China's explosive growth has slowed down over the past few years, ending the heyday of Chinese growth stocks. Yet there are still solid blue chip stocks in the Chinese market which might offer better returns than their American counterparts. Let's take a look at three that investors should consider buying: Baidu (NASDAQ:BIDU), China Mobile (NYSE:CHL), and Sinopec (NYSE:SHI).
Baidu is the largest search engine in China, claiming nearly 80% of all search revenue within the country in the fourth quarter of 2014, according to China Internet Watch.
Baidu greatly benefited from Google's partial exit from mainland China in 2010. Between 2010 and 2014, Baidu's annual revenue soared 520% to $7.9 billion as net income rose 274% to $2.1 billion. Its stock, which trades at 36 times earnings today, is up 236% over the past 5 years.
Today, Baidu's main rival is Qihoo 360 (UNKNOWN:QIHU.DL), which owns a search engine, free antivirus software, ad-sponsored cloud-based Internet security products, web browsers, and Internet value-added services for third-party games and virtual goods. Qihoo's market share in Chinese page views rose from 18% to 29% between Aug. 2013 and 2014, according to market tracker CNZZ. During that period, Baidu's share dropped from 80% to 54%.
It's unclear how much revenue Qihoo's Haosou.com search engine generates on its own, but Qihoo's online advertising revenue rose 81% year over year to $756 million in 2014. That growth is nice, but it equals less than 10% of Baidu's marketing revenue, indicating that Baidu's search business is much more profitable.
China Mobile, the largest telecom company in China, controlled 62% of the Chinese wireless market last year. Its industry peers China Unicom and China Telecom controlled 23% and 15%, respectively. All three providers are state-owned companies.
China Mobile controls the majority of the 2G market and roughly half of the 3G market. In late 2013, China started issuing 4G licenses. Since then, China Mobile's 4G customer base has grown rapidly. Between March 2014 and March 2015, 4G customers as a percentage of China Mobile's total customers soared from 0.4% to 17.5%. During that period, its total customer base grew 4.4% to 815 million.
China Mobile's 4G expansion has been boosted by two big developments. First, it signed a $970 million deal with Nokia last year to boost the network's development with Nokia's software, equipment, and services. Second, China Mobile, China Unicom, and China Telecom formed China's first joint network infrastructure company in late 2014. China's Ministry of Industry and Information Technology will transfer about 1 million wireless telecom towers to that joint venture by August, which will reportedly net a one-time gain of $24 billion for the three companies.
China Mobile's operating revenue rose 3.9% year-over-year last quarter, but its profit slid 5.6% due to network upgrade costs. The new wireless towers gained through the joint venture could soften that blow this year. China Mobile stock has risen nearly 70% over the past 12 months, but it still trades at a reasonable 17 times earnings with a decent 2.7% dividend yield.
Sinopec is a state owned company that owns the country's largest chain of gas stations, engages in oil exploration and refining, and manufactures industrial products.
Shares of Sinopec have soared nearly 130% over the past 12 months thanks to a broader market rally in Shanghai, defying a 44% decline in oil prices and a slowdown in the Chinese economy.
Sinopec bucked those trends with several strategies. First, it adjusted its product mix with "high-value-added" products like high-octane gasoline and jet fuel. Its chemical business adjusted its feedstock and reduced raw material costs. It also shifted its focus toward non-fuel, service-driven businesses throughout the year. Lastly, to protect its bottom line, Sinopec aggressively shut down facilities with "unsatisfactory" margins, cut costs, and strengthened inventory management.
Despite those measures, Sinopec's revenue slipped 1.9% year over year and operating profit fell 24.1% in 2014. But looking ahead, Sinopec is expanding rapidly overseas with partnerships and acquisitions in Africa, the Middle East, Europe, and North America. Those investments will likely pay off when oil prices recover. Yet investors should note that rapid growth has led to serious allegations of corruption -- including kickbacks, nepotism, and theft -- by China's anti-corruption watchdog.
Caution is advised
In my opinion, Baidu, China Mobile, and Sinopec represent three solid ways to invest in the Chinese economy. However, investors should do their due diligence and understand the risks of the Chinese market before investing. If China's growth continues to slow down over the next few years, investor interest in Chinese stocks -- even blue chip ones -- will wane.