The COVID-19 pandemic has crippled global economies. Locks are in place and consumer spending has dropped drastically. Several countries have closed their borders and investors are still trying to measure the impact of the pandemic on corporate finances.
Meanwhile, major indices such as the Dow Jones and the S&P 500 are trading at 28% and 27% respectively below record levels as of March 25. Given the rapid spread of COVID-19, it appears that markets may continue to decline.
However, China, which was once the epicenter of this coronavirus epidemic, is slowly returning to normal.
While the country’s economy will take time to fully reverse, buying Chinese ADRs (US certificates of deposit) currently seems like a good proposition. Here, I have identified three Chinese tech stocks that are already beating the market and continue to be solid bets for long term investors.
JD.com looks set to succeed
At the time of writing on March 25, the actions of JD.com (NASDAQ: JD) are trading at $ 41.35 and have lost 9% since February 19, 2020, when the indexes peaked. The stock gained more than 12% on March 2 thanks to solid quarterly results.
In the fourth quarter of 2019, JD.com reported sales of $ 24.5 billion, a 26.6% year-over-year increase and $ 600 million above consensus estimates. Net income increased 8% to $ 116.5 million, or $ 0.08 per share, and was $ 0.02 higher than estimated.
The company recorded 18.6% growth in active customers, which reached 362 million at the end of the fourth quarter. The majority of this growth was driven by lower-tier cities and promotional strategies. Lower-tier cities will continue to be a key growth engine for JD.com due to the increased purchasing power of the country’s middle class.
JD.com expects revenue growth of at least 10% in the first quarter of 2020 after taking into account the impact of COVID-19. It is the largest direct retailer in China with a solid logistics network. JD also generates part of its revenues from cloud services, digital health services and market advertisements.
According to a report by Statista, JD represented 16.7% of the Chinese e-commerce market in 2019. This leadership should hold it well over the next decade.
Chinese tech giant mega-cap
Ali Baba (NYSE: BABA) is the Chinese leader in electronic commerce. It is also a major player in the digital advertising and cloud infrastructure segments. The technology heavyweight has lost 18.5% of its market value since February 19, as of March 25, and its stock is trading at $ 188.60.
The Statista report I cited above indicates that Alibaba controlled 56% of the Chinese e-commerce market in 2019. In the cloud segment, it represented 46.4% of the market, according to the market research firm Canalys.
Alibaba’s logistics subsidiary, Cainiao, has reduced its operations to pre-coronavirus levels. In addition, the company is expected to benefit from the rapid growth in e-commerce sales in China. According to another Statista report, e-commerce growth in China is estimated to be 15.5% year-on-year in 2020. Investors can expect Alibaba to outpace e-commerce growth in China. country, boosted by the growing popularity of its Tmall and Taobao platforms.
During the quarter ended in December, Alibaba’s cloud sales increased 62% to $ 1.5 billion and accounted for almost 7% of its sales. In the past four quarters, Alibaba’s cloud sales have totaled $ 5.1 billion. It is the fastest growing industry in the business for some time.
Alibaba Cloud continues to gain ground among companies by launching new products and services, extending its SaaS offerings and investing massively in research and development.
Alibaba will continue to benefit from an increase in online sales, an exponential growth in data storage and its growing presence in the digital advertising space.
Another piece of e-commerce
While Baozun (NASDAQ: BZUN) stocks lost 16% between February 19 and March 25, down 55% from record highs. The company was affected by the slowdown in sales and the escalation of the U.S.-China trade war in 2019.
However, for long-term investors, this sale represents an opportunity given the expansion of the electronic commerce market in China. Baozun provides e-commerce services, including digital marketing, store operations, warehousing and fulfillment, as well as IT solutions.
It integrated these e-commerce capabilities into partner back-end systems, allowing partners to effectively track data.
In addition, Baozun can help partner brands establish a healthy online presence in China by launching products on e-commerce platforms such as Tmall and JD.com. At the end of December, Baozun had partnered with 231 brands, against 185 brands a year earlier. The company added eight partner brands in the fourth quarter, which increased sales 26% year over year.
Baozun has an extensive supply chain network and can reach more than 200 cities in China. It also serves regions of Greater China such as Hong Kong, Taiwan and Macao. Like Alibaba and JD, Baozun will also benefit from an increase in consumption levels which will lead to an increase in online retail sales, making it one of the best bets in this segment.
The attractive valuations of Alibaba, JD.com and Baozun offer huge upside potential for long-term investors. Alibaba has a price / sales ratio of 6.8, and this metric is 1.5 for Baozun. JD.com is currently trading at a price / sales ratio of 0.7, which makes it incredibly cheap considering the company’s estimated double-digit revenue growth over the next two years.
These companies generate 100% of their sales in China, which is, ironically, a safe bet in this volatile market. In the long term, these three companies will benefit from the expansion of the Chinese middle class, which will translate into increased purchasing power and consumption levels. China is already the largest e-commerce market in the world, and its estimated growth could help these tech companies to crush market returns over the next decade.