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BlackRock’s Latest Report on China and 10 Stocks to Watch

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·12 min read
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In this article, we discuss BlackRock's latest report on China and the 10 stocks to watch. If you want to skip our detailed analysis of BlackRock's Chinese stock picks and market outlook, go directly to BlackRock's Latest Report on China and 5 Stocks to Watch.

New York-based BlackRock is the world's largest asset manager, with more than $10 trillion in assets under management as of the first quarter of 2022. Founded in 1988, the money-manager now boasts a global footprint, with 70 offices in 30 countries which serve clients in around 100 countries. As a mammoth in its respective field, it's only natural that Wall Street takes notice when BlackRock shares its analysis on a particular situation.

With a solid history of investing in Chinese stocks, BlackRock has now turned bearish on the world's second largest economy. The asset manager cited growing geopolitical concerns, amidst China's close ties to Russia, as well as a deteriorating macroeconomic outlook, as the reason for trimming its outlook from 'Slightly Overweight' to 'Neutral'. Jean Boivin, head of the BlackRock Investment Institute, told clients in a weekly note:

"China’s ties to Russia also have created a new geopolitical concern that requires more compensation for holding Chinese assets, we think."

The outbreak of the Omicron wave in China has upended the nation's economic growth, and this effect is exacerbated by the government's 'zero-tolerance' policy to mitigate the spread of the virus. This means entire cities are put under strict lockdowns, and massive testing carried out until the virus is completely weeded out. Shares of Chinese companies have considerably declined since October. BlackRock analysts Jean Boivin and Wei Li, who previously held a 'Modest Overweight' stance on Chinese stocks as their attractive valuations covered for the risks, now believe these lockdowns will significantly hurt the economy. The yuan has declined to an 18-month low against the US dollar, currently hovering at 6.79 yuans per dollar.

As a response to this economic instability, Chinese regulators have decided to ease off their clampdown against the country's tech industry, according to the Wall Street Journal. For the last several months, the authorities were hounding big tech names under their vision of 'Common Prosperity', where large corporations making unprecedented profits and enjoying unchallenged monopolies were reformed to put society on a more equal footing. But authorities are planning to hold off on the introduction of new regulations, and are reportedly considering to force tech giants to offer 1% equity stakes to the government and a direct role in corporate decisions. As this news broke in late April, shares of Alibaba Group Holding Limited (NYSE:BABA), JD.Com, Inc. (NASDAQ:JD), Pinduoduo Inc. (NASDAQ:PDD) rallied, offering the economy some immediate relief.

Jack Ma

Our Methodology

We picked the 10 Chinese stocks in BlackRock's portfolio as of the first quarter of 2022, and analyzed their latest market situation in light of analyst ratings, business fundamentals, share price gains/losses, and hedge fund sentiment. Insider Monkey's database of 900+ elite hedge funds were used to derive the hedge fund sentiment around each stock.

BlackRock's Latest Report on China and 10 Stocks to Watch

10. JD.Com, Inc. (NASDAQ:JD)

BlackRock's Stake Value: $237.29 million Number of Hedge Fund Holders: 67

JD.Com, Inc. (NASDAQ:JD) is first up on the list of 10 Chinese stocks to watch in BlackRock's portfolio. As of the end of the first quarter, the world's largest asset manager owned 4.1 million shares of the Chinese firm at a value of $237.3 million. Based in Beijing, JD.Com, Inc. (NASDAQ:JD) is an e-commerce giant which deals in online retail marketplaces, services related to the logistics business, as well as property and technology initiatives.

On May 2, Mizuho analyst James Lee maintained a 'Buy' rating on JD.Com, Inc. (NASDAQ:JD) shares and reduced the firm's price target to $90 from $100. Lee notes that the first half of 2022 will be challenging for the Chinese internet sector as Covid restrictions affect consumer spending and business activities. He sees this negative impact spreading across all segments of the internet sector, including cloud computing, e-commerce and advertising. However, the analyst doesn't see Covid as a structural risk, but thinks the zero-tolerance policy in China will only delay the recovery schedule.

As of the end of the fourth quarter of 2021, 67 out of 924 hedge funds tracked by Insider Monkey held positions in JD.Com, Inc. (NASDAQ:JD) with a combined value of $8.75 billion. This shows a positive trend from the quarter before where 66 hedge funds held stakes in the Chinese firm. At the end of Q1 2022, Fisher Asset Management held a stake worth $445 million in JD.Com, Inc. (NASDAQ:JD), making it the firm's largest shareholder.

