Many of China's top stocks were crushed over the past year as the U.S.-China trade war, tariffs, and the novel coronavirus outbreak all contributed to the country's economic growth rate dropping to a 30-year low. Yet those headwinds will eventually wane, so it might be the right time to pick up a few high-quality Chinese stocks for your investment portfolio.
1. China's tech titan: Alibaba
Alibaba owns China's largest e-commerce, digital advertising, and cloud infrastructure platforms. It also owns streaming media platforms, a film production unit, a mobile web browser and search engine, and a growing smart speaker business. Its affiliate Alipay is also one of the two most widely used digital payment platforms in China.
Alibaba generates most of its revenue from its core commerce business, which consists of its online marketplaces and brick-and-mortar stores. The profits from that unit subsidize the growth of its unprofitable cloud, digital media, and innovation initiatives businesses.
Alibaba controlled 56% of China's e-commerce market last year, according to eMarketer, and Canalys estimates that it controlled 47% of the cloud platform market. Alibaba's dominance of those two growing markets ensures that it will continue generating double-digit revenue growth for years to come.
Alibaba recently warned that the coronavirus crisis would temporarily throttle its core commerce revenue with slower shipments of physical goods. However, long-term investors should focus on three facts: Alibaba has a wide moat and enjoys a first-mover's advantage across multiple markets, and its stock is cheap at 25 times forward earnings.
2. China's biggest retailer: JD.com
JD.com is China's largest direct retailer and second-largest e-commerce company. It owns one of the country's largest logistics networks and generates additional revenue from marketplace ads, cloud services, and digital health services.
Unlike Alibaba, which mainly facilitates transactions between buyers and sellers, JD shoulders its own inventories and fulfills orders with its own logistics network. This business model is more capital-intensive than Alibaba's, but it filters out lower-quality and counterfeit goods.
That's why JD continues to grow -- its total number of annual active shoppers grew 19% annually to 362 million last quarter, marking its biggest quarterly gain in three years. eMarketer estimates that JD controlled 17% of China's e-commerce market last year.
JD's investments in its logistics network -- including warehouse robots, driverless delivery vehicles, and drones -- throttled its margins in previous years. However, its improving scale boosted its operating margins in recent quarters. JD further monetizes its logistics network by charging other companies for its services.
JD also recently warned that the coronavirus outbreak would impact its near-term sales, but stated that its "robust growth momentum" would continue after the crisis ended. JD's stock also remains cheap at less than one times its annual revenue.
3. China's top gaming and social networking company: Tencent
Tencent is the world's largest video game publisher. It also owns WeChat, China's top mobile messaging platform, the older QQ messaging service, and WeChat Pay, which holds a near-duopoly in digital payments with Alipay. Its other businesses include Tencent Video, a major stake in Tencent Music, and Tencent Cloud, the second-largest cloud platform in China.
Tencent generates nearly a third of its revenue from its gaming business, which publishes hit games like Honor of Kings, Peacekeeper Elite, and League of Legends. However, most of its growth comes from its "fintech and business services" unit, which includes WeChat Pay and Tencent Cloud.
WeChat, which hit 1.15 billion monthly active users last quarter, also locks in users with a sprawling ecosystem of Mini Programs which allow users to access various services like ride-hailing services, deliveries, games, and payments, without leaving the app. Tencent's investments in other major e-commerce platforms, including JD and Vipshop, also tether their marketplaces to that ecosystem.
Tencent's stock isn't cheap at nearly 30 times earnings, but the tech giant still has plenty of irons in the fire. Its gaming business continues to expand domestically and overseas, it's developing new social apps to counter Gen Z-oriented rivals like ByteDance, and it's expanding into China's digital healthcare market. The growth of all those businesses could accelerate over the next ten years.