The collapse of Luckin Coffee earlier this year caused many investors to become darkly skeptical of Chinese stocks. And the passage of a new Senate bill in May that could force Chinese companies to delist their stocks if they don't comply with new regulations exacerbated that pressure.
Faced with these issues, investors need to be more selective with Chinese stocks. Today, I'll highlight three Chinese stocks investors should avoid: Secoo (SECO), Cheetah Mobile (CMCM -0.47%), and iQiyi (IQ 4.67%).
Image source: Getty Images.
1. Secoo
Luxury e-tailer Secoo went public at $13 in Sept. 2016, but it now trades at less than $3 a share. In its IPO filing, Secoo claimed it was "Asia's largest online integrated upscale products and services platform" by GMV (gross merchandise volume), or the value of all goods sold on its marketplace.
That claim, which was based on a report from the controversial research firm Frost & Sullivan, immediately raised red flags because Secoo generated a tiny amount of GMV compared to e-commerce giants Alibaba and JD.com.
Secoo's filing also included an unexplained gap between its "registered" and "active" customers, and indicated it was about to run out of cash prior to its IPO. Those issues all convinced investors to stay away from the stock.
Secoo's revenue and net income rose 28% and 4%, respectively, in fiscal 2019. But in the first quarter of 2020, its revenue declined 14%, and it posted a net loss -- even as Alibaba and JD continued to generate double-digit growth in revenue and profits. Therefore, it doesn't make any sense to invest in this shady e-commerce underdog when the market leaders are growing at much faster rates.
2. Cheetah Mobile
Cheetah Mobile went public at $14 a share six years ago, but its stock now trades at about $2. Cheetah produces a wide range of mobile apps and games for Chinese and overseas users, including Clean Master, CM Browser, CM Locker, and Piano Tiles 2.
Image source: Getty Images.
Cheetah initially impressed investors with its double-digit revenue and earnings growth, but its stock collapsed after Facebook and Alphabet's Google cut ties with Cheetah over allegations of ad fraud. Both companies claimed Cheetah was injecting background clicks on devices to claim credit and ad revenue for app installations that didn't originate from its own apps.
Facebook barred Cheetah from its ad network, while Google booted Cheetah from its ad network and Play Store. That one-two punch caused Cheetah's revenue and adjusted earnings to plunge 28% and 71%, respectively, last year. Analysts expect its revenue to tumble another 35% this year and result in a net loss.
To stay afloat, Cheetah divested its higher-growth live video streaming business and its stake in ByteDance to raise cash and expand its new AI-related robotics business -- but that unit remains unprofitable. Cheetah's apps are still available in China, but competition from Alibaba, Tencent, and other bigger companies could finish off its struggling domestic business.
3. iQiyi
Baidu (BIDU 3.21%) spun off iQiyi, one of the top video streaming platforms in China, in an IPO two years ago. iQiyi's revenue rose 52% in 2018, but decelerated to 16% growth in 2019 and just 7% in the first half of 2020. Its net losses also widened annually during all three periods.
iQiyi's slowdown can be attributed to competition from Tencent Video, Alibaba's Youku Tudou, and Bilibili, as well as sluggish ad spending in China. iQiyi expects that slowdown to continue with 0%-6% revenue growth in the third quarter.
Those weaknesses already made iQiyi a wobbly investment, but the prolific short seller Muddy Waters -- which correctly identified Luckin Coffee's fraudulent practices before its stock crashed -- also accused iQiyi of fraud earlier this year.
Muddy Waters and Wolfpack Research claimed iQiyi inflated its revenue by up to 44% and its user numbers by as much as 60%. Last quarter, iQiyi disclosed that those accusations had triggered an SEC probe into its accounting practices.
iQiyi is still trading about a dollar above its IPO price, but it could quickly lose its footing if the SEC probe forces the company to restate its financials. That trouble would also likely take down Baidu, which relies heavily on iQiyi's revenue growth to offset its declining ad revenue.
