In this article, we discuss BlackRock’s latest report on China and the 10 stocks to watch.
New York-based BlackRock is the world’s largest asset manager, with more than $10 trillion in assets under management as of the first quarter of 2022. Founded in 1988, the money-manager now boasts a global footprint, with 70 offices in 30 countries which serve clients in around 100 countries. As a mammoth in its respective field, it’s only natural that Wall Street takes notice when BlackRock shares its analysis on a particular situation.
With a solid history of investing in Chinese stocks, BlackRock has now turned bearish on the world’s second largest economy. The asset manager cited growing geopolitical concerns, amidst China’s close ties to Russia, as well as a deteriorating macroeconomic outlook, as the reason for trimming its outlook from ‘Slightly Overweight’ to ‘Neutral’. Jean Boivin, head of the BlackRock Investment Institute, told clients in a weekly note:
“China’s ties to Russia also have created a new geopolitical concern that requires more compensation for holding Chinese assets, we think.”
The outbreak of the Omicron wave in China has upended the nation’s economic growth, and this effect is exacerbated by the government’s ‘zero-tolerance’ policy to mitigate the spread of the virus. This means entire cities are put under strict lockdowns, and massive testing carried out until the virus is completely weeded out. Shares of Chinese companies have considerably declined since October. BlackRock analysts Jean Boivin and Wei Li, who previously held a ‘Modest Overweight’ stance on Chinese stocks as their attractive valuations covered for the risks, now believe these lockdowns will significantly hurt the economy. The yuan has declined to an 18-month low against the US dollar, currently hovering at 6.79 yuans per dollar.
As a response to this economic instability, Chinese regulators have decided to ease off their clampdown against the country’s tech industry, according to the Wall Street Journal. For the last several months, the authorities were hounding big tech names under their vision of ‘Common Prosperity’, where large corporations making unprecedented profits and enjoying unchallenged monopolies were reformed to put society on a more equal footing. But authorities are planning to hold off on the introduction of new regulations, and are reportedly considering to force tech giants to offer 1% equity stakes to the government and a direct role in corporate decisions. As this news broke in late April, shares of Alibaba Group Holding Limited (NYSE:BABA), JD.Com, Inc. (NASDAQ:JD), Pinduoduo Inc. (NASDAQ:PDD) rallied, offering the economy some immediate relief.
Jack Ma
Our Methodology
We picked the 10 Chinese stocks in BlackRock’s portfolio as of the first quarter of 2022, and analyzed their latest market situation in light of analyst ratings, business fundamentals, share price gains/losses, and hedge fund sentiment. Insider Monkey’s database of 900+ elite hedge funds were used to derive the hedge fund sentiment around each stock.
BlackRock’s Latest Report on China and 10 Stocks to Watch
10. JD.Com, Inc. (NASDAQ:JD)
BlackRock’s Stake Value: $237.29 million
Number of Hedge Fund Holders: 67
JD.Com, Inc. is first up on the list of 10 Chinese stocks to watch in BlackRock’s portfolio. As of the end of the first quarter, the world’s largest asset manager owned 4.1 million shares of the Chinese firm at a value of $237.3 million. Based in Beijing, JD.Com, Inc. is an e-commerce giant which deals in online retail marketplaces, services related to the logistics business, as well as property and technology initiatives.
On May 2, Mizuho analyst James Lee maintained a ‘Buy’ rating on JD.Com, Inc. shares and reduced the firm’s price target to $90 from $100. Lee notes that the first half of 2022 will be challenging for the Chinese internet sector as Covid restrictions affect consumer spending and business activities. He sees this negative impact spreading across all segments of the internet sector, including cloud computing, e-commerce and advertising. However, the analyst doesn’t see Covid as a structural risk, but thinks the zero-tolerance policy in China will only delay the recovery schedule.
As of the end of the fourth quarter of 2021, 67 out of 924 hedge funds tracked by Insider Monkey held positions in JD.Com, Inc. with a combined value of $8.75 billion. This shows a positive trend from the quarter before where 66 hedge funds held stakes in the Chinese firm. At the end of Q1 2022, Fisher Asset Management held a stake worth $445 million in JD.Com, Inc., making it the firm’s largest shareholder.
