Coronavirus and trade wars and an economic slowdown -- oh my!

China certainly has a long list of sizeable problems plaguing it this month. Depending on which poll you read, economic forecasters are calling for China's gross domestic product growth rate this quarter to be either 4.5% (down from 6% in the fourth quarter of 2019), 2%, or even 0%.  

Ultimately, of course, this novel coronavirus (officially known as COVID-19) will be overcome -- just as SARS was before it, and the bird flu before that. In the meantime, though, how should investors play these turbulent times in China?

Here are three top Chinese stocks that may hold some clues: Alibaba Group (BABA -3.51%), (BIDU -3.17%), and (TCOM -5.19%) -- roughly in the order that you should start paying attention.

Chinese flag superimposed on a wall of stock prices

Image source: Getty Images.

1. Alibaba Group

Chinese e-commerce giant Alibaba reported its fiscal third-quarter 2020 earnings last week -- and not all the news was good.

Sales surged 38% year over year, and pro forma profits were up even more strongly -- 49% compared to last year's third quarter. Cloud services sales -- Alibaba's attempt to continue claiming the title of "China's" by mimicking the success of Amazon Web Services (AWS) -- leaped ahead 62% and now accounts for 7% of Alibaba's annual revenue.

All of which sounds wonderful until you get to the fine print. Alibaba warned that the "black swan event" of coronavirus sweeping across China "is having significant impact on China's economy" and "will present near-term challenges to the development of Alibaba's business across the board."

Although Alibaba ended the calendar year 2019 "on a high note," said CFO Maggie Wu on the company's conference call, the rapid spread of the virus is making it difficult for Alibaba to give any "accurate estimation for the full financial impact" on the company in the current quarter ending in March. All management was able to say is that it's likely to be "negatively impacted."

Those ominous words subtracted about 2% from Alibaba's market capitalization the day the news came out, although the stock has recovered about half those losses since. Whether Alibaba investors get the rest of their money back may depend on what the companies that report to Alibaba have to say about the progress of the virus.


Probably the best-known Chinese name after Alibaba, Baidu is the "Chinese Google" to Alibaba's "Chinese" If investors used Alibaba's report to gain a glimpse into how the Chinese retail economy is handling coronavirus, Baidu could be the bellwether providing the first big indicator of how China's tech sector will weather the crisis.

Baidu is slated to report earnings on Feb. 27 -- about six weeks into the crisis. And truth be told, investors right now are actually pretty sanguine about the company's prospects. Although consensus estimates predict that Baidu's sales will decline slightly year over year (down to $3.94 billion), most analysts are forecasting a big bump in profits. Instead of the $1.86 per share that analysts predicted a month ago (before coronavirus was a full-blown health scare), analysts now believe Baidu could report profits as high as $2.45 per share for fiscal Q4 2020. Earnings are even projected to grow again in the first quarter of 2020.  

Why are analysts so optimistic? Because on Jan. 31, Baidu updated its guidance to reassure investors that all is well. In fact, Baidu's January update forecast sales even better than analysts now assume -- from $4.06 billion to $4.15 billion, representing 4% to 6% revenue growth. Profits under generally accepted accounting principles (GAAP) are predicted to range from $890 million to $970 million, or about $2.68 per share at the midpoint -- also comfortably ahead of Wall Street projections, and 37% higher than last year.  

If Baidu's actual report matches these numbers, maybe the coronavirus outbreak won't turn out to have such a big financial impact after all.


So there's a rosy scenario for Baidu. But even if next Thursday turns out well for Baidu, China as a whole may not be out of the woods yet -- and we may see this illustrated in stark detail in a report due out that same day from another Chinese company:  

China's best-known online travel brokerage, is scheduled to report its earnings on Feb. 27 as well, and the picture here may be anything but rosy. On Wednesday, in an article entitled "The World Closes Its Doors to China," The Wall Street Journal described how coronavirus fears are putting a real hurt on China's travel industry.  

The world, says the Journal, is taking a "defensive posture" with respect to China. Thirty airlines have suspended China service, and 25,000 airline reservations have been canceled. Around the globe, "a 78-nation matrix of rules and quarantines from the U.S. to Singapore have all but banned Chinese travelers from foreign soil," the Journal said. And even within China, the entire 60-million-person population of the city of Wuhan has been quarantined, with sporadic "city and neighborhood blockades constrain[ing] movement elsewhere" in the country.

Suffice it to say this is not good news for a business built on selling travel services to Chinese customers.

Granted, analysts remain optimistic about the Q4 numbers, forecasting 4.5% sales growth for in its fiscal fourth quarter, and only a small drop in profits. Those numbers, however, refer to how was doing before coronavirus appeared. Already, however, investors are bracing themselves for guidance that could show Q1 earnings dropping as much as 65% on an 11% decline in sales.

Next week we'll learn if this doomsday scenario is just an overreaction or frighteningly overoptimistic.