After years of underperformance, China stocks are coming back to life.
The CSI 300 index of Shanghai hit a five-year high this month on optimism that the Chinese economy is recovering from health-related shutdowns. Buying in the Chinese markets was fueled in part by an editorial in the state-owned China Securities Journal urging investors to take advantage of a "healthy bull market." In the U.S., a surge in the polls by presumptive Democratic presidential candidate Joe Biden opens the possibility of a normalization of trade relations between the U.S. and China starting in 2021. Here are seven top U.S.-listed Chinese stocks to buy, according to Bank of America.
Alibaba Group Holding (ticker: BABA)
Alibaba is the owner of Chinese e-commerce platforms Taobao and Tmall and the market share leader in e-commerce and cloud services in China. Analyst Eddie Leung says Alibaba should remain the market leader in online retail in China, and the technology company's efforts to target customers in lower-tier cities could even expand its market share lead. Alibaba is also aggressively investing in research and development, opening the door to better monetizing its base of more than 960 million customers. That's nearly three times the entire population of the U.S. Bank of America has a "buy" rating and $241 price target for BABA stock.
JD.com is another leading online retailer in China. Leung says JD shares should lead the charge as the Chinese economy recovers for several reasons. First, JD's relatively low exposure to apparel is a positive, given lingering weakness in the category. Second, the company's logistics coverage, brick-and-mortar retail partners and Jingxi app should help to expand its user base in lower-tier cities. Third, JD has a strong presence in supermarket categories. And finally, the company's targeted advertising and social commerce should lead to more repeat business. Bank of America has a "buy" rating and $70 price target for JD stock.
China Mobile (CHL)
China Mobile had 944 million mobile subscribers as of late 2019, making it the world's largest mobile operator. The telecom company has said it plans to add 250,000 units of 5G base stations by the end of 2020, and analyst Danny Chu says it is on track to hit that target. In the first four months of 2020 alone, China Mobile added 44 million 5G subscribers, suggesting that the company will not need to offer heavy handset subsidies to attract subscribers. Bank of America has a "buy" rating and $59.35 price target for CHL stock.
China Life Insurance Co. (LFC)
China Life Insurance is China's largest life insurer. Profits were down 34% in the first quarter of 2020, says analyst Michael Li, but the company's 13% premium growth outpaced Chinese peers. Li says China Life is facing headwinds, including lower interest rates and slower value of new business growth. However, Li says further progress on trade relations between the U.S. and China could drive upside for the stock. China Life shares also pay a sizable 4% dividend. Bank of America has a "buy" rating and $14.17 price target for LFC stock.
NetEase is a Chinese gaming and online services company. Leung says NetEase has a strong pipeline of upcoming game releases, including Sky in the third quarter. NetEase is also investing in differentiated content for NetEase Cloud Music by targeting independent musicians and testing electronic music live sessions, singing apps and other potential growth sources. Leung says NetEase's June secondary listing in Hong Kong only generated about 5% dilution for shareholders. He says the company has a pristine balance sheet and a strong portfolio of high-margin, self-developed games. Bank of America has a "buy" rating and $478 price target for NTES stock.
CNOOC is a Chinese oil exploration and production company that has exclusive rights to negotiate offshore production sharing contracts with international oil companies in China. Analyst Matty Zhao says CNOOC management seems confident that it can grow output, despite a lower-priced oil environment. Zhao says CNOOC's Bohai Bay and eastern South China Sea production has a break-even cost of $25 per barrel, an extremely competitive rate in the international market. CNOOC also holds a 25% interest in the Guyana field, which began production in late 2019. Bank of America has a "buy" rating and $131.48 price target for CNOOC stock.
Chinese search engine Baidu has significantly lagged its U.S. mega-cap tech peers in recent years. Leung says Baidu has been building its mobile ecosystem, including growing its content creator base and integrating multiple distribution channels to optimize content consumption and engagement. After bottoming in late February, core advertising business has consistently improved each week, a trend Leung says he expects to continue in the second half of 2020. Baidu's streaming video platform, iQiyi, also creates long-term monetization opportunities. Bank of America has a "buy" rating and $186 price target for BIDU stock.
China stocks for investors to consider:
-- Alibaba Group Holding (BABA)
-- JD.com (JD)
-- China Mobile (CHL)
-- China Life Insurance Co. (LFC)
-- NetEase (NTES)
-- CNOOC (CEO)
-- Baidu (BIDU)