3 Compelling Chinese Stocks to Buy for Multibagger Returns
It would be an understatement to say that the last few years have been unimpressive for Chinese stocks. The reasons include regulatory headwinds, geopolitical tensions, and decelerating GDP growth. It however seems that the worst is over for the economy. Further, several Chinese stocks are deeply undervalued and this might be the best time to accumulate.
It’s worth noting that China’s GDP growth for the March quarter was better than expected. Expansionary policies are likely to continue and will support growth. Additionally, the world is moving towards relatively low interest rates to boost growth. In a globally synchronized world, it’s likely that the worst is over for the Chinese corporate sector.
The focus of this column is on three Chinese stocks to buy and hold for the long term. In my view, these stocks are trading at a valuation gap and represents businesses with immense growth potential. As sentiments change, these undervalued stocks can be expected to surge higher.
Li Auto (LI)
Li Auto (NASDAQ:LI) is the best name to consider among emerging EV companies from China. With deliveries growth decelerating, LI stock has sharply corrected by 49% for year-to-date. This is a good accumulation opportunity with the EV stock trading at a forward P/E of 16.7.
For May, Li Auto reported deliveries growth of 23.8% on a year-on-year basis to 35,020 cars. Even with growth deceleration, the delivery numbers are impressive. This has been backed by laser-sharp focus on China coupled with continued launch of new models.
In March Li Auto has 474 retail stores in the country. This has expanded to 487 stores in 144 cities by May. Aggressive retail expansion is another factor that will continue to support deliveries growth. From a financial perspective, Li ended Q1 2024 with a cash buffer of $13.7 billion. This provides ample flexibility to invest in product innovation and potential expansion in the international markets.
With ample scope for penetration in China, healthy vehicle margin, and focus on next-generation autonomous driving, LI stock is a potential multibagger.
Miniso Group (MNSO)
Miniso Group (NYSE:MNSO) is another Chinese growth stock that trades at a an attractive forward P/E of 17.3. The lifestyle retailer has ambitious global growth plans that’s likely to translate into healthy revenue and EBITDA growth in the next five years.
For Q1 2024, Miniso reported revenue growth of 26% on a year-on-year basis to $515.7 million. Further, adjusted EBITDA increased by 36.7% on a year-on-year basis coupled with a 200 basis points increase in EBITDA margin to 25.9%.
An important point to note is that Miniso ended the quarter with total stores of 6,630. On a year-on-year basis, the number of stores increased by 1,116. Miniso further expects to increase the store count by 900 to 1,100 annually through 2028. This is likely to translate into robust revenue growth and cash flow upside.
I must add here that MNSO stock offers a dividend yield of 1.9%. Considering the growth plans, healthy dividend growth is likely in the next five years.
JD.com (JD)
Amidst volatility, JD.com (NASDAQ:JD) stock has trended higher by 15% in the last six months. The upside comes after a sustained period of price and time correction. With JD stock trading at a forward P/E of 8.9, I expect the positive momentum to sustain.
An important point to note is that China cut interest rates in February to boost the housing sector. Further rate cuts are likely to accelerate construction, consumption, and manufacturing spending. This is expected to benefit JD.com in the next 12 to 24 months.
Specific to JD.com, the retail business remains the cash flow driver. For Q1 2024, operating profit from JD Retail was 9.3 billion renminbi. However, JD Logistics is a potential growth driver for the next five years. For Q1, the segment achieved operating level profitability and revenue growth was healthy at 15% on a year-on-year basis.
At the same time, JD.com has been incubating new businesses that can be value creators in the long term. At some point of time, business de-merger can unlock significant value. Overall, with robust operating and free cash flows, JD.com is positioned to invest aggressively to accelerate growth.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
