This week, President Trump said he had a "very good phone conversation" with Chinese President Xi Jinping and that their two teams would hold talks ahead of the G-20 summit in Japan next week. Trump also stated that he will hold "an extended meeting" with Xi during the summit, sparking hopes for a trade truce between the world's two largest economies.
Investors should remain skeptical about a truce, but some beaten-down Chinese stocks could soar if it actually happens. Three stocks that stand to benefit from some actual forward movement on a trade resolution include: Baidu (NASDAQ: BIDU), JD.com (NASDAQ: JD), and Huya (NYSE: HUYA).
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China's biggest search engine provider
Baidu, which owns the largest search engine in China, lost more than 50% of its value over the past 12 months as its core advertising business hit a brick wall. Last quarter its total ad revenue, which accounted for 73% of its top line, rose just 3% annually.
Baidu attributed that decline to the slowdown in the Chinese economy, which throttled ad spending from certain companies, especially in the healthcare, online gaming, and financial sectors. Its longtime search chief, Hailong Xiang, also abruptly resigned.
Baidu's total revenue rose 15% annually (21% excluding its upcoming divestments), but that growth was mostly fueled by its stake in the video streaming company iQiyi. iQiyi is still unprofitable, and Baidu subsidizes its growth, making it a dead weight on its bottom line. Other big investments, including expansions into the smart speaker, AI, and automotive markets, are also weighing down its profits.
That's why Baidu posted its first-ever quarterly loss last quarter, and analysts expect its full-year earnings to tumble nearly 50%. Things look grim now, but the stock's downside is arguably limited at just 15 times forward earnings. Moreover, a trade truce could help Baidu's core advertising business recover quickly, and the stock could suddenly look very cheap relative to its long-term growth potential.
China's biggest retailer
JD.com is China's top direct retailer and the second largest e-commerce player after Alibaba. JD lost more than 30% of its market value over the past 12 months as it struggled with slowing sales growth, rising costs, and a rape allegation against its founder and CEO Richard Liu.
But those clouds are parting. JD's revenue rose 21% annually last quarter, marking its slowest growth since its IPO, but its forecast for 19%-23% growth in the second quarter indicates that its growth is finally stabilizing.
Image source: JD.com.
JD also grew its base of active customers, expanded its gross margin year-over-year, cut costs with layoffs, boosted its adjusted net income 150%, and generated positive free cash flow again. JD also expanded its Prime-like JD Plus membership service, sold more marketplace ads, and offered more of its logistics services to third-party companies. The rape charge against Liu was also dropped, although the alleged victim is still suing Liu and JD.com.
Analysts expect JD's revenue to rise 18% this year and for its adjusted earnings to nearly double, which are high growth rates for a stock that trades at 28 times forward earnings and less than one times next year's sales. If a trade truce is reached, the growth of JD's core marketplace could accelerate again and make the stock even cheaper.
China's top esports player
Huya, which was spun off from YY last year, owns a live streaming platform that mainly hosts gaming and esports videos. Huya more than doubled its revenue annually last year and posted 93% sales growth in the first quarter. It also expanded its gross margin and grew its adjusted net income 93% annually.
Huya's average monthly active users (MAUs) grew 33% annually to 123.8 million during the quarter. Within that total, its average mobile MAUs climbed 30% to 53.9 million. It generated 95% of its revenue from sales of virtual gifts and items that viewers buy for their favorite broadcasters. Its total paid users rose 57% to 5.4 million last quarter.
Analysts expect Huya's revenue and earnings to rise by 57% and 33% this year. Next year they expect its revenue to rise 34%, but for its earnings -- boosted by an increase in paid users -- to nearly double again. That's a jaw-dropping growth rate for a stock that trades at 34 times forward earnings.
Unlike Baidu and JD, Huya's core business model is well-insulated from economic headwinds. Yet this baby was tossed out with the bathwater, and the stock lost nearly half its value over the past 12 months. Any positive news about China could cause investors to flock back to this stock.
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