Chinese stocks have taken off. Here are the investment sure-fires from the Middle Kingdom

Chinese stocks have taken off – A bullish rally in Chinese assets has made the Middle Kingdom’s stock market indices the best in the world this year. Why is there such heightened investor interest in companies from a country ruled by the communist party? Which Chinese stocks are worth putting in your portfolio?

In this article you will learn:

• Why have Chinese stocks been soaring recently?
• Which Chinese companies are investment safe bets?
• Why do you still need to be very careful when investing in the Middle Kingdom?

Chinese stocks the best (?) in the world this year

Chinese stocks were lying on the floor for a long time and no one was interested in them. Political turmoil plus the real estate crisis, plus the threat that companies listed on the US stock exchanges would be “punished” by the Chinese Communist Party – all this scared off investors.

However, a lot has changed in recent days. Capital has begun to flow into the Chinese stock market in a wide stream. Over the past 30 sessions (as of 7.10.2024), the Hang Seng index is the best stock market indicator in the world, which has grown by as much as 35%. For comparison, the Japanese Nikkei 225 went up by 8,6% during this period, American S&P 500 by 4%, and the Turkish XU100 fell by -5,4%. On Monday, September 30, Chinese shares recorded their best session since 2008, the Shanghai CSI 300 index rose by 8,5%.

What happened to make investors take notice of Chinese stocks? Analysts agree: it's Beijing's recent stimulus announcements. The Chinese Politburo has called on the People's Bank of China to drastically cut interest rates. In addition, China plans to allocate at least 800 billion yuan ($114 billion) to support liquidity in stock markets, and are ultimately considering establishing a stock market stabilization fund. These announcements convinced the market that Chinese policymakers had become concerned about the state of the economy and stock market and that they would take sufficient action to limit the risk of a significant decline in economic growth.

Hang Seng, Nikkei and S&P 500 indices in 2024. Source: TradingView

Since Chinese stocks are back in the market, maybe it's worth following the trend? Maybe, but as is usually the case on the stock exchange, it's worth betting on fundamentally strong companies, or those that have some unusual feature that is a competitive advantage. We've tried to point out 4 Chinese companies that we think are worth putting in your portfolio, at least for a while.

READ: The Chinese real estate market - everything you need to know about it

Alibaba

The Chinese e-commerce giant founded by Jack Ma. The company’s market capitalization hovers around $280 billion, but the price has only recovered to around $115 in early 2023, a far cry from its late 2020 peak of over $300. BABA’s stock struggles began with fears of government repression following comments by company founder Jack Ma. However, the government has recently sent positive signals about Alibaba, which is an extremely good sign that things are getting back on track.

Alibaba's P/E ratio is currently around 29, and its Forward P/E is 13,3 (which is not too high for e-commerce). Alibaba shows a 7,4% profit margin and has $448 billion in cash on hand.

As for the EBIT margin for the last 12 months, it is 14,03%, which is 78,7% higher than the industry average (7,85%). Alibaba’s profit margin of 7,4% is 65,4% higher than the industry average of 4,46%. In Q2024 3,9, BABA’s revenue increased by 234,16% YoY to RMB33,23 billion (USDXNUMX billion).

Alibaba's performance against the Hang Seng Index (5 years). Source: TradingView

JD.com

JD.com has a market capitalization of around $72 billion. It is a Beijing-based e-commerce and logistics company that sells everything from computers and consumer electronics to home appliances, food, cosmetics, pharmaceuticals, and even industrial products and car accessories. More importantly, it provides an external market. The company likes to surprise positively with its earnings per share, and in August it showed a 92% year-on-year increase in earnings. The company's P/E ratio is 16,3. The company has $202 billion in liquid funds.

JD.com's performance against the Hang Seng Index (5 years). Source: TradingView

Ping An Insurance

The Shenzhen-based company provides financial products and services to insurance, banking, asset management and technology companies in China. It operates in the segments of life and health insurance, property and casualty insurance, banking, trusts, other asset management and technology.

Ping An's capitalization is around $147 billion. The stock's P/E ratio is 10,7. The company has a profit margin of 10% and an ROE of 9,15%. It has $2,4 trillion in liquid assets, yes, as much as $2,4 trillion - that's no mistake.

In Q2024 275,89, Ping An's total revenue was RMB39,15 billion (USD2,8 billion), while insurance revenue increased by 136,85% YoY to RMB19,42 billion (USD45,05 billion). The company's profit for the period was RMB6,39 billion (USD2025 billion). Analysts expect the company's revenue for the year ending December 5,2 to increase by 83,05% YoY to USDXNUMX billion.

Ping An quotes against the Hang Seng index (5 years). Source: TradingView

Tencent Holdings

The holding company headquartered in Shenzhen, China, is an investment company that also operates in the online advertising and fintech industries worldwide. In Poland, it is associated with the acquisition of a majority stake in the video game company Techland, which built its great position on the title "Dying Light".

Tencent's capitalization is $4,4 trillion. The P/E ratio is currently 27,2. The company boasts a phenomenal profit margin of 24% and ROE of 17,6%. It has nearly $370 billion in liquid funds.

The company’s EBIT margin and EBITDA margin in the last 12 months are 30,44% and 33,80%, respectively, which is 229% and 85,6% higher than the industry averages of 9,25% and 18,21%, respectively. In Q2024 8, Tencent’s total revenue increased by 161,12% YoY to RMB 22,87 billion (USD 21,3 billion). Gross profit increased by 85,90% YoY to RMB 12,19 billion (USD 12,5 billion). Analysts expect QXNUMX revenue to increase by XNUMX% ​​YoY. The company has exceeded consensus EPS estimates in each of the last four quarters, which is impressive.

Tencent's quotes against the Hang Seng index (5 years). Source: TradingView

Warning: This could just be a blind bull rally.

However, you have to be careful when investing in Chinese stocks. You have to remember why, for quarters or even years, investors were able to disregard these assets – because they are listed on a politicized market. Even after the dynamic increases in the valuations of Chinese companies in recent weeks, analysts from large investment firms are warning against placing too much hope in assets from the Middle Kingdom. Invesco, JPMorgan Asset Management, HSBC Global Private Banking and Wealth and Nomura Holdings – experts from these companies are skeptical about the recent rebound on the Chinese stock exchange.

"In the short term, sentiment may be too optimistic. Many Chinese companies have become overvalued in a short period of time. However, investors will soon cool down their emotions and start looking at the fundamentals" – Raymond Ma, chief investment officer of Invesco in Hong Kong, told Yahoo Finance.

In general, analysts are waiting for specific moves from the Chinese authorities, and secondly, they fear that the announced steps will not be enough to reverse the slowdown in the country's economic growth. Although Goldman Sachs Group has raised its recommendation for Chinese stocks to "overweight" and stated that the Middle Kingdom's stock market indices could rise by another 15%-20% in the near future if the authorities implement the announcements.

Besides, Chinese stocks are no longer dirt cheap after the rally of recent weeks. According to  Morningstar Global Market Barometer as of October 4, Chinese stocks were undervalued, but only by 9% relative to fair value. Meanwhile, according to the same indicator, Polish stocks, for example, are undervalued by 14%.

Morningstar Global Market Barometer – China. Source: Morningstar

Investors should therefore exercise great caution when investing in the Chinese stock market. The September-October rally can only be – to retain the poetics so dear to Chinese hearts – "blind bull rally"...