, marking its strongest growth in four quarters. 70% of those new customers came from China's lower-tier cities, which offset its slower growth in top-tier cities like Beijing.
JD's logistics business, which weighed down its earnings in previous years, is also stabilizing -- thanks to economies of scale, increasingly automated services (like warehouse robots, drones, and delivery vehicles), and revenue from third-party companies. JD could also reportedly spin off the logistics unit in an IPO later this year to boost its cash flow and operating margins.
Wall Street expects those tailwinds to boost JD's revenue and earnings by 19% and 37%, respectively, next year, which are impressive growth rates for a stock that trades at 27 times forward earnings.