On May 4, JD.Com, Inc. announced the approval of a special cash dividend of $0.63 per ordinary share, or $1.26 per ADS, to shareholders as of May 20. The total amount paid through this special dividend will stand at around $2 billion.
Argosy Investors, an investment firm, mentioned JD.Com, Inc. in its Q3 2021 investor letter, stating:
“We sold JD as a result of the furor over Chinese stocks during the quarter. We had been concerned about China’s lack of respect for investor rights for some time, and Beijing has become significantly more aggressive in asserting itself of late. In addition, the legal structure Chinese companies use to come public in the U.S., a Cayman Islands shell corporation leaves American investors with an unsure path to recovering value should these companies cease to trade on U.S. exchanges. Because of the uncertainty, we exited our position in JD completely. We still love JD’s long-term prospects, but we cannot estimate the legal/regulatory risk associated with these companies anymore. More broadly, we are freeing up cash for some other positions we already own which have declined in this market, and after additional review, remain attractive.”
In addition to Alibaba Group Holding Limited and Pinduoduo Inc., JD.Com, Inc. is one of the most exciting Chinese stocks to watch.
9. Huazhu Group Limited (NASDAQ:HTHT)
BlackRock’s Stake Value: $252.24 million
Number of Hedge Fund Holders: 29
Huazhu Group Limited (NASDAQ:HTHT) is a Chinese firm which deals in the development, ownership and management of hotels throughout Mainland China. Prior to 2018, it was known as China Lodging Group, and currently manages approximately 8,000 hotels under a range of brand names.
As of the end of the first quarter of 2022, BlackRock owned 7.64 million shares of Huazhu Group Limited with a price tag of $252.24 million. The total number of hedge funds holding stakes in the firm stood at 29 at the end of the fourth quarter of 2021, with combined stakes worth $1.97 billion. In comparison, 28 hedge funds were long on the company shares a quarter ago.
For the first two months of 2022, Huazhu Group Limited reported that it was on track towards recovery in its RevPar (revenue per available room), which stood at 65% of the 2019 level in March 2022, as compared to only 47% of the 2019 level in January 2022. However, the widespread outbreak of Covid in China and the subsequent lockdown measures have halted this recovery as leisure, travelling and business activities take a hit. Nonetheless, some demand for hotel rooms has increased owing to the quarantine needs of infected patients and medical staff.
Credit Suisse analyst Lok Kan Chan on March 24 upgraded Huazhu Group Limited to ‘Outperform’ from ‘Neutral’ and set a price target of HK$33, down from HK$41. The analyst notes that the Covid lockdowns have affected near-term recovery, but the recent price correction gives investors a good buying opportunity given the firm’s ongoing network expansion and a potentially better domestic recovery.
8. ZTO Express (Cayman) Inc. (NYSE:ZTO)
BlackRock’s Stake Value: $487.07 million
Number of Hedge Fund Holders: 28
Based in Shanghai, ZTO Express (Cayman) Inc. (NYSE:ZTO) offers delivery and value-added logistics services throughout China with a fleet of approximately 11,000 trucks. With 19.48 million shares worth $487 million, the firm represented 0.01% of BlackRock’s portfolio at the end of the first quarter of 2022.
Citi analyst Lu Xu on March 18 lowered the firm’s price target on ZTO Express (Cayman) Inc. to $39.60 from $40.90 and reiterated a ‘Buy’ rating on the company shares, owing to the firm’s attractive valuation and “defensiveness with better-than-peer cost advantage”. The company estimates that its parcel volume for FY2022 will record a year-on-year increase of 18%-24% as based on the current market conditions and company operations.
For the fourth quarter of 2021, ZTO Express (Cayman) Inc. posted an EPS of $0.34, beating estimates by $0.02. Revenue of $1.45 billion for the quarter missed estimates by $62.6 million, but exceeded year-on-year figures by 14.3%.
Out of all the hedge funds tracked by Insider Monkey, 28 reported owning stakes in ZTO Express (Cayman) Inc. at the close of the fourth quarter with a total value of $1.09 billion. This shows growing investor confidence in the Chinese firm over the previous quarter where 20 hedge funds held $1.01 billion worth of positions in the company. According to its portfolio for Q1 2022, Platinum Asset Management held 14.9 million shares of ZTO Express (Cayman) Inc. worth $372.6 million, making it the firm’s largest shareholder.
