[Editor’s Note: “5 Chinese Stocks to Buy for the Second Half 2020 Rebound”was originally published in December 2019. It is regularly updated to include the most relevant information.]
The bull thesis on Chinese stocks going into 2020 was surprisingly simple and compelling. You had easing trade tensions, stabilizing geopolitical relations, ample fiscal stimulus from the People’s Bank of China, a rebounding manufacturing sector, and similarly rebounding consumer spending trends. Everything looked good for a big rebound in Chinese stocks.
Then, the coronavirus outbreak happened.
Tens of thousands of individuals in mainland China fell ill to a new, rapidly spreading novel coronavirus strain dubbed Covid-19. A few thousand infected patients died. Daily life in China came to a screeching halt. So did the 2020 rebound in China’s economy and Chinese stocks.
But, the coronavirus moves fast. Just as quickly as it burst onto the scene in China in late January, it has faded in early April, with new daily cases approaching near-zero.
In other words, while the rest of the world is fighting an escalating Covid-19 problem, China has all but halted the spread of the virus in its own country. Daily life in China is consequently returning to normal, and the Chinese economy is expected to rebound in the second quarter.
All of this is to say that the big surge in Chinese stocks that was supposed to happen in early 2020, is now set to happen in summer 2020.
With that in mind, here are the best Chinese stocks to buy for this big second-half 2020 rebound:
Chinese Stocks to Buy for 2020: Alibaba (BABA)
The best Chinese stock to buy for a second-half rebound is Chinese e-commerce and cloud giant Alibaba.
Yes, retail sales in China were whacked in the first two months of the year, dropping 20% year-over-year. But, online retail sales were down only 3% in January and February. That’s not that big of a drop, and it implies that the coronavirus headwind for Alibaba wasn’t all that big.
Perhaps more importantly, the coronavirus headwind now appears to be largely behind the country. Retail sales trend should bounce back. Online retail sales growth will return to its 15%-plus mark. Alibaba’s e-commerce business will get back on track.
On the cloud side of things, the coronavirus pandemic has actually boosted enterprise cloud demand in China, as companies have rushed to migrate their services online. Alibaba is the unparalleled leader in this market. Therefore, it seems like Alibaba’s cloud business both weathered the coronavirus storm, and is well-positioned to accelerate demand over the next few quarters.
Overall, Alibaba is positioned to get back to growing at a robust pace over the next few months. As the company does, BABA stock — which trades at a relatively cheap 24-times forward earnings multiple — will rebound.
JD.com (JD)
Much like Alibaba, Chinese e-commerce company JD.com appears well positioned for a big second-half rebound.
Even though consumer spending trends in China got whacked in the first two months of the year, JD.Com management said in early March that they still expect the company’s revenues to grow by 10% or more in the first quarter of 2020. That’s pretty impressive.
More importantly, JD reported 27% revenue growth in the fourth quarter of 2019, before Covid-19 impacted consumer spending trends. In the second quarter of 2020, Chinese consumer spending trends will likely rebound close to their fourth quarter levels, in the absence of the coronavirus outbreak. If so, that means JD is on track to report 10%-plus growth in Q1, and then get back to 20%-plus growth in Q2, Q3, and Q4.
This revenue growth rebound — coupled with sustained robust margin expansion — should spark a huge profit growth reversal in the back-half of 2020, the likes of which will probably send JD stock to new 2020 highs.
Luckin Coffee (LK)
Often labeled as the Starbucks of China, retail coffee house operator Luckin Coffee has huge long-term growth potential.
From this perspective, the coronavirus crisis — which has knocked LK stock down by 50% — is creating a compelling long-term buying opportunity.
Luckin operates small coffee houses in China. They started with less than a dozen such stores at the end of 2017. Today, they have over 4,500 coffee houses in China. This robust growth is supported by two tailwinds.
First, there has been a secular pivot among young, urban Chinese consumers from regular tea consumption, to regular coffee consumption. This pivot will continue with significant momentum over the next several years, as young Chinese consumers become increasingly more “Western”.
Second, Luckin has figured out the best way to tap into growing coffee demand, by creating small, asset-light coffee houses that are optimized for mobile ordering and quick service, and feature the lowest prices in the industry.
Because both of these tailwinds project to remain vigorous for the next few years, Luckin Coffee projects to keep growing at a robust pace for the next few years, too. That big growth should sustain strong gains in LK stock… once coronavirus headwinds pass (and it appears they will fully pass in China soon).
Bilibili (BILI)
The bull thesis on Chinese social video platform Bilibili is pretty simple: this is a big growth company, with minimal Covid-19 exposure, that is set to keep firing on all cylinders in coming quarters.
Bilibili is an online platform. As an online platform, the company actually saw engagement go up during the first two months of the year, when Chinese consumers were cooped up inside. Many of those consumers paid up for Bilibili’s various paid products. As such, as of mid-March, management is guiding for Bilibili to sustain huge revenue growth in Q1, calling for growth of nearly 60% year-over-year.
In other words, the coronavirus had very little impact on Bilibili’s business. Yet, BILI stock has lost a third of its value on coronavirus concerns.
That doesn’t make much sense. The rationale is that sustained coronavirus hysteria will plunge China’s economy into a recession, at which point Bilibili’s users will stop paying up for the platform’s services. But, that thesis doesn’t hold water, considering China is already getting back to normal and putting the coronavirus outbreak behind it.
Big picture — Bilibili will sustain big growth for the rest of the year. As it does, investors will understand that the recent sell-off in BILI stock is overdone. They’ll buy the dip, and shares will rebound.
Vipshop (VIPS)
Last, but not least, on this list of Chinese stocks to buy for the second-half rebound is Chinese online discount retailer Vipshop.
Vipshop has staying power in the Chinese e-commerce market as the de-facto off-price leader. If there is one thing that consumers are always attracted to, it is low prices. Thus, so long as Vipshop can maintain dominance in the off-price channel, the company will forever remain an important part of the Chinese e-commerce landscape.
The Chinese e-commerce landscape fared pretty well during the coronavirus outbreak, with online retail sales only dropping 3% year-over-year in January and February. That growth rate will rebound in March, and even more-so into the summer as pent-up consumer demand turns into robust sales growth.
Ultimately, in coming quarters, Vipshop’s growth trends should improve. As go profits, so go stocks. VIPS stock is no exception. Over the next few quarters, then, reinvigorated profit growth will drive this stock way higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long JD and LK.