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3 Appealing Chinese Tech Stocks

By Aditya Raghunath - Mar 28, 2020 at 12:06PM

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While the S&P 500 is down substantially from record highs, shares of JD.com, Alibaba, and Baozun have managed to outperform the indexes in 2020.

The COVID-19 pandemic has brought global economies to a standstill. Lockdowns are in place and consumer spending has fallen drastically. Several countries have shut their borders, and investors are still trying to measure the impact of the pandemic on company financials.

Meanwhile, major indexes such as the Dow Jones and S&P 500 are trading 28% and 27% below record highs, respectively, as of March 25. Given the rapid spread of COVID-19, it looks like the markets might continue to fall lower.

However, China, which was once in the epicenter of this coronavirus outbreak, is slowly limping back to normalcy.

While the country's economy will take time to stage a complete turnaround, buying Chinese ADRs (American depository receipts) seems like a good proposition currently. Here I have identified three Chinese tech stocks that are already beating the market and continue to be solid bets for long-term investors.

U.S. and Chinese currency shown as well as an investment graph.

Image source: Getty Images.

JD.com looks poised to succeed

At the time of writing on March 25, shares of JD.com (JD -2.77%) are trading at $41.35 and have lost 9% since Feb. 19, 2020, when indexes peaked. The stock gained more than 12% on March 2 on the back of strong quarterly results.

In the fourth quarter of 2019, JD.com reported sales of $24.5 billion, a rise of 26.6% year over year and $600 million above consensus estimates. Its net income grew 8% to $116.5 million, or $0.08 per share, and was $0.02 above estimates.

The company saw an 18.6% growth in active customers, which rose to 362 million at the end of Q4. A majority of this growth was driven by lower-tier cities and promotional strategies. The lower-tier cities will continue to be a key growth driver for JD.com due to the rise in purchasing power of the country's middle class.

JD.com expects revenue growth of at least 10% in the first quarter of 2020 after considering the impact of COVID-19. It is China's largest direct retailer with a robust logistics network. JD also generates part of its revenue from cloud services, digital health services, and marketplace advertisements.

According to a report from Statista, JD accounted for 16.7% of China's e-commerce market in 2019. This leadership should stand it in good stead in the next decade.

China's mega-cap tech giant

Alibaba (BABA 1.36%) is China's leading e-commerce company. It is also a major player in the digital advertising and cloud infrastructure segments. The tech heavyweight has lost 18.5% in market value since Feb. 19, as of this writing on March 25, and its stock is trading at $188.60. 

The Statista report I cited above states that Alibaba controlled 56% of China's e-commerce market in 2019. In the cloud segment, it accounted for 46.4% of the market, according to market research firm Canalys.

Alibaba's logistics subsidiary, Cainiao, has returned its operations to pre-coronavirus levels. Further, the company is set to benefit from the rapid growth of e-commerce sales in China. According to another Statista report, China's e-commerce growth is estimated at 15.5% year over year in 2020. Investors can expect Alibaba to outpace the country's e-commerce growth driven by the growing popularity of its Tmall and Taobao platforms.

In the quarter ended in December, Alibaba's cloud sales were up 62% at $1.5 billion and accounted for close to 7% of its top line. In the last four quarters, Alibaba's cloud sales totaled $5.1 billion. This has been the company's fastest-growing business segment for a while.

Alibaba Cloud continues to gain traction among enterprises by launching new products and services, expanding its SaaS offerings and investing heavily in research and development. 

Alibaba will continue to benefit from an increase in e-commerce sales, an exponential growth in data storage, and its growing presence in the digital ad space.  

Another e-commerce play

While Baozun (BZUN -0.57%) shares had lost 16% between Feb. 19 and March 25, they were down 55% from record highs. The company was impacted by slowing sales and the escalation of the trade war between the U.S. and China in 2019.

However, for long-term investors, this sell-off presents an opportunity given China's expanding e-commerce market. Baozun provides e-commerce services including digital marketing, store operations, warehousing, and fulfillment, as well as IT solutions.

It has integrated these e-commerce capabilities with the back-end systems of partners, allowing the latter to efficiently track data.

Further, Baozun can help brand partners establish a healthy online presence in China by launching products on e-commerce platforms including Tmall and JD.com. Baozun had partnered with 231 brands as of the end of December, up from 185 brands a year prior. The company added eight brand partners in the fourth quarter that drove sales higher by 26% year over year.

Baozun has a vast supply chain network and can reach over 200 cities in China. It also services Greater China regions such as Hong Kong, Taiwan, and Macau. Similar to Alibaba and JD, Baozun will also benefit from an increase in consumption levels that will drive online retail sales higher, making it one of the top bets in this segment. 

The verdict

The attractive valuations of Alibaba, JD.com, and Baozun offer tremendous upside potential for long-term investors. Alibaba has a price-to-sales ratio of 6.8, and this metric stands at 1.5 for Baozun. JD.com is currently trading at a price-to-sales ratio of 0.7, which makes it incredibly cheap given the company's estimated double-digit revenue growth in the next two years.

These companies generate 100% of sales from China, which is, ironically, a safe bet during this volatile market. In the long term, these three companies will benefit from China's expanding middle class, which will result in an increase in purchasing power and consumption levels. China is already the world's largest e-commerce market, and its estimated growth could help these tech companies crush market returns in the next decade.

Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Baozun, and JD.com. The Motley Fool has a disclosure policy.

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Stocks Mentioned

JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$55.50 (-2.77%) $-1.58
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$92.43 (1.36%) $1.24
Baozun Stock Quote
Baozun
BZUN
$8.67 (-0.57%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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