There are plenty of reasons to avoid Chinese stocks right now: The Chinese economy remains sluggish, the trade war remains unresolved, and a recently passed Senate bill could boot Chinese companies from U.S. exchanges if they don't comply with tighter regulations.
However, many Chinese tech stocks still rallied this year as investors seemingly dismissed those threats and focused on their growth. Three of those stocks -- Tencent (TCEHY 0.10%), JD.com (JD 0.20%), and Baozun (BZUN -2.52%) -- could still have plenty of room to run.
Image source: Getty Images.
1. Tencent
Tencent owns WeChat, the top mobile messaging app in China. It also owns the world's largest video game business, China's second-largest cloud infrastructure platform, one of the country's largest digital payment networks, and several leading streaming media platforms.
Last year, Tencent's revenue rose 21% as its adjusted profit grew 22%. In the first half of 2020, its revenue climbed 28% year over year as its adjusted profit grew 29%.
Tencent's business grew throughout the COVID-19 crisis as stay-at-home measures boosted its mobile gaming revenue, higher ad purchases from pandemic-oriented businesses (including e-commerce, online education, and gaming companies) lifted its ad revenue, and its cloud platform benefited from the elevated usage of cloud-based services.
Tencent also continues to expand WeChat's ecosystem of Mini Programs, which enables users to make payments, order food, buy products, play games, hail rides, and much more without ever leaving the app. The Trump administration recently threatened to ban WeChat in the U.S., but that symbolic move probably won't affect the app's core Chinese business. Tencent also continues to expand its portfolio of investments domestically and overseas.
Analysts expect Tencent's revenue to rise 30% this year and for its earnings to grow 32%. Tencent's stock might not seem cheap at nearly 40 times forward earnings, but its diverse business model, wide moat, and robust growth rates easily justify the premium price.
2. JD.com
JD is the largest direct retailer in China and the second-largest e-commerce company after Alibaba (BABA 0.28%). Unlike Alibaba, which doesn't take on inventories at its top marketplaces, JD takes on inventories and fulfills its orders with its own warehouses and logistics network.
Image source: JD.com.
JD's revenue rose 25% last year as its adjusted earnings more than tripled. JD attributed that earnings growth to the expansion of its first-party logistics network and its growth as a standalone business serving other companies. That stable profit growth gave JD room to expand its ecosystem with a new cloud platform and JD Health, which offers telehealth and online pharmacy services.
In the first half of 2020, JD's revenue rose 28% year over year as its adjusted earnings grew 21%. Its sales remained robust throughout the crisis, and its growth in annual active customers accelerated significantly as it gained more shoppers from China's lower-tier cities. Its annual 618 Shopping Festival in June also significantly boosted its second-quarter sales.
Wall Street expects JD's revenue and earnings to rise by 30% and 52%, respectively, this year. JD's stock trades at over 50 times forward earnings, but that valuation is actually quite reasonable relative to its dazzling growth rates.
3. Baozun
Baozun helps companies quickly digitize their retail businesses in China. It provides digital storefronts, marketing campaigns, fulfillment services, IT services, customer service tools, and other services. It mainly helps large multinational brands set up shop in China.
Baozun previously helped merchants fulfill orders with a capital-intensive "distribution" model. But over the past few years, it pivoted toward a higher-margin "non-distribution" model in which retailers fulfill their own orders. That shift, along with a prioritization of higher-margin brands, enabled Baozun to remain consistently profitable.
Baozun's revenue grew 35% last year, as its adjusted earnings rose 3%. In the first half of 2020, its revenue rose 23% year over year as its adjusted earnings grew 26%. It attributed its strong growth to robust e-commerce sales throughout the crisis and a high volume of orders during the 618 Shopping Festival in the second quarter. Its gross margin, operating margin, and take rate (the cut of each sale it retains as revenue) all increased year over year in the first half of the year.
Baozun recently spooked the bulls by warning its growth in GMV (gross merchandise volume) would decelerate in the third quarter, mainly because of seasonal headwinds and a strategic decision to pivot away from lower-margin electronics brands. Nonetheless, analysts still expect Baozun's revenue and earnings to rise 26% and 57%, respectively, for the full year -- which are high growth rates for a stock that trades at just over 30 times forward earnings.
