After a strong 2020, China’s stock market had a rough go of it last year. Beijing’s regulatory action and tight monetary policy led to a 29% decline in the MSCI China index. Most U.S. listed Chinese companies didn’t fare well either.
Looking ahead to 2022, the good news is that Chinese equities 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.
Combine the attractive valuation with the potential more supportive government policy and investing in China looks like a good move in 2022, i.e., the year of the tiger.
The next question is a harder one. Which stocks should U.S. investors buy?
A good starting point is to find undervalued plays on the purchasing power of the Chinese consumer. Here are three names that should rise to the top of the buy list.
Is JD.com Stock Undervalued?
JD.com (NASDAQ: JD), short for Jingdong.com, is China second-largest online retailer. It sells a vast assortment of products from electronics and furniture to books and clothing. And although it faces intense competition from Alibaba and others, the size and projected growth of the Chinese retail market should create multiple winners. It is a market that according to research group Technavio will grow 10% annually through 2025.
China’s retail market is also attractive because it remains highly fragmented. Whereas the top 20 U.S. retailers make up more than half of the domestic retail market, China’s top 20 comprise less than 20%. So as the pandemic continues to accelerate the Chinese consumer’s shift to online, JD.com should be a major beneficiary.
Formerly 360buy.com, the company has recently expanded beyond regular e-commerce with a Retail-as-a-service offering. Making its technology and retail infrastructure available to others has opened JD.com to more sectors of the Chinese economy and created a strong complimentary revenue stream.
The largest JD.com shareholder is Chinese tech conglomerate Tencent Holdings Limited at 17% and Walmart owns approximately 9% of the stock. With other public companies, institutions, and insiders owning most of the stock this leaves about one-fifth of the shares outstanding left for retail investors. With JD.com down 40% from its February 2021 peak and analysts forecasting 33% earnings growth in 2022, it’s a good time to grab some of those shares.
What is a Good China Grocery Store Stock?
Dingdong (NYSE: DDL) is a grocery store and delivery service in one that has a presence in 29 Chinese cities. It is establishing a leadership position in China’s massive on-demand grocery market by selling meat, seafood, produce, and other daily staples from huge warehouse-style stores that remind of Costco and Sam’s Club. Overlay this with a Doordash-esque home delivery service that has an ambitious 29 minute delivery target and Dingdong should be ringing plenty of doorbells in the years to come.
The company estimates that China’s fresh groceries and daily necessities markets will grow at an annual rate of 6% and 7%, respectively, through 2025. By then the combined market size is expected to be roughly $2.4 trillion about half of which will take place online. So, the market opportunity is clearly there, but what about Dindong’s financials?
While Dingdong’s stock has trended lower since listing on the NYSE in June 2021, its financial performance has gone the opposite direction. Revenue was up 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 almost 6% of GMV and will be an important growth driver going forward. The company is operating at a net loss, but the gross and net margins are trending higher, and analysts expect a sharp bottom line improvement in 2022.
Dingdong stock is down to about $14 after shooting above $40 on its second day of trading. When it comes to defensive bets on China’s grocery industry, Dingdong is not next to the Twinkies…it’s in the bargain aisle.
Is PetroChina Stock a Good Value?
PetroChina (NYSE: PTR) is not as oversold as other beaten-up 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 7x this year’s earnings estimate. It also pays a semiannual dividend which based on last year’s distribution gives the stock a 7.5% yield.
When it comes to finding international energy stocks to play the rebound in oil and gas prices, PetroChina has been more of an afterthought. Many investors stay away from it because it is a state-run entity and as such is subject to the unpredictable actions of the Chinese government. But it may be a risk worth taking considering the company’s recent surge in profitability. Year-to-date through September operating income has nearly tripled despite the average realized oil price up a more modest 56%.
China’s electric vehicle ambitions have also kept investors away from PetroChina. Yet there is expected to plenty of demand for crude oil for plenty of auto and non-auto related industries over the next few years with China being the world’s second-largest oil consumer. The company’s growth prospects in natural gas are also encouraging with a shift from coal to natural gas underway. And with PetroChina involved in numerous non-gasoline products like diesel, kerosene, and lubricants, it touches many sectors of the Chinese economy—and could help fuel growth and income accumulation in a long-term portfolio.