7. Alibaba Group Holding Limited (NYSE:BABA)
BlackRock’s Stake Value: $495.82 million
Number of Hedge Fund Holders: 96
Alibaba Group Holding Limited is a Chinese e-commerce giant which operates a range of retail and wholesale e-commerce platforms. It also offers Alibaba Cloud, which offers a complete suite of cloud services. According to regulatory filings for the first quarter of 2022, BlackRock owned 4.55 million shares of Alibaba Group Holding Limited at a value of $495.8 million, representing 0.01% of its overall portfolio.
On May 16, JPMorgan analyst Alex Yao double upgraded Alibaba Group Holding Limited to ‘Overweight’ from ‘Underweight’ with a price target of $130, up from $75. Yao expects “early-cycle sectors” such as digital entertainment, local service, and e-commerce “to be the first batch of out-performers”. The uncertainties plaguing the Chinese internet sector are abating on the back of recent regulatory announcements, according to the analyst, who now has a more balanced view on the stocks. Mizuho analyst James Lee was also bullish on Alibaba Group Holding Limited in early May, giving the stock a ‘Buy’ rating and a revised price target of $160 from $180.
96 hedge funds reported owning stakes in Alibaba Group Holding Limited at the close of the fourth quarter, with aggregate holdings worth $6.93 billion. This is down from 115 hedge funds a quarter ago with combined positions worth $10.2 billion in the company. Billionaire and prominent investor Ken Fisher was bullish on Alibaba Group Holding Limited at the close of the first quarter of 2022, with his Fisher Asset Management holding a $1.57 billion stake in the Chinese giant comprising of 14.44 million shares.
Here is what Baron Funds, an investment firm, had to say about Alibaba Group Holding Limited in its Q1 2022 investor letter:
“We have eliminated 6 holdings during the first quarter (including) Alibaba. We have sold our Alibaba Group Holding Limited position as the company continues to face competitive challenges and regulatory pressures remain, making it difficult (if not impossible) to appropriately assess the range of outcomes and associated probabilities for the future profitability of the business.”
6. XPeng Inc. (NYSE:XPEV)
BlackRock’s Stake Value: $557.75 million
Number of Hedge Fund Holders: 29
Then there’s XPeng Inc. (NYSE:XPEV), an electric carmaker headquartered in Guangzhou, China. It makes and sells SUVs under the G3 name, sports sedans under the P7 name, and family sedans under the P5 name. BlackRock, according to its Q1 2022 portfolio, owned a $557.8 million stake in the firm comprising of 20.21 million shares.
On April 1, HSBC analyst Yuqian Ding initiated coverage of XPeng Inc. with a ‘Buy’ rating and a $37 price target. The analyst expects the firm’s leading and differentiated smart driving experience to boost its sales and brand equity, as it is the only Chinese firm to achieve the impressive feat of building its software for autonomous driving completely in-house, like Tesla (NASDAQ:TSLA). The analyst sees the firm’s product cycle driving rapid volume growth.
XPeng Inc. announced that it delivered 9,002 smart EVs in April 2022, signaling a 75% increase year-over-year. However, this was a 42% drop from the previous month on the back of supply chain and other issues related to the Covid lockdowns. Year-to-date deliveries stood at 43,563 as of April 30, representing a 136% jump from the year-ago figure.
Of the 900+ elite hedge funds tracked by Insider Monkey at the close of the fourth quarter of 2021, 29 held positions in XPeng Inc. with a collective price tag of $1.17 billion. This is a positive trend from the previous quarter where 25 hedge funds held $657 million worth of stakes in the EV maker.
Just like Alibaba Group Holding Limited, JD.Com, Inc., and Pinduoduo Inc., XPeng Inc. is a Chinese stock on the radar of investors.
5. Li Auto Inc. (NASDAQ:LI)
BlackRock’s Stake Value: $771.59 million
Number of Hedge Fund Holders: 24
Li Auto Inc. (NASDAQ:LI) is another Chinese automaker stock which features in BlackRock’s Q1 2022 portfolio, with 29.89 million shares valued at $771.6 million. The Beijing-based company offers smart electric vehicles equipped with ADAS (advanced driver assistance systems) under the Li ONE brand for its SUVs. As of May 16, shares of Li Auto Inc. have gained 15.76% in the last 12 months, but slumped 32.53% in the year to date.
