Navigating Chinese stocks

China’s recent crackdown on Didi (DIDI) shook financial markets.

One of the hottest IPO countries flexed its political might, reminding investors of the risks that come with foreign equities.

So are any Chinese stocks safe?

It shouldn’t be much of a surprise that our TrackstarIQ data saw a surge in searches for DIDI.

But, we also found some other names worth looking into.

Rather than cover one individual stock, we decided to give you a brief overview of the most popular ADRs along with the pros and cons.

Nio (NIO)

The hottest electric vehicle company in China, Nio manufacturers and sells the EVs to the Chinese market, with people calling it the Tesla of China.

Unlike many of the U.S. startups, Nio is already well underway with sales of more than $3.5 million annually. While that’s not a ton, it’s more than the goose egg put up by Workhorse (WKHS).

Pros:

  • Doubled sales last year.
  • Is one of the first EV companies expected to commercialize solid-state battery technology, which could be a game changer.
  • Only sells in China with virtually no cross-border data sharing.
  • Operating cash flow positive last year.

Cons:

  • Operating cash flow looks suspicious (most EVs don’t turn cash flow positive until well down the road).
  • Chip shortages set to impact their deliveries for the next several quarters.
  • High amounts of debt

Baidu (BIDU)

The Google of China, Baidu is China’s largest search engine as well as having international operations. And like Google, the company makes its fortune through advertising.

Google struggled to make inroads into the Chinese market specifically because the Politburo backed Bidu while Google struggled to accept any content restrictions.

Pros:

  • One of the more established companies in China.
  • Has been expressly propped up by the Chinese government.
  • Turns a healthy profit with a very reasonable valuation of 8.6x earnings.
  • Like Google, the company diversifies revenue into videos, apps, and streaming services.
  • Small AI business is expected to top online marketing revenue in the next 3 years

Cons:

  • Growth opportunities outside of China are limited given the government’s substantial influence.
  • Core competitive position eroded by Tencent and Alibaba (BABA) in recent years.
  • The iQYI segment remains unprofitable.

JinkoSolar Holding (JKS)

Who doesn’t love a good solar stock these days?

With green energy on the rise, solar companies are in vogue once again.

One of the biggest solar manufacturers globally, JKS operates nine production facilities, seven in China, one in the U.S., and one in Malaysia.

Growth has been running along at a nice double-digit clip, with a positive operating margin.

Pros:

  • Growth continues at over 15% per year.
  • Operations in the U.S. market and Malaysia allow it to avoid tariff problems.
  • Cheap price to sales ratio at 0.5x
  • Larger trend industry

Cons:

  • Overseas operations make it a prime target for Chinese government regulation.
  • The company is considering listing on the STAR market instead of the Nasdaq, following a similar announcement from CSIQ.
  • Company has barely been operating cash flow positive for years.

iShares China Large-Cap ETF FXI

One way to gain exposure to China without company-specific risk is through an ETF.

The FXI holds 50 of the largest companies in China, including ones not listed in the U.S. 

While it won’t give you the explosive gains tied to any individual company, it prevents intervention from the Chinese government in any one company from blowing up your portfolio.

Pros:

  • Diversification across the largest companies in China
  • Gain access to companies not available for trading in the U.S.
  • High liquidity in certain ETFs

Cons:

  • Expense ratios eat away at profits. In this case, you pay 0.74% annually.
  • You can’t do company specific analysis and investment.
  • Broader macroeconomic themes tend to have a wider impact on the general markets.

Our hot take

These are just a few of the options that came out of our TrackstarIQ data to invest in China. 

Many others exist including Alibaba (BABA) and more that are great companies.

When you do your research, ask yourself whether the business could run afoul with the Politburo from cross-border data sharing.

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