5 Chinese stocks to watch now - do you have them in your portfolio?

Published by: 17.08.2021 08:33:45

Hundreds of Chinese companies are listed in US markets. But what Chinese stocks are best to buy or watch right now? We've picked the most interesting ones:Weibo (WB), Sohu (SOHU), Nio (Nio), BYD Co. (BYDDF) and Li Auto (LI).

Let's justify this choice

China is the world's most populous nation and second largest economy with a thriving urban middle class and amazing entrepreneurial activity. Dozens of Chinese stocks are often among the top performers in a wide range of sectors.

But given China's crackdown on Didi Global (DIDI), for-profit education firms and other sectors, Chinese stocks sold in the U.S. have been devalued in recent weeks, only exacerbating a generally weak year 2021. While Beijing has indicated it would like to see stocks stabilize, it also continues to plant restrictions and increase oversight of the private sector. It is easy to deduce that the risk associated with Chinese equities is great. 

Best Chinese stocks in many industries

Given the size of the Chinese market, the huge growth of Chinese stocks focused on ecommerce or mobile gaming is no surprise.

Stocks of note include:

• Alibaba (BABA)

• JD.com (JD)

• Pinduoduo (PDD)

• Tencent (TCEHY)

• Vipshop (VIPS)

• Baidu (BIDU)

• Tencent Music Entertainment (TME)

• NetEase (NTES)

• Trip.com (TCOM)

• Dada Nexus (DADA)

• Bilibili (BILI)

• Joy (YY)

• KE Holdings (BEKE)

In the electric vehicle space, several Chinese companies are becoming rivals to Tesla (TSLA).

We've picked the most interesting ones:

• Nio (NIO)

• Xpeng Engines (XPEV)

• Li Auto (LI)

• BYD Co. (BYDDF)

• Several Chinese financial firms or brokers listed in the U.S.

• Futu Holdings (FUTU)

• Up Fintech Holding (TIGR)

• 360 Digitech (QFIN)

• Noah Holdings (NOAH)

Several Chinese stocks are also in the energy sector, particularly solar power.

• Daqo New Energy (DQ)

• JinkoSolar (JKS)

Chinese education stocks are a remarkable non-technical sector.

• New Oriental Education (EDU)

• Tal Education (TAL)

• 17 Education and Technology Group (YQ)

• Gaotu Techedu (GOTU), formerly known as GSX Techedu.

Don't forget stocks in other industries such as bicycle maker Didi Global (DIDI), beauty products maker Yatsen (YSG) and data centre operator GDS Holdings (GDS).

Beijing crackdown on Chinese stocks

Investors should be aware of the significant risks associated with investing in Chinese equities. The authoritarian state and its regulators can impose extensive restrictions, fines or bans on large companies, often with little notice or transparency.

Alibaba came into conflict with the government in late 2020.In April, China fined Alibaba $2.8 billion and ordered it to change various practices.

Earlier this month, the Chinese government ordered app stores to remove Didi Chuxing, just days after Didi Global (DIDI) staged one of the biggest US IPOs in years. China said Didi violated rules regarding the collection and use of personal information. This came just days after an order to suspend new user registrations.

Education operators, including New Oriental Education (EDU), TAL Education (TAL) and Gaotu Education (GOTU), collapsed on July 23 as Beijing pondered whether to make the after-school education companies a non-profit organization. The stocks have already fallen sharply in 2021 as regulators and leaders signaled new restrictions.

Beijing later confirmed the profit cap, triggering continued  losses in Chinese stocks and big losses in Chinese stocks in the US. China is also setting new rules for app-based delivery firms and has hinted it may target the real estate sector. Finally, Beijing has hinted at even tougher rules for Hong Kong and Macau.

On August 3, Chinese state media criticized online gaming as a "spiritual opium" for teens. China has previously cracked down on online gaming firms. Tencent (TCEHY), NetEase (NTES) and Bilibili (BILI) were big losers.

On August 10, the Communist Party Central Committee released a new five-year plan that calls for greater regulation across a broad spectrum of businesses and the economy, which will trigger fresh losses in Chinese stocks.

Investing in China through ETFs

One way to minimize the risks of individual Chinese stocks is through ETFs. Another advantage of buying ETFs is that a growing number of Chinese companies are selling shares in Hong Kong or Shanghai, rather than in the U.S.

Interesting Chinese stocks worth noting:

IBD's CAN SLIM investment system has a proven track record of significantly outperforming the S&P 500. Outperforming this industry benchmark is the key to generating exceptional returns over the long term.