On May 11, Citi analyst Jeff Chung reiterated a ‘Buy’ rating on Li Auto Inc. shares, and reduced the firm’s price target to $26.80 from $51.50. The firm’s first quarter earnings showed a stable free cash flow and ‘defensive’ margin trends, according to the analyst, who maintained his volume forecasts through 2024. But given the expectations of higher costs and growing R&D investment with new model launch, the analyst reduced his earnings estimates for 2022 and 2023 by 83% and 36%, respectively.
Investors were seen buying into Li Auto Inc.. 24 hedge funds reported bullish bets on the company shares at the close of Q4 2021, as compared to 20 hedge funds a quarter ago. Billionaire Jim Simons upped his stake in the Chinese firm by 162% to consist of 4.47 million shares valued at $115 million, making his hedge fund Renaissance Technologies the largest shareholder of Li Auto Inc. at the end of the first quarter of 2022.
4. Pinduoduo Inc. (NASDAQ:PDD)
BlackRock’s Stake Value: $847.61 million
Number of Hedge Fund Holders: 34
Pinduoduo Inc. operates a mobile application-based e-commerce platform which offers a range of consumer products throughout China. BlackRock held 21.13 million shares of the firm at a value of $847.6 million, representing 0.02% of its total portfolio as of the end of the first quarter of 2022. At the close of Q1 2022, Bridgewater Associates was the leading shareholder of Pinduoduo Inc., with 4.93 million shares valued at $198 million.
On May 16, JPMorgan analyst Andre Chang double upgraded Pinduoduo Inc. to ‘Overweight’ from ‘Underweight’, and increased the price target to $55 from $27. Chang noted that the uncertainties faced by the Chinese internet sector were abating on the back of news that regulators are loosening oversight policies in response to slowing economic growth. In April, analysts from 86 Research and Goldman Sachs both gave Pinduoduo Inc. ‘Buy’ ratings.
Investors reduced their overall holdings in Pinduoduo Inc. at the close of the fourth quarter, where 34 hedge funds reported owning the company shares, as compared to 49 hedge funds in the preceding quarter.
Investment firm Tao Value mentioned many stocks in its Q4 2021 investor letter, and Pinduoduo Inc. was one of them. The fund said:
“On the detracting side, one of our largest detractors includes Pinduoduo (ticker: PDD). Pinduoduo (PDD) reported the second consecutive GAAP profit quarter yet missed on the revenue due to nation-wide consumption weakness & scaled back Sales & Marketing efforts. Market disliked it and the stock price plunged on the earnings. In my opinion, the accounting profits proved the original thesis of using S&M to acquire users and using great shopping experience to keep them. After realizing the first growth curve, Pinduoduo now shifted its focus & investment to agriculture. It is still very early, but the reduced size due to price drop warrants a position to watch and continue grow with such a team with strong culture.”
3. Yum China Holdings, Inc. (NYSE:YUMC)
BlackRock’s Stake Value: $1.33 billion
Number of Hedge Fund Holders: 26
Yum China Holdings, Inc. (NYSE:YUMC) is a food conglomerate which operates a number of brands in China, including KFC, Pizza Hut, Taco Bell, Little Sheep, and East Dawning, among others. BlackRock’s stake in the company amounted to 32.02 million shares at the close of the first quarter, representing 0.03% of its total portfolio and carrying a price tag of $1.33 billion.
In early May, the firm reported that the Omicron wave in China had caused significant volatility in its business operations during the first quarter, and this trend looks set to continue in the second quarter. The worsening US-China trade relations could also put further strain on the company shares. As of May 16, shares of Yum China Holdings, Inc. have lost 19.43% in the year to date.
Out of all the hedge funds tracked by Insider Monkey, 26 reported owning stakes in Yum China Holdings, Inc. at the end of the fourth quarter with a combined value of $842.5 million. This shows a downward trend from the preceding quarter where 30 hedge funds held $832.6 million worth of positions in the firm. Ray Dalio’s Bridgewater Associates held 1.62 million shares of Yum China Holdings, Inc. at the end of the first quarter, with a price tag of $67.5 million, making it the firm’s leading shareholder.
