China may be experiencing a second outbreak of COVID-19 after over 180 people fell ill after coming in contact with a market in Beijing. Authorities have declared a level 2 emergency response level, canceled flights, and closed off several communities near the epicenter of the outbreak.
While it is too soon to predict the full impacts of this developing situation, investors can take proactive steps to protect their portfolios.
Here are two coronavirus-proof Chinese stocks that can thrive in this uncertain environment because of their rapid growth and coronavirus-resistant business models. The first pick is TAL Education Group (NYSE:TAL), a bet on China's booming online education market. The second is JD.com (NASDAQ:JD), a rapidly growing online retailer that will benefit from stay-at-home shopping and its robust logistics network.
1. TAL Education Group
TAL Education is a China-based education service provider that offers tutoring in core subjects like English, Chinese, mathematics, and science. China's education market is expected to grow at a CAGR of 11.3% until 2023 due to the country's increasing urbanization, household wealth, and internet penetration. And TAL is poised to benefit from this trend because of its established brand and large online footprint.
The stock has held up well during the coronavirus pandemic with shares soaring 40% year-to-date compared to a 4% decline in the S&P 500. TAL is coronavirus-resistant because its online education business can offset potential declines in its offline business due to coronavirus-related school closures.
In the fiscal fourth quarter of 2020, which ended in February, TAL reported revenue growth of 18% from $727 million to $858 million while revenue contribution from its online offering Xueersi.com grew from 17% of the total to 24% of the total. The company also migrated some of its small class students to online classes which demonstrates a level of flexibility in the business model that could help shield it from a potential second wave of COVID-19.
Geographical expansion is a key part of TAL's growth strategy that will also help protect the company from localized school shutdowns (such as the one going on right now in Beijing). During the fourth quarter, revenue from second and third-tier cities helped offset the coronavirus-related declines in first-tier cities like Beijing, Shanghai, Guangzhou, Shenzhen, and Nanjing.
China is the largest e-commerce market in the world, and the opportunity continues to grow at a breakneck pace with a projected CAGR of 10% until 2023. As China's second-largest online retailer (behind Alibaba), JD.com is uniquely poised to exploit this massive opportunity because of its strong logistics network and coronavirus-resistant business model.
Like TAL Education, JD.com stock has performed well during the pandemic with shares soaring by 67% year to date. The business can benefit from stay-at-home demand as consumers turn to online shopping to help with social distancing and slow the spread of COVID-19.
JD reported first-quarter earnings on May 15, and the results demonstrate strong resilience in the face of coronavirus-related challenges in the economy. Total revenue grew by 21% to 146.2 billion RMB ($20.6 billion) and annual active customer accounts expanded by 25% to 387.4 million in the trailing twelve months ending on March 31, 2020.
JD has a competitive edge in logistics because of its large network of over 730 warehouses and front distribution centers in 29 cities. This could give it an advantage in same-day delivery, making the business more pandemic-resistant. In the first quarter, JD Logistics launched a service called "Mobile Fresh Basket" to deliver fresh produce in over 100 Chinese cities amid coronavirus lockdowns, and it expanded its on-demand delivery service to supply medical products like insulin and traditional herbal medicines.
China may be on the verge of another major coronavirus outbreak, but that's no reason to shun Chinese stocks altogether. TAL Education Group and JD.com offer rapid growth and compelling, coronavirus-resistant business models. That's why they are good stocks to consider during these uncertain economic times.