China Stock Market: Companies to Watch

The Chinese market, consisting of three stock exchanges (Shanghai, Shenzhen and Beijing), is one of the most important sectors in the world. According to Goldman Sachs, in 2021, the capitalization of all Chinese companies around the world will be 18 trillion dollars, including 14.3 trillion dollars of shares traded on national exchanges. About $4 trillion of this amount is in Hong Kong.

The Hong Kong stock exchange, located in the autonomous region, is not part of the Chinese market, although it is related to and similar to the offshore stock market. Foreign investors have two main routes to access the Chinese market, one is through the Hong Kong Stock Exchange, whose main Hong Kong index, the Hang Seng, covers 66 of the largest domestic issuers and is one of Asia’s most important stock market indicators.

As one of the leading digital personal finance companies, Freedom Finance Europe explores a variety of companies listed on the Hong Kong Stock Exchange with growth potential in both the short and long term.

Twitter’s Chinese counterpart, Weibo Corporation (DB, 9898), operates in two segments: advertising and marketing services; and value-added services. The $5.5 billion capitalized company records TTM revenue of $2.3 billion, maintaining high revenue and customer base growth after a banner year in 2021. Last December, Weibo obtained a secondary listing in Hong Kong, thereby reducing the risks associated with it. Delisting from Nasdaq. However, the company has a VIE structure (through the Cayman Islands) and bears all the associated risks. At any time, Chinese authorities could close the VIE in a new crackdown on IT companies, and investments in Weibo would be blocked. Large advertisers from Alibaba and SINE account for a significant portion of the company’s revenue (11% for 2021), which carries the risk of becoming dependent on specific customers.

“Weibo is subject to significant administrative influence from the authorities. It regularly blocks content that goes against the policies of the Communist Party. Weibo is a dynamic company with good medium-term growth prospects. Since its mid-March 2022 share price low, the company’s stock price has risen 27% with the potential for an additional 12% upside in the near term. Maxim Manturov, Head of Investment Consulting of Freedom Finance Europe, explains this.

Alibaba Group Holding Ltd (BABA, 9988) operates in four segments (Core Commerce, Cloud Computing, Digital Media and Entertainment), has $305.4 billion in capitalization, $127.3 billion in revenue, and $9.25 billion in profits. Alibaba conducts 71% of its business in China (69% retail and 2% wholesale) and has reached one billion active customers in China. However, the current global situation poses a risk to the Chinese market, as a worsening of China’s economic relationship with the US or any weakening of the US dollar could lead to a crisis in China. Cloud computing is one of the fastest growing segments of business. Alibaba predicts that China’s cloud market will grow fivefold to 1 trillion yuan ($160 billion) by 2025. The share buyback program has been increased from $15 billion to $20 billion by 2024.

“Increasing costs relative to income has had a negative impact on business in recent years. The unpredictable policies of the Chinese private sector pose a serious risk to Chinese companies. As we approach the annual report, it is likely that the remaining figures will not break records, despite the increase in turnover. Since its mid-March 2022 low, the company’s price has risen 58% with an additional 8% near-term upside potential.” Maxim Manturov commented.

KE Holdings Inc. (BEKE, 2423) An integrated online and offline platform for housing transactions and services in China. The $178.2 billion company generated $10.8 billion in revenue, up 15% over the past twelve months. However, the impact of current real estate policies and measures, the emergence of COVID-19 in specific regions and related restrictive measures may continue to adversely affect the Company’s business. In the first quarter of 2022, the company achieved weak financial results with total operating value of ¥586.0 billion ($92.4 billion), down 45.2% from the previous year. Net income was RM12.5 billion ($2.0 billion), down 39.4% year-on-year.

“The company aims to strengthen collaboration with high-end real estate developers and create data-driven products to effectively increase valuation of new housing projects and sales conversion. The company has reduced its liabilities several times, which will have a positive effect on the future activity of the business. The company is worth a long-term view. After bottoming out in mid-March 2022, the company’s price has risen 120% with an additional 15% upside in the near term.” Maxim Manturov says.

Trip. com Group Limited (TCOM, 9961) Provides travel services for booking accommodation in China and abroad, purchasing transportation tickets, package tours and destinations, managing business trips and other travel-related services. The $15.3 billion capitalized company has just $3.0 billion in revenue.

As travel returns to normal, Asia’s global aviation industry is expected to respond quickly to reduced demand. From April 1 to May 5, the total number of orders increased by 54% compared to March figures (this represents a 22% year-over-year increase). In April, flight bookings increased by 383% year-on-year. Savings rates have stabilized since May and started to rise. The main downside is that there are still uncertainties about the Covid restrictions affecting business.

“The company is attractive enough to acquire, it has good growth prospects, quarterly financial results are rising, revenues, profits show that the company’s business is undervalued. Lagging demand in the market following Covid restrictions in China presents an opportunity to revive activity. After bottoming out in mid-March 2022, the company’s price has risen 56% with the potential for an additional 10% upside in the near term.” Maxim Manturov explains.

ZTO Express (Cayman) Inc. (ZTO, 2057) It provides express delivery and other value-added logistics services in China. The company, which is capitalized at $20.3 billion and equipped with a good report in the first quarter of 2022, records a turnover of 7.9 billion. Total revenue of $1,246.8 million was up more than 20% year-over-year, driven by growth in the core express division.

Unfortunately, with the widespread pandemic, ZTO Express lowered its forecast for parcel volumes in 2022. The forecast of 24.96-25.86 billion (previously 26.30-27.64) indicates an increase of 12-16% compared to last year’s indicator. High operating costs are holding back ZTO’s profit growth. Despite the difficult market conditions, the company continues to perform well and growth is expected in the medium term. After bottoming out in mid-March 2022, the company’s stock price is up 30%, with near-term upside potential of 7-10%.

Other companies to watch include XPeng Inc., which specializes in smart electric vehicles. (XPEV, 9868), China’s market leader in new energy vehicles Li Auto Inc (LI, 2015), fast-moving industry Yum China Holdings, Inc. (YUMC, 9987) included. food, Baidu Inc (BIDU, 9888), an Internet search engine via software, Sunny Optical Technology (2382), a developer and manufacturer of optics and microelectronics.

“After the global crisis, the Chinese market is starting to recover faster than other global markets. The growth of the Chinese stock market is not greatly influenced by foreign capital, but is linked to economic growth. The country’s GDP has doubled over the past decade to $17.5 trillion, while the value of the yuan against the dollar has barely changed. This is confirmed by the value of indices such as the Shanghai Composite (SSEC) and Hang Seng (HSI), which have practically recovered and are not falling, having fallen since the beginning of the year. only about 5%” Maxim Manturov concludes.

Leave a Reply

Your email address will not be published. Required fields are marked *