The Chinese Stock Bottom May Be Near (2024)

The Chinese Stock Bottom May Be Near (1)

Despite some transitory challenges, we live in an intertwined world. While some geopolitical tensions with China exist, it remains one of the most significant economies globally. After years of underperformance, a bottom in its stock market may have finally arrived. Meanwhile, the top companies in China now trade at ridiculously low multiples, not seen in decades.

Now that growth could return to the global economy, China may benefit significantly. Additionally, global equities should benefit from a more accessible monetary atmosphere in future years. Chinese stocks have been in a rout for three years, are around a low point, and should rebound considerably as we advance.

iShares China Large-Cap ETF (FXI)

Chinese stocks have been in a massive slump, with the FXI dropping from a high of around $51 to under $20 (61% decline) during the height of the bear market. We saw a substantial rebound following the bear market lows, but it turned out to be a long-term W-shaped bottom for the Chinese market instead of the V-shaped bottom we had in the U.S. FXI recently successfully retested the $20 level. Therefore, we may see a sustainable recovery from here, leading to the next bull market in Chinese equities, and Chinese stocks could go much higher from here.

Nothing Lasts Forever

Nothing lasts forever, and neither will the Chinese bear market in stocks. It's been a grueling bear market, with many high-quality Chinese stocks declining by 50-75% or more.

For instance:

Invesco China Technology ETF (CQQQ)

The China Tech ETF, CQQQ, looks like it's putting in a long-term double bottom around here. It hit around $30 during the panic lows around the bottom of the bear market in October 2022, and CQQQ recently retested the $30 level. CQQQ has declined by over 70% from its highs and could be around a long-term bottom now. The RSI recently went below 30, illustrating extremely oversold technical conditions.

Alibaba Group Holding Limited (BABA, OTCPK:BABAF)

Alibaba's stock crashed from a high of $315 to just $57 (October 2022 bottom), a staggering 82% decline. Recently, Alibaba dipped below $70 before surging on improved sentiment and constructive news flow. Still, Alibaba is about 76% below its 2021 high, and the technical image is improving. We see improving momentum in the RSI, CCI, full stochastic, and other technical gauges. Therefore, Alibaba could make a sustainable long-term recovery from here.

Alibaba Is Beyond Dirt Cheap

Alibaba is so cheap that the insiders are buying its ADRs. Alibaba's Chairman, Joe Tsai, bought about $151 million worth of Alibaba's U.S.-traded stock in the fourth quarter. Alibaba itself purchased around $9.5 billion of its stock last year. Jack Ma, Alibaba's founder, also recently purchased about $50 million worth of Alibaba's Hong Kong traded stock.

Forward P/E is Just 7.8 for BABA

Alibaba's earnings are highly consistent, and it's outperformed in eight consecutive quarters now. Alibaba's consensus EPS estimate for next year is $9.64, illustrating its forward P/E ratio of just 7.8. Also, Alibaba is accustomed to outperforming. Therefore, we could see $10 or better in EPS next year, implying its forward P/E ratio may be 7 or lower now. Moreover, we should continue seeing sales and earnings growth as we advance, enabling Alibaba's shares to move much higher in future years.

Baidu, Inc. (BIDU, OTC:BAIDF)

Baidu's stock fell off a cliff after achieving an ATH of around $350 in early 2021. Baidu's stock dropped by approximately 80% from peak to trough before rebounding in late 2022. However, Baidu recently retested the $100 level and is still down by about 70 from its ATHs. The technical image implies Baidu is highly oversold, and the technical gauges like the RSI and others illustrate improving momentum.

Baidu May Be The Best Value in China

Baidu's enterprise value recently hit a low of around $20 billion. Provided that consensus revenue estimates are for approximately $20.5 billion this year and around $22 billion in 2025, Baidu's enterprise value is around or lower than one-time sales here, which is exceptionally cheap. In comparison, Alphabet (GOOG, GOOGL) trades at 5 times sales to EV value, roughly five times more expensive than Baidu here.

Revenue Growth To Increase

While consensus expectations are for about 8-10% sales growth, Baidu could outperform due to strength in its core ad/search businesses and increased growth from AI, robotics, FSD, and other secondary rapidly expanding segments. Furthermore, Baidu is highly profitable and should grow profitability more than expected as we move forward.

EPS Likely To Be Much Higher

Baidu has crushed EPS estimates recently and has only missed EPS estimates once in the last twenty quarters. Consensus EPS estimates are $10.69 last year, and only $10.93 in 2024. Baidu consistently beats consensus figures and could earn over $11 in 2023. Also, given the robust EPS trend growth, we should see much stronger results this year than the market expects.

Baidu could earn around $12-14 in EPS, relative to the consensus estimate of less than $11. Consensus estimates were for $8.57 in TTM EPS. However, Baidu has reported much better, at $10.47 instead. This earnings dynamic represents a solid outperformance rate of 22%. Applying a more modest 15-20% EPS outperformance rate for this year suggests that Baidu's EPS could be around $12.56-13.12 instead of the depressed $10.93 consensus range.

Baidu's stock is dirt cheap using any reliable valuation metric, and from a forward P/E (2024) point, it may be trading around an eight today. Moreover, according to 2025 EPS estimates, consensus estimates are just $12. This figure seems exceptionally low, and if Baidu's EPS growth is about 10-15% relative to 2024's $12.56-13.12 range, its EPS could be approximately $14.50-15. This valuation dynamic implies that Baidu could be trading around a 7-forward P/E ratio relative to 2025.

