With the government in China imposing more rules and regulations on the country’s companies, Chinese tech stocks have had a difficult summer. As investing in Chinese tech stocks is still seen as risky, many investors prefer to look towards other emerging markets.
However, some investors view this as an opportunity. Cathie Wood, the founder of Ark Invest and one of the world’s most popular investment managers, is slowly adding to her positions in a few Chinese tech stocks.
JD.com Inc is a holding company that engages in e-commerce business. Its operations consist of online retail, marketplace, and marketing services in China. JD also offers electronics products, home appliances, and other general merchandise. The company has its own online platform, on which third-party merchants offer products and provides marketing and display advertising services to these merchants, suppliers, and other business partners on its website channels.
Since the beginning of the year, JD shares declined 8.69%, underperforming ProShares Online Retail ETF (ONLN) that decreased only 4.15% year-to-date.
Over the past years, JD has posted rapid growth. This e-commerce company grew its net sales by more than 20% in the last 3 years and is expected to reach a peak in 2021, up 29.3% year-on-year to 957.5b CNY. On the other side, JD’s bottom-line growth is expected to post a huge decline of 84.5% year-on-year to 7.64b CNY in 2021 but should lift more than two times in 2022 to 14.8b CNY, representing a net margin of only 1.27%.
However, the e-commerce giant has a comfortable balance sheet, with an expected cash balance of 129.8b CNY in 2021, which should lift 15.4% in 2022 to 149.8b CNY. More importantly, the company is aggressively investing to fuel its growth. JD has risen year-on-year CAPEX over the years and yearly CAPEX growth is expected to stabilize around 20% in 2022, reaching a total value of 18.04b CNY.
In spite of China’s crackdown that has reduced the valuation of tech companies, the valuation metrics of JD are still stretched, evolving at a 2022e EV/EBITDA of 24.7x and a 2022e P/E of 54.5x.
Tencent Holdings Limited (TCEHY)
TCEHY is an investment holding company, providing value-added services (VAS) and online advertising services in Mainland China and internationally. Ranging from online gaming, social networking, fintech and cloud solutions, the company provides a wide variety of services. In addition to these services, TCEHY is also involved in the production, investment and distribution of feature films and television programs. Copyright, licensing and merchandise sales are also among activities TCEHY engages in.
TCEHY stock dipped 14.89% year-to-date, underperforming both JD and the ONLN benchmark.
The holding company has grown in the past years at similar rates as JD. Net sales are expected to jump by 20.3% to 579.8b CNY and TCEHY yearly growth rate should slightly decelerate in 2022, up 19.5% to 692.9b CNY. TCEHY’s net income is anticipated to decrease by 5.9% to 150.4b CNY in 2021, in contrast to the rapid bottom-line advance of the past years. Nevertheless, analysts are expecting TCEHY’s revenue to return to a healthy growth path in 2022, up 10.1% year-on-year to 165.6b CNY.
TCEHY’s balance sheet has significantly improved this year. The tech giant liquidated its debt in 2020 and is expected to post a net cash position of 135.5b CNY in 2021, which should nearly double in 2022 to 238.1b CNY.
The valuation metrics of TCEHY are significantly more attractive than JD’s and are relatively cheap for the tech industry, with a 2022e P/E of 23.2x and a 2022e EV/EBITDA of 15x.
Pinduoduo Inc. (PDD)
Pinduoduo Inc. specializes in mobile e-commerce platforms in China. The group offers products such as apparel, footwear, accessories, child care products, fresh agricultural products, foods, consumer electronics and more.
PDD has lost much of its market capitalization, year-to-date, plunging 41.31%, underperforming most of its peers and the ONLN benchmark.
This poor stock performance is fairly uncorrelated from the fundamental picture of the company. Indeed, the company has nearly doubled its net sales over the past two years. Going forward analysts expect this growth to stabilize around 35%, expecting an advance of PDD’s top-line by 40.5% to 151.4b in 2022. Looking at the bottom line, the company is not yet profitable and is expected to deliver a net loss of 3.77b CNY in 2021. Nevertheless, with its high growth, the company should generate a profit of 2.7b CNY in 2022.
PDD’s balance sheet is well-capitalized, with a net cash position in 2022 of 143.4b CNY. Yet, this cash balance has been built with the issuance of new equity, which explains the poor stock performance of PDD.
With this in mind, the valuation of the tech is overly stretched. Indeed, the tech company is currently trading at a huge 2022e P/E ratio of 346x and at a 2022e EV/EBITDA of 93.5x.