3 stocks to watch amid the sale of DiDi in China
Chinese carpooling company DiDi Global (NYSE: DIDI) got off to a rocky public start – its shares fell 20% just days after its initial public offering closed. The action plunged after Chinese regulators ordered the removal of DiDi’s app from app stores and asked the company to cease registrations of new users while they conduct a review of its practices. data gathering.
But DiDi is not the only one coming under close scrutiny from Beijing officials. The Chinese government is also reportedly considering new rules that would allow it to prevent Chinese companies from listing abroad and increase its regulatory oversight of their business activities.
Wall Street hates uncertainty, so it’s no surprise that a large number of Chinese companies trading in U.S. markets ended up with these headlines.
It’s far too early to know how all of this will play out, but for bargain hunters, many Chinese stocks are trading at prices far lower than they were just a few weeks ago. We asked three fools which Chinese stocks they are watching most closely right now. here’s why Li Auto (NASDAQ: LI), NIO (NYSE: NIO), and Alibaba Holding Group (NYSE: BABA) aroused their interest.
A strong operator in a sector that China is determined to develop
Lou whiteman (Li Auto): Li Auto is part of a generation of young electric vehicle (EV) companies based in China, and its offerings are differentiated to meet the specific needs of Chinese consumers. Li’s vehicles have built-in gasoline generators to allow recharging when no recharging station is available. That’s important in China – a rapidly growing market for electric vehicles, but also a market where charging stations can be difficult to find outside of major cities.
Li Auto focuses on SUVs, a segment of the market that tends to be higher margin.
The company is not yet profitable as management still prioritizes growth, but recent results have exceeded expectations and it is offering additional models and updates to its existing fleet. In the first quarter of 2021, Li Auto delivered 12,579 vehicles and management expects it to deliver 10,000 per month by September. It is rapidly building the infrastructure it needs to achieve this, with 65 retail stores and 135 service centers to date.
Still, Li Auto couldn’t escape the sale inspired by DiDi. The title is down 11% on the month.
Here’s another reason to love Chinese automakers: Based on recent reports, it seems there is tension between those in the Chinese government who are trying to promote and expand Chinese companies, and those who are concerned about the collection and control of this data. DiDi had problems in part because its data on shopping pickups could be used to track the movement of government officials, such as showing which departments are extending their working hours and which are closing early.
A natural compromise between these factions would be to favor manufacturing companies over tech and information companies, promoting brands for which data is not the product. Although automobiles are becoming increasingly digital, electric vehicles still seem likely to do well in China if its government policies tilt in favor of industrial companies where data is less of a concern. And given that the Chinese government has already made electric vehicles a significant part of its efforts to go green – it has set itself a target that electric vehicles make up 20% of all passenger vehicles sold there from. by 2025 – this sector is less likely than others to be slowed down by regulatory headwinds.
China’s best electric vehicle maker on sale – but probably not for long
Jean Rosevear (NIO): NIO was another U.S.-traded Chinese stock that had a tough week following the DiDi mess, losing around 8.8% of its value through Thursday’s close. But the company remains an intriguing bet, so this could be one of those downside buying times.
Here are a few reasons why I think NIO stands out among the crowd of entry-level Chinese electric vehicle manufacturers.
- The demand is great. NIO delivered nearly 22,000 vehicles in the second quarter, more than double its total from last year. The company has gone to great lengths to establish and nurture relationships with its growing army of loyal fans, who have returned the favor by placing numerous orders for its sleek electric vehicles.
- The balance sheet is solid. NIO was in trouble in early 2020, when the pandemic struck just after a year in which it had made large investments to support its growth. But last summer’s surge in stock prices gave the company a chance to raise additional cash, and it didn’t lose the opportunity. As of March 31, NIO had roughly $ 7.3 billion in cash on its books – enough reserve to withstand the next big storm, if and when it arrives.
- NIO always invests in growth. The company will add two sedan models to its current SUV lineup next year, completing its coverage of the premium automotive market. And in May, it signed a new deal with its manufacturing partner that will increase its plant’s output to 20,000 vehicles per month (from around 8,000 to 10,000 now) – so it will have the capacity to deliver while its backlog continues to increase.
All of these growth-oriented investments explain why NIO is not yet profitable, but it is on the right track. The company’s first-quarter loss was smaller than Wall Street had expected, and although its production in the current quarter was somewhat constrained by the current global semiconductor shortage, this problem is expected to arise. subside over the next few months.
In short: with powerful allies in his home government, a growing enthusiastic fan base, the rapid adoption rate of electric vehicles in China and a big rival You’re here Staggering, NIO looks set to record good growth over the next few years.
This stock of gigantic value just got even cheaper
Rich Smith (Alibaba Group): There is no doubt that the DiDi stock has taken a hit, and other Chinese top thieves have also lost a lot of ground. But if your goal is to fully profit from the sale of DiDi and get some cheap Chinese stocks back while other investors panic, why limit yourself to losing companies in the traditionally low-margin auto sector?
Instead, you could invest in something that’s obviously worth owning: a profitable, free cash flow positive business like the Alibaba Group.
Of course, investors who buy Chinese Amazon shares will now not get as big a discount as on DiDi or Nio shares: Alibaba has only fallen 8% since the end of June. Yet when you calculate the numbers, Alibaba shares still look like an incredible bargain.
According to the company’s latest financial report, released in May, it generated $ 35.5 billion in net income last year and $ 26.4 billion in positive free cash flow. Considering its market cap of $ 576 billion, that gives it a P / E ratio of 16.2 and a P / FCF ratio of 21.8.
Are these assessments inexpensive? Well, consider that the analysts surveyed by S&P Global Market Intelligence expect Alibaba to increase profits at an annualized rate of 38% over the next five years. This would give the stock a price / FCF ratio of 0.6 and a PEG ratio of just 0.4. (Hint: Value investors generally consider anything below 1.0 to be “cheap”.)
And Alibaba shares could be an even better deal than these numbers suggest, given that in the last quarter, for example, the company increased sales by 78% year-over-year. Granted, the possibility of interference from Chinese regulators will always pose a risk to Alibaba – but then again, that’s part of the reason why its shares recently sank.
If you can take the risk of investing in Chinese stocks, Alibaba seems to be one of the most likely to reward it.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.