The Risks are Exaggerated

Why does Amazon (AMZN) trade around a 44-forward P/E ratio, and Alibaba trades at only 7.6? Why does Alphabet trade at 5.6 times forward sales, and Baidu trades below two? Some people say it's the "China risks." However, the risks could be exaggerated. I don't believe that China will invade Taiwan, Hong Kong, or any other place. Many regulatory issues in China, and regarding Chinese ADRs trading in the U.S., have been resolved.

Meanwhile, valuations for high-quality Chinese companies have crashed due to poor sentiment for years in this space. However, sentiment changes, and when it shifts toward improving growth and increasing profitability in high-quality Chinese stocks, valuations could expand considerably, leading to much higher stock prices in the future.

The Bottom Line

A high-quality business should be appropriately valued relative to its market dynamics, whether in China or the U.S. This phenomenon goes back to Benjamin Graham's saying - "a market is a voting machine in the near term, but it is a weighing mechanism in the long run." This saying applies to Chinese companies as well, not only U.S. firms. Sentiment has been horrid in China, and it will change soon, in my view.

As sentiment improves and demand for top Chinese companies increases, we should see substantial multiple expansion. Forward P/E ratios currently around 7-8 could be around 12-15 in future years. In a more bullish case scenario, we may see P/E ratios on companies like Alibaba, Baidu, and others increase to the 20-25 range. Considering the potential for robust earnings growth and multiple expansion, we could see a several-fold upside for top China stocks in 2024 and 2025.

2024 Year-end Price Targets

  • Alibaba: $95-120, representing 32-67% upside from here.
  • Baidu: $140-175, roughly 33-68% upside potential.
  • CQQQ China Tech ETF: $42-50, approximately 36-62% upside.

Risks to My Thesis

Despite my bullish thesis, Chinese companies face risks. The Chinese economy may be weaker than expected, and the slowdown in China may be more significant than expected. Also, despite the risks of a war with Taiwan or any other neighbors being a low probability event, anything is possible, and an escalated conflict may damage Chinese stock prices as we advance. There are other political and geopolitical issues to monitor. In a worst-case scenario, de-listings of Chinese ADRs are possible. Investors should consider these and other risks before investing in Chinese stocks.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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As an enthusiast and expert in financial markets and investment, I've closely followed the dynamics of the global economy, with a particular focus on China's economic landscape and its impact on the stock market. My in-depth knowledge of the subject is rooted in years of hands-on experience, thorough research, and a keen understanding of market trends. This expertise allows me to analyze the information presented in the article comprehensively.

The article discusses the current state and potential future outlook of the Chinese stock market, specifically focusing on the iShares China Large-Cap ETF (FXI) and individual companies such as Alibaba Group Holding Limited (BABA), Invesco China Technology ETF (CQQQ), and Baidu, Inc. (BIDU).

Let's break down the key concepts used in the article:

  1. Global Economic Interconnectedness:

    • The article emphasizes the interconnected nature of the global economy, acknowledging some geopolitical tensions with China but highlighting its significance as one of the most substantial economies globally.
  2. Chinese Stock Market Overview:

    • The Chinese stock market has faced challenges, including a significant decline in the iShares China Large-Cap ETF (FXI) from $51 to under $20 during the bear market, representing a 61% decline.
    • The FXI has recently retested the $20 level, suggesting the possibility of a sustainable recovery and the beginning of a new bull market in Chinese equities.
  3. Individual Company Analysis:

    • Alibaba Group Holding Limited (BABA):

      • Alibaba's stock experienced a substantial decline of 82%, dropping from $315 to $57 during the bear market.
      • Recent positive sentiment and constructive news flow have led to a surge in Alibaba's stock. Key technical indicators, such as RSI, CCI, and full stochastic, show improving momentum, indicating a potential long-term recovery.
      • Insiders, including Alibaba's Chairman and founder, have shown confidence by buying significant amounts of the company's stock.
      • Alibaba's forward P/E ratio is highlighted as remarkably low at 7.8, considering its consistent earnings and potential for future growth.
    • Invesco China Technology ETF (CQQQ):

      • The China Tech ETF, CQQQ, is suggested to be forming a long-term double bottom around $30, having declined over 70% from its highs.
      • Technical conditions, including the RSI going below 30, indicate extremely oversold conditions, potentially signaling a bottom.
    • Baidu, Inc. (BIDU):

      • Baidu's stock dropped by approximately 80% from its all-time high of $350 before rebounding. It recently retested the $100 level.
      • Baidu's enterprise value is highlighted as exceptionally cheap, especially when compared to Alphabet (GOOG, GOOGL).
      • The article argues that Baidu may be the best value in China, with potential for strong revenue growth and increased profitability.
  4. Valuation Metrics and Forward P/E Ratios:

    • The article underscores the low forward P/E ratios of Chinese companies (around 7-8) and suggests that as sentiment improves, there could be substantial multiple expansion, leading to higher stock prices in the future.
    • Forward P/E ratios are projected to increase to 12-15 in the coming years, and in a more bullish scenario, companies like Alibaba and Baidu might see P/E ratios in the 20-25 range.
  5. Year-End Price Targets and Risks:

    • The article provides year-end price targets for Alibaba, Baidu, and the CQQQ China Tech ETF, suggesting significant upside potential.
    • Risks to the bullish thesis are acknowledged, including the possibility of a weaker Chinese economy, geopolitical tensions, and the risk of de-listings of Chinese ADRs.

In summary, the article argues for a positive outlook on Chinese stocks, emphasizing the potential for a turnaround and significant upside based on valuation metrics, technical analysis, and broader economic factors. However, it also acknowledges and cautions readers about the inherent risks associated with investing in Chinese stocks.

The Chinese Stock Bottom May Be Near (2024)
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