3 Chinese stocks to buy in 2020 and beyond

Author: Aditya Raghunath

Estimated read time: 5 minutes

Publication date: 31st Jul 2020 11:03 GMT+1


As the COVID-19 pandemic continues to cast an air of uncertainty, it is imperative that investors should choose companies that have a resilient business model. The Chinese e-commerce companies are showing immense promise even amid the coronavirus crisis.

China is the biggest e-commerce market in the world and is creating opportunities rapidly. Buying some of these stocks will indeed be a smart move at this point.

We have picked three Chinese e-commerce stocks that continue to prosper and have a business model that actually thrives amid the pandemic. Due to the lockdown and social distancing norm, people have no option but to turn to online shopping.

 

Alibaba: Going strong amid robust financials and resilient B2B model

Ever since its IPO in 2014, Alibaba (NYSE: BABA) is one stock whose growth is unabated. At the core of the company is its e-commerce business. However, Alibaba’s business model is just like Amazon in the US.

Even the Chinese company’s cloud computing segment has shown solid growth. RBC Capital’s analyst told Barron that Alibaba is “the single best play on the growth of the internet in China.” The COVID-19 has actually highlighted the competency and resilience of Alibaba’s operations.

The unique point about Alibaba is its business-to-business e-commerce model unlike Amazon’s business-to-consumers.  As a result, the Chinese e-commerce giant doesn’t depend on logistics and warehouses for the delivery of goods. This naturally translates into higher operating margins and lower dependence on external funding. The company is also cash rich with limited debt exposure.

Alibaba’s financials look stronger for fiscal 2020. The revenue 2020 surged 35% and it expects revenue growth to be 28% in 2021. The company’s adjusted EPS also climbed 38% in FY 2020. However, a point of concern is Alibaba’s increased inclination towards the brick-and-mortar stores which are low-margin.

Alibaba stock is up 18.7% year-to-date while the S&P 500 and Nasdaq have returned 0.3% and 21.4% respectively in 2020.

 

JD.com: Entry into agricultural produce and medical supply delivery to boost strength

JD (NASDAQ: JD) is China’s second-largest e-commerce platform after Alibaba. The company’s business is expanding at a breakneck speed due to its robust logistics network. It has more than 700 warehouses with front distribution centres in nearly 30 cities.

It covers almost all the cities and districts in China with fulfilment centres in 7 cities. JD has invested loads of money to develop its logistics and that is paying off. As a result, the supply disruptions during lockdown didn’t impact it much.

The company has a strong presence in the supermarket segment. In fact, its limited exposure to the garments section works in its benefit. In Q1, it launched Mobile Fresh Basket to deliver fresh local agricultural produce to around 100 cities. JD also expanded its service to deliver medical products and traditional Chinese herbal medicines.

Its Q1 results indicated a revenue growth of more than 20% to $20.6 billion, while its bottom line shows stability due to operational efficiency. Its active customers also climbed 25% year-on-year (YoY) for the twelve months ended March 31. JD stock surged nearly 66% YTD, which shows the investor confidence. Given its pace of growth and supply chain competency, we expect the bull run to continue.

 

Baozun: A small cap stock with immense potential

After seeing its share of lows since July 2019, the Chinese small cap e-tailer, Baozun (NASDAQ: BZUN) has bounced back to life. Since March, the stock has soared nearly 50% and its business has gained momentum amid the pandemic.

Also known as the ‘Shopify of China’, Baozun offers digital storefront, order fulfilment services and marketing support to leading global brands. Baozun also integrates the digital storefront with leading online marketplaces in China like Alibaba.

Many retail brands from the US who find it difficult to gain foothold in other markets, see immense growth opportunities in China. For such brands, platforms like Baozun are their gateway to the Chinese market.

Naturally, more brands are signing up for Baozun. The company has also added a dedicated platform for small enterprises which is poised to see considerable growth due to the rise of middle-class Chinese businessmen.

In the first quarter, Baozun’s revenue climbed 18% year-on-year (YoY), while its total brand partner base expanded 20% to 239. At this juncture, this stock looks attractive to buy considering its growth potential in the e-commerce business.

 

Conclusion

Going by news reports, the Chinese economy has reopened and is recovering at an amazing pace. Though some reports indicate that there could be a second round of outbreak of the coronavirus in China due to a wet market in Beijing, it is too early to judge its impact.

But whatever is the situation, the COVID-19 is favouring the e-commerce model. The US listed Chinese e-commerce stocks do face challenges like escalating tensions between the US and China or an imminent delisting. However, talking about the fundamentals, they remain a strong bet.


Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.