Technology stocks in China have underperformed their counterparts in the U.S. in 2021. Concerns about regulatory and merger-related issues surrounding some Chinese tech companies have contributed to this decline.
However, this current situation provides investors an opportunity to buy quality stocks at a lower valuation.
Here, we look at three such companies that are poised to gain momentum in May.
JD.com (NASDAQ: JD)
The first stock on the list is e-commerce giant JD.com. This stock is trading at an attractive valuation despite its 75% gains in the last year. JD.com reported revenue of $34.4 billion in Q4 of 2020 which was up 31% year over year. Comparatively, adjusted earnings almost tripled to $0.23 per share in the December quarter. In the whole of 2020, its sales surged by 29.3% year over year.
One reason that supported JD.com’s top-line growth was a 30% increase in its customer base that stood at a massive 472 million at the end of 2020. Its earnings growth was driven by JD.com’s high-margin Services business that grew 42% year over year, accounting for 12.6% of total sales in 2020.
Despite its spectacular growth JD.com stock is valued at a forward price to sales multiple of 0.84x and a price to earnings multiple of 43x. Comparatively, analysts tracking the stock forecast sales to grow by 26% to $145 billion in 2021 and by 21.2% to $176 billion in 2022. While earnings are estimated to rise 11% in 2021, this growth might accelerate to 44% next year.
Pinduoduo (NASDAQ: PDD)
Shares of Pinduoduo have surged 177% in the last year and are up 500% since the start of 2019. Pinduoduo is one of the fastest-growing e-commerce companies in China and its mobile platform offers a range of products that include apparel, shoes, bags, electronic appliances, auto accessories, fitness, and personal care items.
In the December quarter, Pinduoduo’s sales were up a staggering 146% at $4.1 billion. This growth can be attributed to a rise in its GMV (gross merchandise volume) which is basically the total value of goods bought on the platform, as well as expansion of its new business Duo Duo Maicai.
Pinduoduo ended 2020 with 788 million active buyers which is more than Alibaba’s figure of 779 million active buyers, making it the largest e-commerce platform in China. The company has focused on selling products at discount prices in lower-tier cities as well as marketing strategies that have allowed it to gain market share.
Due to its stellar growth, Pinduoduo stock is trading at a premium. It has a market cap of $170 billion which suggests a forward price to sales multiple of 10.35x. However, its sales are forecast to grow by 79% to $16.4 billion in 2021 and by 37% to $22.5 billion in 2022.
Vipshop Holdings (NYSE: VIPS)
The final stock on the list is Vipshop Holdings which has gained 460% since the start of 2019 and is up 84% in the last year. Vipshop is a discount retailer that is already profitable, unlike several other e-commerce companies. While sales were up 10% year over year in 2020, analysts expect top-line growth to accelerate to 22% in 2021 and by 14% in 2022. Comparatively, its earnings are forecast to grow by 24% in 2021 and 18% in 2022.
Vipshop stock is trading at a forward price to sales multiple of just over 1x and its price to earnings ratio is also low at 17.6x.
The final takeaway on Chinese stocks in May
All three stocks mentioned here are part of China’s e-commerce market which is all set to grow at an enviable pace in 2021 and beyond. The Economist published a great article earlier this year on China’s e-commerce industry.
Further, the rise in purchasing power of China’s middle class will drive consumer spending higher, making them solid long-term bets right now.