3 Chinese Stocks to Buy on the Dip After Evergrande Default

Home to the biggest population in the world and the second-largest economy, China is a business powerhouse. Its booming urban middle class has spurred amazing entrepreneurial activity that often produces lucrative investment opportunities.

If you’re looking for a way to invest in Chinese stocks, there is no shortage of options. Stocks from all over the country are among some of their best-performing assets on any given day and can provide diversification that will help protect against market volatility.

However, due to Beijing’s regulatory crackdown, many U.S.-listed stocks have been hammered in recent months as investors seek safety elsewhere. It is particularly devastating for the stockholders that could not exist in time.

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Beijing is also preparing to take action in the event of a default by China’s biggest property developer, Evergrande (OTCMKTS:EGRNF). The company missed multiple payments on dollar-denominated debt, and it has drawn concern from investors due to its potential impacts on markets around Asia.

Against this backdrop, it is unsurprising China stocks are doing poorly. The situation reminds me of a Warren Buffett quote, “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

Here are three China stocks trading at a discount to their 52-week highs you need to keep an eye on:

Considering the size of the Chinese economy and the robustness of its middle class, blips in performance are temporary. Cooler heads will prevail in terms of policy directives. Both the major movers and shakers in the U.S. and China understand the importance of market stability, especially in the post-Covid-19 world.

Alibaba (BABA)

Alibaba Group (BABA) headquarters sign located in Hangzhou ChinaAlibaba Group (BABA) headquarters sign located in Hangzhou China
Alibaba Group (BABA) headquarters sign located in Hangzhou China

Source: Kevin Chen Photography / Shutterstock.com

Alibaba is the largestonline shopping website in China, hosting hundreds of millions of users and businesses. In fact, Alibaba handles more transactions than any other company on earth.

BABA is often dubbed the Amazon (NASDAQ:AMZN) of China, and for good reason. The two companies have grown similarly in their early stages before breaking away from each other with wildly different trajectories over time. However, both still hold an international reach that few can match.

Although both Amazon and Alibaba are pure ecommerce companies, they do not have the same business model. Amazon is a massive retailer for both new products and used items, while Alibaba operates like an intermediary between buyers and sellers on its platform to make sure customers get what they want at the best price possible (with lots of options).

Nevertheless, both companies are growth stocks. BABA in particular is very enticing because it usually trades at a steep discount to Amazon. Recently though, price momentum has been exceptionally sluggish. The Chinese government brought down the hammer on the e-commerce giant. They opened probes into internet platforms and suspended Alibaba’s Ant Group IPO in late 2020.

In April, the Chinese government ended up fining them $2 billion for anti-competitive behavior and ordering changes to their practices. Understandably, these recent events have not helped investor sentiment.

But there is another way to look at this. The e-commerce giant is rock solid in terms of revenue and shows no signs of slowing down. If anything, the latest dip gives you a great opportunity to buy an outstanding tech stock at a discount. And for many, the fine is merely a rap on the knuckles.

Nio (NIO)

A Nio (NIO) sign outside of the company's facilities in Shanghai, China.A Nio (NIO) sign outside of the company's facilities in Shanghai, China.
A Nio (NIO) sign outside of the company’s facilities in Shanghai, China.

Source: Andy Feng / Shutterstock.com

Tesla (NASDAQ:TSLA) is considered the undisputed leader in the electric vehicle space. However, there are now several companies challenging the Elon Musk-led juggernaut. The biggest competition, especially in China, is Nio: an innovative, international automaker that is smashing delivery records every quarter.

However, one thing is irking a certain section of investors, and that’s the close relationship between the company and state authorities.

Last year, during the height of the pandemic, the Chinese electric vehicle startup secured $1 billion in funding from a local government, Hefei, to finance operations. In return, Nio and several state-owned companies in Hefei agreed to form a unit that would help bolster the local economy.

Many will balk at the relationship. The regulatory environment in China is not as transparent as the U.S., and there are concerns regarding government intervention. However, the good news in all of this is that having a relationship with the Chinese government is not necessarily a bad thing. We are just a few months removed from the fine against Alibaba. And there is always the threat of potential Chinese regulatory activity. Against this backdrop, the Hefei association can lead to certain benefits.

Considering all of these factors, it’s not having a company like Nio in your portfolio. You know that it is fundamentally very strong. At the same time, if it runs into any trouble, it can also get bailed out very easily. The stock has a one-year return of 38.2%, while Tesla is up 144.4% during the same period. No one can say these stocks are available at a discount. However, Nio is the more attractive option at this point.

JD.com (JD)

JD.com (JD) logo displayed at the entrance to the company's Silicon Valley office.JD.com (JD) logo displayed at the entrance to the company's Silicon Valley office.
JD.com (JD) logo displayed at the entrance to the company’s Silicon Valley office.

Source: Sundry Photography / Shutterstock.com

Alibaba and JD.com often dominate the ecommerce discussion in China. While both companies have similar operating models, there are a few key differences. Alibaba is a platform that third-party sellers use to offer their merchandise. The company receives a fee from these transactions without handling any of the logistics themselves, while JD sells products and takes care of the logistics.

JD offers a marketplace for third-party sellers too, but that isn’t their primary business. The company is heavily invested in tech and uses drones to deliver products with the most efficient logistics possible, which differentiates them from other competing businesses such as BABA

JD’s dedication towards building up its brand by handling all these things themselves makes it one of those rare opportunities out there where you can invest safely without any risk involved.

The business model of a company is important when predicting how much it will grow. In this case, JD has high fixed costs and potential for higher margins because its margins have more room to expand. Much like other ecommerce giants, this company did very well in 2020. Year-over-year sales comparisons will suffer because last year, the whole world was stuck in a pandemic. Nevertheless, the business model is solid.

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