Many Chinese tech stocks surged over the past year, and their valuations rose to frothy levels. Therefore it might seem tough to find decent Chinese tech plays trading at reasonable multiples. So today, I'll highlight three Chinese stocks which still trade at surprisingly low valuations -- NetEase (NASDAQ: NTES), Yirendai (NYSE: YRD), and China Mobile (NYSE: CHL).
NetEase publishes PC and mobile games. It also develops social, news, and media apps, provides online services like email and note-taking services, and owns the e-commerce site Kaola.com. However, the lion's share of its revenue comes from its gaming business, which publishes popular Chinese games like Fantasy Westward Journey, Onmyoji, and Ghost Story.
NetEase's Onmyoji. Image source: Google Play.
NetEase published three of the top ten highest-grossing games in both the Chinese iOS and Android app stores in July. This makes it the only major game publisher that can effectively compete against Tencent (NASDAQOTH: TCEHY), which dominates the charts with hit games like Honor of Kings, the most popular mobile game in China.
NetEase is often overshadowed by bigger tech companies in China, but its growth is impressive -- its revenue and earnings respectively rose 68% and 73% in 2016. Analysts expect its revenue to rise 40% this year, but for its earnings to rise just 8% on higher game production expenses. However, its earnings are expected to rise 17% next year after it launches new titles.
NetEase trades at just 18 times earnings, which is lower than Tencent's P/E of 53 and lower than the industry average of 37 for internet information providers. It also pays a forward dividend yield of 1.4%, which is supported by a low payout ratio of 25%.
Yirendai is a peer-to-peer (P2P) lender that cuts banks out of the loop. This business model has proven wildly popular in China, where outstanding P2P loans hit 816.2 billion yuan ($123 billion) in 2016 -- compared to just over 100 billion yuan in 2014.
However, the P2P market is also a risky one due to fraud and problematic loans. Last year, Chinese regulators claimed that about three quarters of all P2P lenders had troubled loans on their balance sheets. In response, the country started capping loans from a single lender and limiting maximum loans per individual, and banned P2P lenders from taking public deposits and selling wealth-management products.
But despite those headwinds, Yirendai's growth remains robust. Its revenue rose 137% annually in 2016, while its net income and adjusted EBITDA respectively jumped 356% and 217%. Wall Street expects its revenue to rise 59% this year, but for its earnings to rise just 7% this year on higher expenses before growing another 37% next year.
Those growth figures make Yirendai look remarkably cheap at 13 times earnings. However, the stock is cheap due to ongoing concerns about tighter regulation and the company's dependence on subprime loans. Last quarter, only 5.8% of loans on its platform were provided to top-tier "Grade I" lenders -- which could be a red flag for its long-term growth.
China Mobile is the largest telecom company in China, with a wireless customer base of 874 million. Only 617 of those customers are on 4G networks, which leaves the telco room to boost its average revenue per customer with upgrades. It also serves 99 million customers with its newer wireline business, which can be bundled with wireless plans.
Image source: Getty Images.
China Mobile, along with its two industry peers China Unicom and China Telecom, are state-backed enterprises. The government periodically rotates the management of all three telcos and oversees deals so that one company doesn't overwhelm the other two. While that system ultimately throttles China Mobile's growth, it prevents margin-crushing pricing wars and makes it a fairly low risk investment.
Unlike NetEase and Yirendai, China Mobile is a slow growth play. Its revenue and earnings respectively rose 1% and 7% last year, and analysts expect both figures to rise about 5% this year. But China Mobile's stock is also cheap at 13 times earnings, which is well below the industry average of 22 for telecom companies. It also pays a 5.5% forward yield (paid semi-annually), which is supported by a payout ratio of 44%.
The key takeaways
These three Chinese stocks all have low valuations, but they have very different risk profiles. Conservative investors should stick with China Mobile, investors looking for a little more risk can buy NetEase, while speculative investors can nibble on Yirendai -- which could either generate huge gains or incur big losses with its wobbly loan portfolio.