In this list we are going to get you up to speed with the best way to invest in Chinese stocks with the 10 best Chinese stocks to buy now. Be it because of your admiration for the home of a certain sizeable wall or for strategic positioning, you could do worse than invest in these companies so if you’re eager – go straight ahead to our straight-to-the point version – 5 best Chinese stocks to buy now.
2020 has been a rough year for the whole world but you might remember China being in the beginning of it all. After the markets of Wuhan were ravaged by COVID-19 which lead to an unprecedented lockdown, you might think the nation is rather the worse for wear in financial terms. Well, you’re certainly wrong – China is the only large economy in 2020 that is expected to achieve positive growth. The International Monetary Fund expects the country’s economy to expand by 1.2% by the year’s end while other sources put that number closer to 2%. It might not seem like much but once you apply the sheer scale of the economy to it, it’s definitely a sizeable degree of growth. So much so that China on its own is pulling the global numbers above the 0 mark. Without it, the IMF would have recorded a negative cumulative growth.
To add to that, this October’s World Bank report underlines that the country is expected to head into a strong 2021 with a predicted growth of 7.9%. In other news, investors who are looking for good foreign returns should get ready to look back at China. You might take a look at short term trends and decide to invest in Chinese stocks. However, you should also know that the long-term trends also point to much stronger Chinese economy. American capitalism beat Russian style socialism 30 years ago. On the contrary, Chinese style socialist capitalism seems to be performing much better than American capitalism or as Bernie Sanders calls it, corporate socialism. China’s economy is set to become the biggest economy in the world within the next 10 years. China is still technologically behind the United States, but it is catching up fast. China might actually leapfrog the United States in terms of self driving cars in the next few years as Chinese government is doing whatever it can to catalyze the advancement of Chinese companies’ self driving technology, including building smart roads.
Did you know that In 2018 China’s automotive market produced nearly 30 million light vehicles, nearly 70% bigger than the U.S. automotive market? China can produce almost anything cheaper, faster, and in larger quantities than the Western countries can. Competition among Chinese companies is brutal. If you think China is a “socialist” country, you should talk to Chinese workers who work longer hours in risky environments. China is brutally capitalist. The government, companies, and workers are all working towards the goal of technological competitiveness and high economic growth rates.
When you look at academic studies about stock market returns, the conclusion of these academic studies is that investing in the stock market would have yielded nearly double digit returns over the years. However, that’s only because these studies use American stock market data. American companies delivered mind blowing returns because America, as a country, has been on the winning side of economic and political struggles. Now China is on its way to becoming the biggest economy in the world. By 2050, Chinese economy will be 60% bigger than the U.S. economy. Even Indian economy will be bigger than the U.S. economy. As an investor, if you don’t want to be left behind, you need to identify the long-term winners in the future’s biggest economies and gain some exposure.
In this article we will try to identify the 10 best Chinese stocks to buy now.
We took a look at the US – China Economic and Security Review Commission (USCC)’s data to identify the top Chinese stocks that trade in the US stock exchanges. Then we crossed that information with Insider Monkey’s hedge fund sentiment data to produce a list of the top 10 Chinese stocks among hedge funds.
Our research has shown that hedge fund sentiment data is a very useful way of identifying stocks with huge upside potential. We have been recommending a portfolio of 12-20 stocks (using hedge fund sentiment data in our selection process) in our premium monthly newsletter since March 2017. Our diversified portfolio of stock picks returned 145% since March 2017, vs. 67% gain for the S&P 500 ETFs. You can download a free sample issue here. Since hedge fund sentiment data was helpful in identifying market beating stocks, we decided to use this data to identify the best Chinese stocks to buy now.
10. Nio Inc. (NYSE: NIO)
Number of hedge funds: 35
Total value of hedge fund holdings: $1.4 billion
Nio Inc. is a rising manufacturer of electric vehicles – a type of transportation that we are sure to see more of in the coming years. Aside from that it’s also involved in organising the first of its kind championship for electric vehicles – FIA’s Formula E.
Recently Nio has seen an increase in popularity with investors that helped it get on a total of 35 hedge fund portfolios. To add to that, and the aggregate value of the hedge fund holdings surged to $1.40 billion from $567.82 million at the end of June. This landed the company a position in the middle on our list of the 10 best auto stocks to buy now.
McLain Capital made some cautious statements about NIO in its Q2 investor letter (obviously given NIO’s meteoric rise since this summer, they were wrong about shorting NIO). Here is what they said:
“Nio, Inc. (NIO): It’s stock up 360% since the beginning of June on no news, and one of our more troublesome short positions, the Chinese electric vehicle manufacturer is valued at a whopping $17bln on trailing revenue of only $1.1bln. In 2019, the business ran a -17% gross margin, a -140% EBITDA margin & burned ~$1.5bln in cash in 2019. The stock has become one of the most popular stocks among retail traders with approximately 250,000 accounts holding the name just on the popular Robinhood trading platform.”
9. Bilibili Inc. (NASDAQ: BILI)
Number of hedge funds: 37
Total value of hedge fund holdings: $1.02 billion
Bilibili ranks 9th in our list of the 10 best Chinese stocks to buy now. Bilibili, aside from a catchy name is also a huge part of modern Chinese culture, being one of the most popular video streaming platforms. The company has expanded into the gaming world by landing a deal for China’s streaming rights for the League of Legends World Championships, aside from owning and competing with its own team. This landed it a spot in our list of the top 10 best gaming stocks to buy now.
Financially, the company has been excelling steadily – hedge fund ownership has risen for four consecutive quarters, increasing by 106% during this year. Yiheng Capital, managed by Jonathan Guo is the biggest holder of Bilibili stock with a total value of $277 million. We covered Tao Value’s detailed Bilibili bullish thesis in this article. Here is a short exceprt from that article:
BILI’s story could one day be a great case study of “how to build a profitable YouTube without ads”. It has made great strides to this goal thus far. Mobile game is a proven lucrative business and is strengthened by Sony’s new strategic investment. Both live streaming & e-commerce are also promising as the monetization models are well built & tested in China, for example, tipping streamer (for which platform can take a quick cut) widely becomes a convention, and mobile payment & logistics infrastructure are mature for e-commerce. Therefore, BILI can focus on fostering high quality PUGC which attracts traffic for further downstream monetization. To achieve this, BILI had built a welldesigned incentive system for creators yet without diluting the “culture” from its origin.
Valuation: BILI looks reasonably value optically at 4.5x sales. However, I think the simple revenue multiple overlooked the mixture of a lucrative game business & rest under-monetized best-of-breed PUGC video business. I estimated BILI’s game business could worth about $3b on a 15x forward earning, which, at our cost basis, implies $2.8b for the rest operating businesses, or $22 market cap for each MAU. This is very cheap considering such a business should be able to easily monetize at $10/user (using either opportunity-cost-based survey or Chinese video/streaming/social media peers) from current mere $3.7/user when they see appropriate. A reference point is that YouTube currently monetizes at $8/user globally, which is also under-done in my opinion. So, we paid 2.2X “fair” revenue for a YouTube of China, where I think a fair multiple should be between 5 to 10 times (depending how much growth you believe is still left). It doesn’t mean BILI price won’t go down than what we paid, but I estimate it could worth twice to 5 times more in 3-5 years with decent probability.”