2. NIO Inc. (NYSE:NIO)
BlackRock’s Stake Value: $1.35 billion
Number of Hedge Fund Holders: 30
According to 13F filings for the first quarter of 2022, BlackRock reported owning 64.58 million shares of NIO Inc. (NYSE:NIO) with a value of $1.35 billion, representing 0.03% of its gigantic portfolio. The firm is a manufacturer of smart electric vehicles based in Shanghai. Apart from its range of SUVs and sedans, it also offers services such as home charging, public charging infrastructure, battery swapping and auto financing.
In April, April, NIO Inc. delivered 5,074 EV units, showing a decrease of 49% from the previous month and a slump of 29% year-on-year. This was due to the firm’s production facilities being hampered by supply-chain problems caused the Covid lockdowns throughout mainland China.
However, BofA analyst Ming Hsun turned bullish on NIO Inc. on May 16. He upgraded the stock from ‘Neutral’ to ‘Buy’, whilst increasing the price target to $26 from $25. The analyst noted that shares of the Chinese automaker are trading at an attractive valuation, with strong fundamentals in terms of brand equity, sales growth, R&D capability, and improved cash flow. Lee increased the estimated sales volume by 3% and 8% for 2022 and 2023 respectively.
As of the end of December, 30 hedge funds out of the 900+ tracked by Insider Monkey were long NIO Inc., with aggregate positions worth $813.7 million. The same number of hedge funds were bullish on the company shares a quarter ago as well.
1. Baidu, Inc. (NASDAQ:BIDU)
BlackRock’s Stake Value: $1.59 billion
Number of Hedge Fund Holders: 38
Baidu, Inc. (NASDAQ:BIDU) is BlackRock’s largest Chinese stock holding, with 12.04 million shares valued at $1.59 billion. It is a tech giant often referred to as China’s Google, offering a range of services such as the Baidu search engine, online marketing services, content streaming, marketplace services, online encyclopedia, short video mobile application and artificial intelligence initiatives.
38 hedge funds reported owning positions in Baidu, Inc. at the close of Q4 2021, with a combined value of $1.43 billion. This is down from 44 hedge funds with $2 billion worth of stakes in the Chinese tech giant in the previous quarter.
On April 28, Baidu, Inc. received Chinese government permits to provide driverless cab-hailing to the public on open roads in Beijing, representing a milestone for the autonomous ride-hailing industry in China. The firm already boasts the largest autonomous driving fleet in China.
Mizuho analyst James Lee in early May gave Baidu, Inc. a ‘Buy’ rating and revised the price target to $285 from $300. The analyst noted that internet companies in China may face challenges in the first half of 2022 on the back of Covid’s impact on business activities and consumer spending.
Investment firm Ariel Investments talked about Baidu, Inc. in its Q3 2021 investor letter, stating:
“When we have such a high level of conviction for a company it is not uncommon for us to own it in size across our portfolios. Such is the case with technology giant Baidu, whose leading search engine has been dubbed the “Google of China.” This quarter shares sold off in sympathy with the Chinese internet sector as investors were rattled by the government’s sweeping regulatory crackdown intended to promote “common prosperity” by easing wealth inequality. While we recognize the greater political risk of investing in emerging markets such as China and incorporate an appropriately higher risk premium in the discount rate in our valuation models, we believe Baidu’s business strategy is aligned with national policies and prioritie and is therefore not adversely impacted unlike some other
players in the internet sector who are in the eye of the storm.Indeed, the Chinese government recognizes Baidu’s large, upfront investments in many next-generation artificial intelligence (AI) technologies and hails it as a national champion. For example, the company’s Advanced Driving Support System (ADAS), Apollo, has twice as much data on miles driven than any other initiative in the world, giving Baidu (and China) a large lead in the global AI arms race. In addition, Baidu’s cloud offering touts highly differentiated Platform as a Service (PaaS) features and capabilities for a demanding enterprise customer base. While these initiatives are a temporary drag on margins and require long-term execution, their success will bolster China’s “dual circulation” strategy aimed at spurring domestic demand, innovation and self-reliance.” (Click here to see the full text)
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