In the last decade, Chinese stocks have underperformed their counterparts in the U.S. and India. While the S&P 500 has surged 270% since May 2011, the Nifty is up 176% while the Shanghai Composite Index is up just 22% in this period.
However, this underperformance in China’s equity markets provides investors with an opportunity to buy undervalued stocks that can gain momentum in 2021 and beyond to generate outsized gains. Here, we look at three such stocks that Wall Street is bullish on.
Baozun (NASDAQ: BZUN)
Known as China’s Shopify, Baozun provides e-commerce solutions to brand partners in China. Its integrated end-to-end brand e-commerce capabilities cover multiple aspects of the online value chain that include IT solutions, online store operations, digital marketing, customer services, fulfillment, and warehousing.
In the first quarter of 2021, Baozun reported sales of $308.4 million and earnings per share of $0.13. Wall Street forecast the company to post revenue of $314.5 million and earnings of $0.10 per share.
Baozun said the GMV (gross merchandise volume) in Q1 rose 44% to $20.5 billion as it ended the March quarter with 281 brand partners. The company’s board of directors also authorized a share repurchase program worth $125 million. Further, the management confirmed they are looking to optimize Baozun’s cost structure while will result in meaningful cost savings in the upcoming quarters.
Baozun stock is valued at a market cap of $2.82 billion. Comparatively, analysts expect the company’s revenue to rise by 35.5% to $1.85 billion in 2021 and by 28% to $2.37 billion in 2022. This will help Baozun improve the bottom line from $1.3 per share in 2020 to $1.92 per share in 2022. In 2020, Baozun increased sales by 22% while adjusted net income soared by 50% year over year.
We can see Baozun stock is trading at a forward price to sales multiple of 1.5x and a price to earnings multiple of 26.32x which is really cheap considering its stellar growth estimates. Wall Street has a 12-month average price target of $47.13 for Baozun stock which is 30% above its current trading price.
The company provides e-commerce services to several multinational companies in China that include Nike and Starbucks. Several brands are looking to gain a foothold in China which is one of the largest consumer markets in the world. Baozun not only manages the marketing campaigns of these companies but also fulfills orders and sets up an online marketplace for them to thrive in a competitive but high-growth market.
iQIYI (NASDAQ: IQ)
While Baozun can be likened to Shopify, iQIYI is similar to Netflix. This company provides online entertainment services and offers various products and services that consist of internet video, online games, live broadcasting, animations, online literature, and e-commerce.
iQIYI’s platform provides a library of online video content that includes licensed and original content. In addition to content distribution and online ad sales, the company also operates the iQIYI Mall which is an e-commerce platform that focuses on entertainment-related merchandise such as VR glasses.
In the first quarter of 2021, iQIYI reported sales of $1.2 billion and an adjusted loss of $0.25 per share, better than consensus estimates. Analysts expected iQIYI to post revenue of $1.18 billion and a loss of $0.36 per share in Q1.
Company CFO Xiaodong Wang, “Our total revenue in the first quarter has exceeded our previous guidance, recording healthy growth on both quarter-over-quarter and year-over-year basis.”
However, its total subscribers fell to 105.3 million compared to 118.9 million in the year-ago period. iQIYI lowered its content costs for the third consecutive quarter but also lost subscribers for the third consecutive quarter.
The company continues to lower losses as a percentage of sales. In Q1 its losses were $155 million or 13% of revenue. Comparatively, its losses were 20% of sales in 2020 and 32% of sales in 2019.
iQIYI stock is valued at a market cap of $11 billion. Comparatively, analysts expect the company’s revenue to rise by 10.2% to $5.03 billion in 2021 and by 12.8% to $5.67 billion in 2022. This will help iQIYI improve the bottom line from a loss of $1.46 per share in 2020 to a loss of $0.66 per share in 2022.
We can see iQIYI stock is trading at a forward price to sales multiple of just over 2x which is reasonable. Wall Street has a 12-month average price target of $22 for iQIYI stock which is 42% above its current trading price.
XPeng Inc. (NYSE: XPEV)
The final stock on my list is China’s electric vehicle giant XPeng, a company that is valued at a market cap of $23 billion. It designs, develops, manufactures, and markets smart EVs in China. XPeng offers SUVs under the G3 name as well as a four-door sports sedan vehicle under the P7 name. The company also provides sales contracts, maintenance, supercharging, vehicle leasing and ride-hailing services.
In the first quarter of 2021, XPeng’s vehicle deliveries rose by a staggering 487% year over year to 13,340 units. This allowed it to increase sales from CNY 412.06 million ($64 million) in Q1 of 2020 to CNY CNY8.38 billion ($1.3 billion) in Q1 of 2020.
Analysts expect the company’s revenue to rise by 153.7% to $2.31 billion in 2021 and by 85.5% to $4.28 billion in 2022. This will help XPeng improve the bottom line from a loss of $1.23 per share in 2020 to a loss of $0.32 per share in 2022.
We can see XPeng stock is trading at a forward price to sales multiple of just over 10x which is steep compared to other growth stocks. However, shares of the EV company are also down 60% from record highs.
Wall Street has a 12-month average price target of $46.72 for XPeng stock which is 63% above its current trading price.
The bottom line
All three stocks mentioned here are part of rapidly expanding addressable markets. China is also the largest e-commerce and EV market in the world. The shift towards e-commerce and clean energy solutions is expected to accelerate in the upcoming decade which makes all three companies solid long-term bets, according to Wall Street.