Look for companies that have new products and services changing the way the world works. Invest in stocks with recent quarterly and annual earnings growth of at least 25%.

Start with those that have strong earnings growth, such as Alibaba or Pinduoduo stock. If they are not profitable, look for at least rapid earnings growth like Nio stock. The best Chinese stocks should have strong technicals, including superior price performance over time. 

Chinese stocks are not popular. Whether it's the general malaise for electric car names like Nio and Xpeng, or the regulatory crackdown on Alibaba, Didi or New Oriental Education, Chinese stocks have lost significantly in the US in 2021. After a brief bounce in May and June, Chinese stocks are under heavy pressure again.

Li Auto Stock

Li Auto is one of several Chinese electric vehicle makers trading in the U.S., competing with Tesla (TSLA).

Although Li Auto is still facing losses, it has seen huge sales growth for its current model, the Li One SUV. The Li One is actually a hybrid, with a small gasoline engine that extends its range.

As of August 1, Li Auto reported sales of 8,529 units in July, up 251% from a year earlier and up 11.4% from June. Li Auto has delivered 38,473 Li One SUVs in 2021.

After a big surge since the July 2020 IPO to a record 47.70, on November 24, 2020, Li Auto shares plunged to 15.98 in May. The stock more than doubled to 36.66 on July 1, but has since retreated.

The Chinese company's stock surged 16% on July 28. It also plans to introduce a new, larger hybrid SUV in 2022.

Nio

Although not as big as the diversified and profitable BYD, Nio is the most widely used of China's electric vehicles. Nio has three models, the ES8, the ES6 and the crossover EC6. It plans to release a top-of-the-line ET7 sedan in 2022.

The company is not yet profitable, but sales growth is very strong. Sales in Q1 2021 were up 529% from the previous year, when China was at the height of the coronavirus crisis. However, Nio shipments stalled in Q2 vs. Q1 due to chip shortages.

Nio started Norwegian deliveries for its ES8 SUV and began European expansion.

Nio shares hit 66.99 points on January 11, fell to 30.73 on May 13 and rose to 55.13 on July 13, but have since fallen.

Nio's earnings peaked towards the end of August 11. The loss was smaller than expected, while revenue rose 145% to $1.31 billion.The electric vehicle maker also expects a gradual increase in shipments. 

It came after Nio reported July sales of 7,931 units, up 124.5% from a year earlier but down 1.9% from 8,083 in June. The July total included 1,702 EC8 SUVs, 3,669 EC6 SUVs and 2,560 EC6 crossovers.

BYD

BYD Co. is China's largest electric vehicle manufacturer, producing electric cars, buses and also many hybrids. It is also a major manufacturer of batteries for electric vehicles. Berkshire Hathaway (BRKB) is a long-term investor in Warren Buffett.

BYD sold 54,841 pure electric cars in the second quarter, not far off Tesla's sales of

The company's new energy vehicles include hybrids and commercial vehicles.

In July, BYD sold 50,492 new energy vehicles, up 171% year-on-year. Electric vehicle sales were 24,996, an increase of 109%.

The automaker recently introduced the Han EV, which is expected to boost sales even further. Meanwhile, Chinese media reports that BYD will supply batteries for Tesla cars from 2022.

As well as Nio and Xpeng, BYD has started selling electric cars in Norway, starting with the Tang SUV.

BYD is traded in Hong Kong and traded over the counter in the US. BYDDF's stock chart is therefore prone to many small gaps.

Sohu

The Chinese games firm was one of the first Chinese Internet companies to list on the U.S. stock market. It went public in July 2000. Sohu's stock peaked in 2011 and steadily declined until March 2020.

The stock has been losing value lately last week it fell with other Chinese stocks listed in the US.

Investors could use 25.09 as a buy point, just above the July 15 high. 

After several years of losing money, Sohu is profitable again and earnings growth is accelerating. On Aug. 9, Sohu reported better-than-expected earnings per share, with revenue up 27.5% to $204 million. Shares jumped 7% last week.

Weibo

Weibo stock is a popular app, often compared to Twitter (TWTR).

Following a difficult 2020 due to the pandemic, Weibo is growing again. Weibo's profits rose 90% in the latest quarter, with revenue up 42%. 

Weibo shares retreated in August and undercut the 50-day line on August 13. On August 16, WB stock fell to the 200-day line.