On May 4, JD.Com, Inc. (NASDAQ:JD) announced the approval of a special cash dividend of $0.63 per ordinary share, or $1.26 per ADS, to shareholders as of May 20. The total amount paid through this special dividend will stand at around $2 billion.

Argosy Investors, an investment firm, mentioned JD.Com, Inc. (NASDAQ:JD) in its Q3 2021 investor letter, stating:

“We sold JD as a result of the furor over Chinese stocks during the quarter. We had been concerned about China’s lack of respect for investor rights for some time, and Beijing has become significantly more aggressive in asserting itself of late. In addition, the legal structure Chinese companies use to come public in the U.S., a Cayman Islands shell corporation leaves American investors with an unsure path to recovering value should these companies cease to trade on U.S. exchanges. Because of the uncertainty, we exited our position in JD completely. We still love JD’s long-term prospects, but we cannot estimate the legal/regulatory risk associated with these companies anymore. More broadly, we are freeing up cash for some other positions we already own which have declined in this market, and after additional review, remain attractive.”

In addition to Alibaba Group Holding Limited (NYSE:BABA) and Pinduoduo Inc. (NASDAQ:PDD), JD.Com, Inc. (NASDAQ:JD) is one of the most exciting Chinese stocks to watch.

9. Huazhu Group Limited (NASDAQ:HTHT)

BlackRock's Stake Value: $252.24 million Number of Hedge Fund Holders: 29

Huazhu Group Limited (NASDAQ:HTHT) is a Chinese firm which deals in the development, ownership and management of hotels throughout Mainland China. Prior to 2018, it was known as China Lodging Group, and currently manages approximately 8,000 hotels under a range of brand names.

As of the end of the first quarter of 2022, BlackRock owned 7.64 million shares of Huazhu Group Limited (NASDAQ:HTHT) with a price tag of $252.24 million. The total number of hedge funds holding stakes in the firm stood at 29 at the end of the fourth quarter of 2021, with combined stakes worth $1.97 billion. In comparison, 28 hedge funds were long on the company shares a quarter ago.

For the first two months of 2022, Huazhu Group Limited (NASDAQ:HTHT) reported that it was on track towards recovery in its RevPar (revenue per available room), which stood at 65% of the 2019 level in March 2022, as compared to only 47% of the 2019 level in January 2022. However, the widespread outbreak of Covid in China and the subsequent lockdown measures have halted this recovery as leisure, travelling and business activities take a hit. Nonetheless, some demand for hotel rooms has increased owing to the quarantine needs of infected patients and medical staff.

Credit Suisse analyst Lok Kan Chan on March 24 upgraded Huazhu Group Limited (NASDAQ:HTHT) to 'Outperform' from 'Neutral' and set a price target of HK$33, down from HK$41. The analyst notes that the Covid lockdowns have affected near-term recovery, but the recent price correction gives investors a good buying opportunity given the firm's ongoing network expansion and a potentially better domestic recovery.

8. ZTO Express (Cayman) Inc. (NYSE:ZTO)

BlackRock's Stake Value: $487.07 million Number of Hedge Fund Holders: 28

Based in Shanghai, ZTO Express (Cayman) Inc. (NYSE:ZTO) offers delivery and value-added logistics services throughout China with a fleet of approximately 11,000 trucks. With 19.48 million shares worth $487 million, the firm represented 0.01% of BlackRock's portfolio at the end of the first quarter of 2022.

Citi analyst Lu Xu on March 18 lowered the firm's price target on ZTO Express (Cayman) Inc. (NYSE:ZTO) to $39.60 from $40.90 and reiterated a 'Buy' rating on the company shares, owing to the firm's attractive valuation and "defensiveness with better-than-peer cost advantage". The company estimates that its parcel volume for FY2022 will record a year-on-year increase of 18%-24% as based on the current market conditions and company operations.

For the fourth quarter of 2021, ZTO Express (Cayman) Inc. (NYSE:ZTO) posted an EPS of $0.34, beating estimates by $0.02. Revenue of $1.45 billion for the quarter missed estimates by $62.6 million, but exceeded year-on-year figures by 14.3%.

Out of all the hedge funds tracked by Insider Monkey, 28 reported owning stakes in ZTO Express (Cayman) Inc. (NYSE:ZTO) at the close of the fourth quarter with a total value of $1.09 billion. This shows growing investor confidence in the Chinese firm over the previous quarter where 20 hedge funds held $1.01 billion worth of positions in the company. According to its portfolio for Q1 2022, Platinum Asset Management held 14.9 million shares of ZTO Express (Cayman) Inc. (NYSE:ZTO) worth $372.6 million, making it the firm's largest shareholder.

