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These 4 Chinese Stocks Are Too Risky to Own

By Leo Sun – May 27, 2020 at 12:30PM

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Luckin Coffee and three other Chinese stocks could be in the blast zone of newly proposed regulations.

Many investors in U.S.-listed Chinese stocks were recently rattled by a new Senate bill that could delist companies that are controlled by foreign governments or don't open their books to American auditors. The bill still needs to be approved by the House and signed into law by President Trump, but it's gaining bipartisan support.

This looming threat makes it tough to stay invested in Chinese stocks in this volatile market. However, several major companies -- including Baidu and Alibaba -- have already declared they won't delist their stocks.

Nonetheless, the proposed legislation could cause problems for many other Chinese companies. Let's examine five such stocks that could be too risky to own.

A Chinese flag superimposed on a circuit board.

Image source: Getty Images.

1. Luckin Coffee

Luckin Coffee (LKNC.Y 0.85%) dazzled investors with its triple-digit revenue growth and rapid expansion after its IPO last May. The stock surged from its IPO price of $17 to $50 this January as investors focused on its robust top sales growth instead of its widening losses.

But in early April, Luckin admitted that roughly 2.2 billion yuan ($310 million) of its revenue in 2019, over 40% of its projected full-year sales, had been fabricated. Its stock plummeted to about $4 before being halted, and only recently started trading again -- although the NASDAQ already issued it a delisting notice.

Luckin's bad behavior was likely the impetus behind the government's latest crusade against Chinese stocks. This stock might be appealing to day traders, but it's clearly doomed -- so investors should resist the urge to gamble on this battered loser.

2. China Mobile

I personally own shares of China Mobile (CHL), the country's largest wireless provider. In a more placid market, China Mobile would be a sound investment for conservative investors: it serves 947 million wireless customers and 193 million wireline customers, and its dividend yield (declared annually based on its earnings) has remained between 3% and 6% over the past few years.

However, China Mobile -- and its NYSE-listed peers China Unicom (CHU) and China Telecom (CHA) -- are all state-backed enterprises. The Chinese government firmly controls all three telcos, and often rotates their management personnel and dictates their deals. If the proposed delisting bill passes, the government's stake would immediately disqualify the stock from being listed on the NYSE.

3. Pinduoduo

Pinduoduo (PDD 2.02%), China's third-largest e-commerce marketplace after Alibaba and JD.com, generates robust double-digit revenue growth while racking up widening losses.

A woman makes payments on her smartphone.

Image source: Getty Images.

Pinduoduo carved out a niche in the crowded e-commerce market by encouraging shoppers to team up for bulk purchases. This practice caught on in lower-income markets, but it was also blacklisted as a "notorious" marketplace for counterfeit goods by the U.S. Trade Representative's office.

Pinduoduo tried to flush out counterfeit goods with stiff penalties for merchants and an expansion into higher-income cities with brand-name products. But to attract buyers, Pinduoduo convinced merchants to sell their brand-name products at lower prices than Alibaba and JD, then subsidized the difference out of its own pocket.

This "growth at all costs" strategy resembles Luckin's blueprint for challenging Starbucks -- and it could backfire and burn investors as it wages a loss-leading war against Alibaba and JD.

4. GSX Techedu

GSX Techedu (GOTU -0.82%), an online education platform in China, initially seemed like a dream growth stock. Its revenue rose 432% last year as its adjusted net income surged 617%. It also claimed the COVID-19 crisis generated fresh tailwinds as more students enrolled in online courses.

However, several prolific short sellers recently called GSX the next Luckin Coffee, claiming it fabricated sales and student figures, padded its growth with promotional offers, and even populated classrooms with chat bots to maintain that illusion.

GSX has denied those allegations, but Muddy Waters -- the firm that shorted Luckin before its admission of guilt -- recently disclosed a big short position in the stock. GSX could eventually be absolved, but these accusations make the stock too risky to own in this unforgiving market.

 

Leo Sun owns shares of China Mobile and JD.com. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., JD.com, Luckin Coffee Inc., and Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

China Mobile Limited Stock Quote
China Mobile Limited
CHL
Pinduoduo Stock Quote
Pinduoduo
PDD
$62.22 (2.02%) $1.23
Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
LKNC.Y
$16.67 (0.85%) $0.14
Gaotu Techedu Inc. Stock Quote
Gaotu Techedu Inc.
GOTU
$1.21 (-0.82%) $0.01
China Unicom (Hong Kong) Limited Stock Quote
China Unicom (Hong Kong) Limited
CHU
China Telecom Corporation Limited Stock Quote
China Telecom Corporation Limited
CHA

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

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