After a strong 2020, the Chinese stock market was going through a tough phase last year. Regulatory action and tight monetary policy in Beijing led to a 29% drop in the MSCI China Index. Most of the Chinese companies listed in the US did not perform well either.
Looking to 2022, the good news is that Chinese stocks are inexpensive. Using the iShares MSCI China ETF as a proxy, they have a P/E ratio of 15x compared to 23x for the S&P 500 Index.
Combining an attractive valuation with potentially more supportive government policy and investment in China seems like a good move in 2022, the year of the tiger.
The next question is a more difficult question. What stocks should US investors buy?
A good starting point is to find undervalued plays about the purchasing power of the Chinese consumer. Here are three names that should live up to the top of your buy list.
Is JD.com stock undervalued?
JD.com (NASDAQ: JD)Jingdong.com, in short, is the second largest online retailer in China. It sells a wide range of products from electronics and furniture to books and clothing. And although it faces stiff competition from Alibaba and others, the size and projected growth of the Chinese retail market should create multiple winners. According to research group Technavio, it will grow by 10% annually until 2025.
China’s retail market is also attractive because it remains highly fragmented. While the top 20 US retailers make up more than half of the domestic retail market, the top 20 in China make up less than 20%. So as the pandemic continues to accelerate the Chinese consumer’s shift to the internet, JD.com should be the main beneficiary.
Previously 360buy.com, the company has recently expanded beyond regular e-commerce by offering retail as a service. Making its technology and retail infrastructure available to others has opened up JD.com to more sectors of the Chinese economy and created a robust revenue stream.
JD.com’s largest shareholder is Chinese technology conglomerate Tencent Holdings Limited with 17% and Walmart owning nearly 9% of the shares. With companies, institutions, and other public insiders owning most of the shares, this leaves about one-fifth of the shares outstanding to individual investors. With JD.com down 40% from its February 2021 peak and analysts predicting 33% earnings growth in 2022, it’s time to grab some of those shares.
What Is Good China Grocery Store Stock?
Dingdong (NYSE: DDL) It is a grocery store and convenience store delivery service located in 29 Chinese cities. It’s carving out a leadership position in China’s massive on-demand grocery market by selling meat, seafood, food products and other everyday staples from warehouse-style mega stores reminiscent of Costco and Sam’s Club. Overlay this with Doordash-esque home delivery that has an ambitious 29-minute delivery target, and Dingdong should ring a lot of doorbells in the coming years.
The company estimates that the fresh grocery and daily necessities markets in China will grow at an annual rate of 6% and 7%, respectively, through 2025. By that time, the combined market size is expected to be approximately $2.4 trillion, about half of which will be implemented across Internet . So, the market opportunity clearly exists, but what about Dindong’s financials?
While Dingdong stock has trended lower since its listing on the New York Stock Exchange in June 2021, its financial performance has gone in the opposite direction. Revenue increased 111% year over year in the third quarter thanks to a similar jump in gross merchandise value (GMV). Importantly, higher-margin private label products accounted for approximately 6% of GMV and will be an important growth driver in the future. The company is operating at a net loss, but gross and net margins are trending higher, and analysts expect a sharp improvement in net profit in 2022.
Dingdong stock fell to around $14 after crossing $40 on the second trading day. When it comes to defensive bets on China’s grocery industry, Dingdong isn’t right next door to the Twinkies…it’s in the bargain lane.
Is PetroChina a good value?
PetroChina (NYSE: PTR) It’s not as oversold as other shabby Chinese ADRs, but it does offer tremendous value at current levels. That’s because the country’s largest oil company is trading at less than 7 times this year’s earnings estimate. It also pays a semi-annual dividend based on last year’s dividend giving the stock a 7.5% return.
When it comes to finding international energy stocks to play to the oil and gas price recovery, PetroChina was an afterthought. Many investors are shying away from it because it is a state-run entity and thus is subject to unexpected actions from the Chinese government. But it may be a risk worth taking given the recent rise in the company’s profitability. Year-to-September operating income nearly tripled despite a more modest 56% increase in average oil price achieved.
China’s electric car ambitions have also kept investors away from PetroChina. However, crude oil is expected to be in great demand for a lot of auto and non-auto related industries over the next few years with China being the second largest oil consumer in the world. The company’s growth prospects in natural gas are also encouraging with the shift from coal to natural gas underway. With PetroChina’s involvement in many non-gasoline products such as diesel, kerosene and lubricants, it touches many sectors of the Chinese economy – and can help boost growth and income accumulation in a long-term portfolio.