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A Case For Investing In Chinese Internet Stocks

Jul. 08, 2020 7:02 PM ETBaidu, Inc. (BIDU), JD, NIO, NKLA2 Comments
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Seeking Alpha Analyst Since 2009

Co-Founder of Investcraft. Investcraft is a Financial Newsletter that focuses on helping individual investors navigate through the complexities of the stock market. 

I decided on a change a pace today and focus on a couple of Chinese internet companies I've invested in:  JD and BIDU.  But before I get to that, let me provide a quick update on the overall market.

There's little change in my overall assessment of the US Stock market and economy since my last article.  I mentioned before how there was so much money was sitting on the sidelines that any pullback will be pretty mild.  Yesterday was a great example of that -- a moderate drop followed by a 177 point rebound.  I expect a similar pattern in the coming days and weeks.  One thing of note is that a larger stimulus check (possibly $2,000 per individual from what I've read) is expected soon -- maybe as soon as August.  Where do you think this $2,000 is going?  My guess is that many investors who put their $1,200 stimulus checks to work in their Robin Hood accounts will be putting their next stimulus in the same account.  We might see a lot more stock buying once that stimulus check comes through.

Also, I decided to focus today's article on something other than the overall market and the surge in virus spread in the US.  After a while, it just gets depressing looking at the surge in COVID-19 cases across the country.  I thought I'd get away from that for once and focus on countries that are doing better at containing the virus.  There's little debate that Asian countries have fared much better than Europe or the U.S. at containing the virus.  Specifically, I'm talking about the world's 2nd largest economy -- China.

Investing in China comes with its own risks though.   For one, there's much less transparency and many cautionary tales of high-flying Chinese stocks that wind up getting de-listed due to fraud (Luckin Coffee comes to mind) or are simply pump-and-dump schemes.  I've been burned more than once investing in Chinese companies in the past. 

However, there are a few very interesting Chinese companies that have greatly benefited from COVID-19 lock-downs.  One stock that I absolutely love is JD.  I think of that company as the "Amazon of China".  They built their very own logistics business from the ground up (JD Logistics) and their e-commerce business has been growing rapidly in China.  Rather than make my investment case for JD, here's a GREAT article about JD's business that explains it better than I can.  There's also a paywall-free article analyzing JD's business that I can recommend.  Both articles provide a great summary of JD's business and explains the investment thesis very well.

Although JD's stock has risen considerably in the past 6 months, I still think there is plenty of upside and it is also one of the better growth stories out there.  If you believe that China will emerge from COVID-19 much stronger economically than the US or Europe, then you should absolutely pay attention to companies like JD.  The e-commerce market is much larger in China than the US and JD already has a huge footprint in tier 1 cities.  They're now going after the lower tier cities and have recently launched new products, such as Jingxi (a groupon-like group-buying app), to target those cities for growth.  The largest e-commerce company in China is Alibaba but I think they're already so big, with a $635 Billion market cap, that there may be less room to grow.  With JD being 1/7 the size of BABA ($94 Billion market cap), there's more ROI upside if they can continue executing Amazon's playbook to perfection in China.

Another Chinese e-commerce company I like is BIDU.  Baidu is the dominant search engine in China and often dubbed "the Google of China".  However, the search market has evolved significantly in China and Baidu has had a string of missteps that hurt their valuation over the past few years.  Again, rather than rehash what others have already analyzed, here's a great article that analyzes Baidu's business in detail.  

I still see a significant amount of value in both BIDU and JD.  I'm invested in both and I still see a lot of upside in both businesses -- especially as China has seemingly dealt with the COVID-19 virus better than most other countries.  As China's domestic economy recovers and their exports also recover (Europe is also recovering quickly), I see JD and BIDU benefiting greatly in the recovery story.  Ultimately, I am a value investor and I see a lot of value in both of those companies.

However, there are some Chinese companies such as NIO or NKLA that I absolutely avoid at all costs.  Sure, both of those companies stocks are skyrocketing but neither of these companies have an actual business yet.  NKLA hasn't sold a single truck and NIO is bleeding cash.  Investing in those kinds of companies is no different than rolling the dice on the craps table.  If you're a speculator, day trader or you just like to gamble, then knock yourself out.   But if you want to invest in companies with growth stories and actually generate profits, then JD and BIDU are names you should look at.

Again, do your own research and good luck to all!

Analyst's Disclosure: I am/we are long JD, BIDU.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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