3 stocks to buy after Chinese stimulus package

Along with exploiting its economy, the Chinese government has recently announced a number of measures to help them develop. These include lowering banks’ reserve requirements, lowering key interest rates and reducing the percentage down payment required for second homes.

In addition, China will allow institutions, including brokers, funds and insurance companies, to use central bank financing to buy stocks. There is also a plan to allow companies and large shareholders to use government funding to buy back their shares.

With that in mind, let’s look at three Chinese companies trading in the US that could benefit from this stimulus plan.

Baidu

Baidu (BIDU 2.54%) is a Chinese technology conglomerate that is most similar to Alphabet in the US It is best known for its search engine, but, like Alphabet, it also owns cloud computing and robotaxi businesses. The company also owns stakes in a listed Chinese travel company Trip.com and video subscription service iQIYI.

With the sluggish Chinese economy and increasing competition for ads, Baidu has seen its shares struggle this year, down about 20 percent. In the second quarter, its overall revenue was flat, while online advertising revenue fell 2%. A strong point was its cloud business, which saw revenue grow by 14%.

In addition to the impact of the weak macro environment and competitive landscape, the company is also in the process of trying to transform its search experience by integrating generative AI, which it says will provide more accurate and direct answers. In August, about 18% of search results content was created by generative AI, up from 11% in mid-May.

However, the company said this transformation is currently leading to fewer ad impressions, which is hurting revenue in the short term. In the long term, however, the company believes this is the right strategy and will also explore other monetization models, such as moving from a cost-per-click model to a cost-per-sale model.

While Baidu faces short-term domestic and external difficulties, an improving Chinese economy and consumer could go a long way in improving its search ad business.

Alibaba

Wile Baidu looks like Alphabet, Alibaba (GRANDMA 2.15%) is similar to Amazon in the US with large e-commerce, logistics and cloud computing businesses.

While Alibaba shares have performed well this year, up more than 20%, they are still down more than 40% over the past five years. It also struggled with increased competition and a weak Chinese economy. In Q2, its e-commerce revenue fell -1%, although the company is making strides in attracting more customers as its orders grew by double digits and its gross merchandise value (GMV) rose by single digits. Now that its Taobao and Tmall businesses have stabilized, it will look to increase monetization across platforms.

And similar to Baidu, its cloud computing unit has recently been noticed. While its second-quarter revenue rose just 6% last quarter, the segment’s adjusted EBITA (earnings before interest, taxes, depreciation and amortization) rose 155% as it allows lower-margin customers to divest. The company has also just introduced over 100 AI models to help drive further growth.

While Alibaba has made strides in its turnaround efforts, an improvement in the weak Chinese economy could greatly contribute to those efforts.

Image source: Getty Images.

JD.com

Similar to Alibaba, JD.com (JD 5.03%) operates an e-commerce and logistics business in China. JD, however, sells more direct items, so its margin profile is much lower than Alibaba’s. Almost half of its total revenue comes from the sale of electronics and home appliances.

JD.com’s shares are up nearly 15% for the year, but have risen less than 10% over the past five years.

It also felt the pressure of a weak Chinese consumer and increased competition. Last quarter, its revenue rose just 1.2%, with retail revenue up 1.5%. It also saw strength in its smaller grocery business, but electronics and home appliance sales fell 4.6 percent.

To try to improve their business, the company focused on trying to improve their supply chain capabilities to offer the most competitive prices while also working to create a better user experience. It said the strategy is showing some signs of working, with solid user growth momentum in both top- and bottom-tier markets.

While JD.com has made strides in improving its business, given its ties to electronics and home appliance sales, it could be the biggest beneficiary of the three for an improved Chinese consumer.

Three cheap stocks

Baidu, Alibaba and JD.com are all very cheap compared to their US peers, with all three trading at less than 10 times forward price-to-earnings (P/E) based on analyst estimates of next year.

BABA PE Report (1 year ago) data by YCharts.

All three also have a good amount of net cash on their balance sheets and generate solid free cash flow. Given this and their valuations, now could be a good time to add exposure to these Chinese stocks as the government looks to boost the country’s economy.