Financial Pros Eye Bargain Chinese Stocks

Things could be looking up for the Chinese stock market.

Last month, industrial production rose 5.6% from a year earlier, while retail sales also increased 21%, although both were lower than expected.

In the past week, President Biden indicated a potential thaw in relations that frosted over the spy balloon incident.

Trying to get ahead of the curve, financial pros scoured the web for Chinese stocks at an accelerated clip second only to AI-related names.

Top on the list was the Amazon of China, Alibaba (BABA).

From a valuation standpoint, shares are dirt cheap…so long as it backs it up with growth.

So, let’s explore the ins and outs of the company and where it stands amongst its competitors.

Alibaba’s Business

Alibaba is a Chinese multinational technology company specializing in e-commerce, retail, Internet, and artificial intelligence. It’s the world’s largest online business-to-business trading platform for small businesses. 

If you’ve never been on their website, it’s worth checking out.

Alibaba lists its business units in the following breakdown under the Total Revenue section: 

Source: Alibaba Investor Presentation

Recently, Alibaba reported strong earnings with revenue up 37% year over year. This was driven by its core commerce business as well as its cloud computing division.

It’s biggest segment, Chinese commerce, suffered under COVID 19 restrictions. That’s expected to improve in 2023 since they’ve been lifted.

Interestingly, the company announced it would be cutting 7% of its workforce in its cloud unit as it pursues an IPO for the division. Additionally, it plans to IPO Freshippo and Cainiao, its technology-enabled supermarket and logistics arms.

Financials

Source: Stock Analysis

Revenues slowed dramatically during Covid, with growth dropping from 30%-60% per year to just 1.83% last year. Current forecasts put 2023 sales growth at 5.5%, still well below pre-pandemic levels. Gross margins compressed as well during that same period.

With Alibaba serving ~80% of Chinese e-Commerce, the company’s main growth engine now lies outside of China.

Alibaba holds far more cash than debt, giving it plenty of ammo to execute on its $17 billion share buyback plans.

Valuation

Source: Seeking Alpha

There’s no doubt that Chinese stocks are cheap. Investors discount the stocks for geopolitical risk.

We believe the P/E ratio may be elevated ahead of the planned IPOs, and, therefore, not representative of the company’s profitability.

That leaves Alibaba trading at a cheap price-to-cash flow basis, even with tepid growth.

Growth

Source: Seeking Alpha

Growth is the wildcard.

All signs point to 2023 outpacing 2022. But, with international relations the way they are, it’s tough to see things materially changing anytime soon.

In the near term, Alibaba’s success lies in its focus on expanding its international footprint. They need to continue to attract top talent and partnerships globally, as well as invest heavily in research and development to compete with Amazon, Shopify, and other global e-commerce players.

Profitability

Source: Seeking Alpha

Given the revenue uncertainty, Alibaba should focus on improving its gross margins, getting them back over 40% in the near term.  

This could involve cutting back on marketing and advertising campaigns in order to reduce its overall expense base. 

Our Opinion 8/10

We can’t ignore the excellent risk/reward here. Alibaba is cheap and could easily turn things around.

But, it could also stagnate in the face of cold international trade.

Considering you’d be buying near multi-year lows, current prices are attractive, even if growth is limited for the next year or so.