7. Alibaba Group Holding Limited (NYSE:BABA)

BlackRock's Stake Value: $495.82 million Number of Hedge Fund Holders: 96

Alibaba Group Holding Limited (NYSE:BABA) is a Chinese e-commerce giant which operates a range of retail and wholesale e-commerce platforms. It also offers Alibaba Cloud, which offers a complete suite of cloud services. According to regulatory filings for the first quarter of 2022, BlackRock owned 4.55 million shares of Alibaba Group Holding Limited (NYSE:BABA) at a value of $495.8 million, representing 0.01% of its overall portfolio.

On May 16, JPMorgan analyst Alex Yao double upgraded Alibaba Group Holding Limited (NYSE:BABA) to 'Overweight' from 'Underweight' with a price target of $130, up from $75. Yao expects "early-cycle sectors" such as digital entertainment, local service, and e-commerce "to be the first batch of out-performers". The uncertainties plaguing the Chinese internet sector are abating on the back of recent regulatory announcements, according to the analyst, who now has a more balanced view on the stocks. Mizuho analyst James Lee was also bullish on Alibaba Group Holding Limited (NYSE:BABA) in early May, giving the stock a 'Buy' rating and a revised price target of $160 from $180.

96 hedge funds reported owning stakes in Alibaba Group Holding Limited (NYSE:BABA) at the close of the fourth quarter, with aggregate holdings worth $6.93 billion. This is down from 115 hedge funds a quarter ago with combined positions worth $10.2 billion in the company. Billionaire and prominent investor Ken Fisher was bullish on Alibaba Group Holding Limited (NYSE:BABA) at the close of the first quarter of 2022, with his Fisher Asset Management holding a $1.57 billion stake in the Chinese giant comprising of 14.44 million shares.

Here is what Baron Funds, an investment firm, had to say about Alibaba Group Holding Limited (NYSE:BABA) in its Q1 2022 investor letter:

“We have eliminated 6 holdings during the first quarter (including) Alibaba. We have sold our Alibaba Group Holding Limited position as the company continues to face competitive challenges and regulatory pressures remain, making it difficult (if not impossible) to appropriately assess the range of outcomes and associated probabilities for the future profitability of the business.”

6. XPeng Inc. (NYSE:XPEV)

BlackRock's Stake Value: $557.75 million

Number of Hedge Fund Holders: 29

Then there's XPeng Inc. (NYSE:XPEV), an electric carmaker headquartered in Guangzhou, China. It makes and sells SUVs under the G3 name, sports sedans under the P7 name, and family sedans under the P5 name. BlackRock, according to its Q1 2022 portfolio, owned a $557.8 million stake in the firm comprising of 20.21 million shares.

On April 1, HSBC analyst Yuqian Ding initiated coverage of XPeng Inc. (NYSE:XPEV) with a 'Buy' rating and a $37 price target. The analyst expects the firm's leading and differentiated smart driving experience to boost its sales and brand equity, as it is the only Chinese firm to achieve the impressive feat of building its software for autonomous driving completely in-house, like Tesla (NASDAQ:TSLA). The analyst sees the firm's product cycle driving rapid volume growth.

XPeng Inc. (NYSE:XPEV) announced that it delivered 9,002 smart EVs in April 2022, signaling a 75% increase year-over-year. However, this was a 42% drop from the previous month on the back of supply chain and other issues related to the Covid lockdowns. Year-to-date deliveries stood at 43,563 as of April 30, representing a 136% jump from the year-ago figure.

Of the 900+ elite hedge funds tracked by Insider Monkey at the close of the fourth quarter of 2021, 29 held positions in XPeng Inc. (NYSE:XPEV) with a collective price tag of $1.17 billion. This is a positive trend from the previous quarter where 25 hedge funds held $657 million worth of stakes in the EV maker.

Just like Alibaba Group Holding Limited (NYSE:BABA), JD.Com, Inc. (NASDAQ:JD), and Pinduoduo Inc. (NASDAQ:PDD), XPeng Inc. (NYSE:XPEV) is a Chinese stock on the radar of investors.

Click to continue reading and see BlackRock's Latest Report on China and 5 Stocks to Watch.

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Disclosure. None. BlackRock's Latest Report on China and 10 Stocks to Watch is originally published on Insider Monkey.