Chinese ride-hailing company DiDi Global (DIDI -6.22%) has had an eventful public debut -- its shares have fallen by 20% just days after it completed its initial public offering. The stock plunged after Chinese regulators ordered DiDi's app removed from app stores and told the company to cease new user registrations while they conduct a review of its data-collection practices.
But DiDi is hardly alone in coming under scrutiny from officials in Beijing. The Chinese government is also reportedly considering new rules that would allow it to block Chinese companies from listing overseas and increase its regulatory oversight of their business activities.
Wall Street hates uncertainty, so it's no surprise that a large number of Chinese companies trading on U.S. markets sold off on these headlines.
It's far too soon to know how this will all play out, but for bargain hunters, there are a lot of Chinese stocks trading at prices well below where they were just a few weeks ago. We asked three Fools which Chinese stocks they're watching most closely now. Here's why Li Auto (LI -0.47%), NIO (NIO -1.67%), and Alibaba Group Holding (BABA -1.18%) have piqued their interest.
Image source: Getty Images.
A strong operator in a sector that China is determined to grow
Lou Whiteman (Li Auto): Li Auto is one of a generation of young China-based electric vehicle (EV) companies, and its offerings are differentiated to fit the specific needs of Chinese consumers. Li's vehicles have built-in gasoline-powered generators to allow for recharging when no charging stations are available. That's important in China -- a fast-growing market for EVs, but also one where it can be hard to find charging stations outside of big cities.
Li Auto is focused on SUVs, a section of the market that tends to be higher margin.
The company is not yet profitable as management is still prioritizing growth, but recent results came in ahead of expectations, and it's pushing forward additional models and updates to its existing fleet. In the first quarter of 2021, Li Auto delivered 12,579 vehicles, and management forecasts that it will be delivering 10,000 per month by September. It is quickly building the infrastructure it needs to make that happen, with 65 retail stores and 135 service centers so far.
Still, Li Auto was unable to escape the DiDi-inspired sell-off. The stock is down 11% for the month.
Here's another reason to like Chinese automakers: Based on recent reports, it appears there is tension between those in China's government who are trying to promote and grow Chinese companies and those who are worried about data collection and control of that data. DiDi got in trouble in part because its data on ride pickups could be used to track the movement of government officials, for example showing which departments are putting in longer work hours and which are closing shop early.
A natural compromise between these factions would be to favor manufacturing companies over tech and information companies, promoting brands for which the data is not the product. Although autos are getting more digital, electric vehicles still seem likely to do well in China should its governmental policies tilt in favor of industrial companies where data is less of a concern. And given that the Chinese government has already made EVs an important part of its push to go green -- it has set a target for EVs to account for 20% of all passenger vehicles sold there by 2025 -- this sector is less likely than others to get slowed down by regulatory headwinds.
China's best EV maker is on sale -- but probably not for long
John Rosevear (NIO): NIO was another U.S.-traded Chinese stock that had a rough week in the wake of the DiDi mess, losing about 8.8% of its value through Thursday's close. But the company remains an intriguing bet, so this might be one of those buy-the-dip moments.
Here are a few reasons why I think NIO stands out from the crowd of upstart Chinese electric vehicle makers.
- Demand is great. NIO delivered almost 22,000 vehicles in the second quarter, more than double its year-ago total. The company has gone to great lengths to build and maintain relationships with its growing army of loyal fans, who have returned the favor by placing lots of orders for its stylish electric vehicles.
- The balance sheet is strong. NIO was in real trouble in early 2020, when the pandemic hit just after a year in which it had made big investments to support its growth. But last summer's stock-price surge gave the company a chance to raise extra cash, and it didn't waste the opportunity. As of March 31, NIO had about $7.3 billion in cash on its books -- an ample reserve to weather the next big storm, if and when it arrives.
- NIO is still investing in growth. The company will add two sedan models to its currently all-SUV lineup next year, filling out its coverage of the premium auto market. And in May, it signed a new deal with its manufacturing partner that will boost its factory's output to 20,000 vehicles per month (from about 8,000 to 10,000 now) -- so it will have the capacity to deliver as its order book continues to expand.
Over the last 18 months, CEO William Bin Li has ably led NIO out of a cash crunch and into a period of strong growth. Image source: NIO.
All that growth-focused investment explains why NIO isn't yet profitable, but it's on the right track. The company's first-quarter loss was narrower than Wall Street had expected, and although its production in the current quarter has been limited somewhat by the ongoing global semiconductor shortage, that problem should ease over the next few months.
Long story short: With strong allies in its home nation's government, a growing base of enthusiastic fans, China's rapidly rising rate of electric-vehicle adoption, and big rival Tesla faltering, NIO looks poised to deliver nice growth over the next few years.
This gigantic value stock just got even cheaper
Rich Smith (Alibaba Group): There's no doubt that DiDi stock has taken a beating, and other Chinese high-flyers have lost a lot of ground as well. But if your goal is to take full advantage of the DiDi sell-off, and scoop up cheap Chinese shares while other investors are panicking, why limit yourself to money-losing businesses in the traditionally low-margin automotive sector?
Instead, you could invest in something that's obviously worth owning: a profitable, free-cash-flow-positive business like Alibaba Group.
Sure, investors who buy shares of the Chinese Amazon now won't be getting quite as big of a discount as they would on DiDi or Nio stock: Alibaba is only down by 8% since the end of June. Yet when you crunch the numbers, Alibaba shares still look like an incredible bargain.
According to the company's most recent financial report, released in May, it generated $35.5 billion in net income last year, and $26.4 billion in positive free cash flow. Weighed against its $576 billion market capitalization, that gives it a P/E ratio of 16.2, and a P/FCF ratio of 21.8.
Are those valuations inexpensive? Well, consider that analysts polled by S&P Global Market Intelligence expect Alibaba to grow its profits at an annualized rate of 38% over the next five years. That would give the stock a 0.6 price-to-FCF ratio, and a PEG ratio of just 0.4. (Hint: Value investors generally consider any ratio below 1.0 to be "cheap.")
And Alibaba stock could be an even better deal than those figures imply, given that last quarter, for example, the company grew its sales 78% year over year. Granted, the possibility of interference from Chinese regulators will always pose a risk to Alibaba -- but then again, that's part of the reason its shares sank recently in the first place.
If you can stomach the risk of investing in Chinese stocks, Alibaba looks like one of the ones most likely to reward it.
