3 Cheap China Stocks to Consider

Investors looking to take advantage of China’s economic recovery may want to keep these cheap stocks on their screen.

Vikram Barhat 2 August, 2023 | 4:27AM
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China Steps

China is intensifying efforts to bolster its economy. The country recently announced a range of commitments that target multiple sectors to instill confidence among private and foreign investors, signaling a more favourable investment climate.

Investors should pay close attention to these new Chinese economic measures as they present new opportunities for investment. The country’s gradual shift away from export-fuelled economic growth model to one driven by domestic consumption underscores the attractiveness of China’s massive market potential.

Investors looking to take advantage of China’s economic recovery may want to keep the following stocks on their screen. Not only are these companies direct beneficiaries of increased domestic consumption, they are also formidable players in international markets. 

Alibaba Group Holding Ltd (BABA)

  • Industry: Internet retail
  • Fair Value Estimate: US$128
  • Economic Moat: Wide

World’s largest online and mobile commerce company, Alibaba (BABA) operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). China commerce retail division accounts for 67% of revenue, while the rest comes from China commerce wholesale (2%), international commerce retail/wholesale (5%/2%), local consumer services (5%), cloud computing (9%), digital media and entertainment platforms (4%), and others.

Alibaba has access to a large amount of data from its online marketplaces and delivery businesses. This data helps them expand into various areas like retail, cloud computing, media and entertainment, and online-to-offline services. “We think a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba,” says a Morningstar equity report.

Alibaba’s internet services amassed over 1 billion active consumers as of March 2022, versus the 1.4 billion population in China. This provides the company with an unparalleled source of data it can use to “help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment,” says Morningstar equity analyst, Chelsey Tam, who puts the stock’s fair value at US$128.

Tencent Holdings Ltd ADR (TCEHY)

  • Industry: Internet content and information
  • Fair Value Estimate: US$90
  • Economic Moat: Wide

The most influential internet firm in China, Tencent (TCEHY) is the world's largest video game vendor. It owns the world's top-grossing mobile games Honor of Kings and PUBG, and runs China's largest social media super app—WeChat, now part of the fabric of life for Chinese people who use it to chat, shop, watch videos, play games, order food and taxis, and more.

Tencent has been successful in taking advantage of the industry's shift towards mobile gaming over the past decade, rolling out widely popular video games. “To date, games remain Tencent's primary monetization model--as we estimate more than 40% of the group's operating income comes from this segment,” says a Morningstar equity report.

The firm, it adds, would continue to leverage its unrivaled access to user data and financial capital to create innovative, high-quality, and long-cycle games with a mobile-first approach.

Besides games, the Chinese internet giant’s vast business empire includes WeChat, QQ, WePay, music streaming, on-demand cloud, and a host of other ventures. Prospects for the Wechat app are particularly attractive with a significant untapped value in it. “[The app] continues to increase monetization through advertising and acts as a major gateway for other internet services (payment, delivery, insurance, and so on) looking to access the 1.2 billion-plus Wechat users,” says Morningstar equity analyst, Ivan Su, who pegs the stock’s fair value at US$90.

Baidu Inc ADR (BIDU)

  • Industry: Internet content and information
  • Fair Value Estimate: US$183
  • Economic Moat: Wide

With 84% share of the domestic search engine market, Baidu (BIDU) is the largest internet search engine in China.  It generates 62% of revenue from online marketing services. The tech heavyweight’s business footprint spans to multiple segments including artificial intelligence cloud, video streaming services, voice recognition technology, and autonomous driving.

“Baidu’s online advertising business accounted for 73% of Core revenue in 2022 and will be the main source of revenue in the medium term given its dominant market share for search engines,” says a Morningstar equity report, but cautions it could face long-term competition from rivals Tencent and Bytedance.

In recent years, Baidu has been growing its focus on its cloud business and artificial intelligence, with its Ernie generative AI model becoming its flagship product. “Baidu is an early mover and should benefit from China's AI development, but whether Ernie will be the long-term leader will depend on execution,” notes Morningstar equity analyst Kai Wang, who puts the stock’s fair value at US$183.

Wang also warns that despite sharp growth, Baidu could face competitive headwinds from other resource-heavy companies that could swiftly catch up to Baidu if the wide-moat firm’s generative AI development encounters setbacks.

Further, there are encouraging signs of Baidu’s AI cloud monetization which grew to 19% of core revenue in 2022 from 12% in 2020. Wang warns, though, bigger cloud rivals such as Alibaba, Huawei and Tencent are snapping at its heels.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alibaba Group Holding Ltd ADR76.12 USD0.72Rating
Baidu Inc ADR110.30 USD2.87Rating
Tencent Holdings Ltd ADR36.97 USD0.63Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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