There’s Star Wars, there’s the Cola Wars, and these days, we all know about the Trade Wars. The US and China have been at loggerheads for the last two years as the economic superpowers fight it out on the international stage. Will they ever reach an agreement, won’t they? It has started to resemble a soap opera.
Apart from the continuous trade battle, China has had other issues to deal with; its ever-growing economy has been showing signs of slowing down, and the ongoing protests in Hong Kong have been a concern for democratic nations across the globe.
With all the noise in the background, and with recent rumors Chinese stocks will be delisted from US stock exchanges exerting more downward pressure, Goldman Sachs unearthed some interesting findings. The key takeaway was that the hedge funds are actually increasing exposure to Chinese stocks with a collective of $2.1 trillion in equity positions.
Since August, when trade tensions started to cool down, companies with big China exposure have beaten the market, with Goldman saying their firms with the most amount of sales in China outperformed the S&P 500 by 7%, providing 17% returns over the last 3 months.
With this in mind, we took advantage of TipRanks’ Stock Screener to zoom in on 3 Chinese stocks that are Buy-rated, and ones specifically set for gains in the 12 months ahead.
First off to Beijing, which is home to Baidu, the company everyone likes to call ‘The Google of China’, for good reason, too. Baidu ranks as the fourth largest website in the world and has the second largest search engine. It was also the first Chinese company to list on the NASDAQ-100 index.
The internet giant, though, has a had rough year in the market. In May, following a horrible second-quarter report and a perfect storm of increasing competition, a struggling local economy, and the ongoing U.S.-China trade war, the company lost 33% of its value. It is down by 27% year-to-date. However, after a solid Q3 report, the Chinese search engine leader started showing signs of life. So, this naturally begs the question: is the bottom in for Baidu?
Oppenheimer’s Jason Helfstein believes so. Noting Baidu’s strong 3Q, and the stabilization of its core business, the 5-star analyst said, “As the No. 1 search engine in China, BIDU benefits from limited search competition. Meanwhile, large ecommerce, mobile communication, and content platforms have been aggressively competing for consumer attention, weighing on BIDU growth and margins. However, we are now seeing competitive pressure subsiding and management has reduced investments to stabilize margins, making the stock a better value play.”
To this end, Helfstein upgraded his rating to Outperform and set a price target of $145, indicating potential upside of 25%. (To watch Helfstein’s track record, click here)
All in all, the rest of the Street’s take is a bit more varied. With 11 Buy ratings and 4 Holds over the previous three months, the internet giant is a ‘Moderate Buy." Its $140.21 average price target brings upside potential of 22%. (See Baidu stock analysis on TipRanks)
Moving on now, we turn our attention to Guangzhou, which houses the headquarters of live streaming platform, Huya.
The platform’s primary focus is gaming and eSports, though it has been broadening its remit by adding reality shows, musical performances, and animated content to the platform.
The company is expanding internationally, and currently has 17 million monthly active users outside China, and has set its sights on 20 million by the end of the year. A driving force propelling it forward is the Huya-owned Nimo TV, a Spanish language live streaming platform with markets predominantly in Latin America. There are half a billion Spanish speakers worldwide, a huge market for Nimo TV to tap into.
With a strong Q3 report displaying beats across the board, and with total revenue coming in 5% higher than estimates, Credit Suisse’s Kenneth Fong is impressed, noting, “We view HUYA as the leader in the online game live-streaming market in China—it can further ride on this secular tide of online-game live-streaming popularity and medium-term industry structural drivers from 5G network upgrade and cloud-gaming.”
Following the analyst’s positive evaluation, Fong maintained an Outperform rating and raised his price target from $28.50 to $30. This implies a handsome increase of 65% from the current share price. (To watch Fong’s track record, click here)
Though not many have weighed in with an opinion on Huya in the last 3 months, those who have are singing its praises loudly. Overall, three out of four analysts rate the Chinese streamer a Buy, while the average price target stands tall at $27.05. (See Huya stock analysis on TipRanks)
Yum China Holdings (YUMC)
Our Chinese expedition finishes in Shanghai, home to fast food restaurant company, Yum China, and no, that’s not what Trump said following his first KFC on Chinese soil.
We say that because YUMC owns KFC and Pizza Hut in China and it has built a strong presence across the country. Specifically, KFC outlets are opening in smaller cities at a faster pace than the company expected due to the demand foraffordable meals and the ability to turn a quick profit from these locations. Yum China is still coming to grips with demand: last year’s target of 350 new outlets was eclipsed by the eventual opening of 556.
HSBC’s Lina Yan believes Yum is a ‘highly efficient operator’ and thinks ‘Yum China can expand even faster than many investors think’.
The analyst noted, “An impressive return on invested capital (ROIC) indicates the company’s efficiency. We see this increasing to 68.5% in 2021e from 59% in 2018, driven by increases in what is already a stand-out asset turnover ratio (6.8x last year). Globally, quick service restaurants are gauged on ROIC rather than growth, as a higher ROIC supports higher investor returns. For Yum China, the difference is that it simultaneously generates strong growth. If we are right about rising demand for fast food in China, its valuation multiples should be rewarded on both fronts.”
With this glowing assessment, Yan initiated coverage on YUMC stock with a Buy rating, and a price target of $58.10, implying 28% upside from current levels.
Currently YUMC has a Strong Buy consensus rating from the Street, with all 3 analysts tracked over the last 3 months rating the stock a Buy. An average price target of $56.35 indicates a potential 26% increase from its current share price. (See Yum stock analysis on TipRanks)