There's no denying that the coronavirus outbreak that started in China is horrible. The death toll topped 2,000 earlier this week.
Folks are concerned worldwide, but naturally panic levels are higher in China, where most of the damage is being done. The already weakening Chinese economy is slowing to a crawl, and while supply chain disruptions will be felt worldwide, it's the companies counting on Chinese consumers the most that are taking the hardest hit. This is a challenging time for investors, but some Chinese growth stocks -- Tencent Music (NYSE:TME), Bilibili (NASDAQ:BILI), and Youdao (NYSE:DAO) -- are doing just fine in this environment. Let's see why these companies are bucking the trend.
The country's leading player in streaming music is Tencent Music, commanding a whopping three quarters of the market. Unlike other worldwide peers in this typically low-margin and often profitless niche, Tencent Music runs a lucrative business model with high-margin revenue that includes virtual gifting for its karaoke platform. There's a strong social element to the model. When it reports fourth-quarter results next month, it will wrap up its fourth consecutive year of profitability.
Oppenheimer analyst Jason Helfstein put out a bullish note on Tencent Music last week, arguing that the coronavirus outbreak should benefit certain internet sectors -- including online music, live streaming, and social media -- as folks in China spend more time at home. A couple of analysts are downgrading Tencent Music this week on concerns about regulatory headwinds. It also doesn't help that Tencent Music is expected to lose a master license agreement with one of China's three largest record labels, eating into its sub-licensing revenue. However, with premium subscription revenue outpacing its overall growth, you have to like Tencent Music's chances here.
One of China's hottest stocks lately has been Bilibili, the operator of a leading platform for fans of anime, comics, and gaming content. The stock hit another all-time high of $29 on Tuesday, more than tripling its price from nearly two years ago, when it bottomed out on its first day of trading.
Bilibili's collection of casual games, short-form videos, and strong social underpinnings are just the ticket for today's homebound consumer. It also helps that it has a strong grasp on a young audience that advertisers typically have a hard time reaching, since more than 80% of Bilibili users are members of China's Generation Z (folks born between 1990 and 2009). Like Tencent Music, Bilibili will be reporting fresh financials in a few weeks, when we will get a better read of how it's holding up in this environment, but investors are already voting in favor of the stock, with its 46% year-to-date surge.
Online education is another no-brainer in this environment, and recent IPO Youdao is besting even Bilibili with a 58% pop so far in 2020. The intelligent-learning specialist's fastest growing segment is its K-12 division, where its student base has nearly tripled over the past year (and that was even before the coronavirus outbreak).
A bump in K-12 activity is a given if quarantines widen and physical schools temporarily close down. However, another angle here is from its adult paid enrollments business, which wasn't growing as quickly as its K-12 segment. A lot of adults may take advantage of this lull to brush up on new workforce skills, giving Youdao a second way to thrive through the calamity.
All three of these stocks have gone public over the last two years so it should be noted that investing in IPOs isn't for the risk averse. Folks who prefer not to take chances with their portfolios may also be cautious about investing in Chinese stocks, especially these three volatile internet options. However, they seem to be making the most of a horrible situation in China -- and that matters.