These 3 Chinese Stocks Will Soar on a Trade Truce

These 3 Chinese Stocks Will Soar on a Trade Truce

Posted On June 20, 2019 2:44 pm

This week, President Trump said he had a “very good phone conversation” with Chinese President Xi Jinping and that their two teams would hold talks ahead of the G-20 summit in Japan next week. Trump also stated that he will hold “an extended meeting” with Xi during the summit, sparking hopes for a trade truce between the world’s two largest economies.

Investors should remain skeptical about a truce, but some beaten-down Chinese stocks could soar if it actually happens. Three stocks that stand to benefit from some actual forward movement on a trade resolution include:  Baidu (NASDAQ:BIDU)JD.com (NASDAQ:JD), and Huya(NYSE:HUYA).

China’s biggest search engine provider

Baidu, which owns the largest search engine in China, lost more than 50% of its value over the past 12 months as its core advertising business hit a brick wall. Last quarter its total ad revenue, which accounted for 73% of its top line, rose just 3% annually.

Baidu attributed that decline to the slowdown in the Chinese economy, which throttled ad spending from certain companies, especially in the healthcare, online gaming, and financial sectors. Its longtime search chief, Hailong Xiang, also abruptly resigned.

Baidu’s total revenue rose 15% annually (21% excluding its upcoming divestments), but that growth was mostly fueled by its stake in the video streaming company iQiyi. iQiyi is still unprofitable, and Baidu subsidizes its growth, making it a dead weight on its bottom line. Other big investments, including expansions into the smart speaker, AI, and automotive markets, are also weighing down its profits.

That’s why Baidu posted its first-ever quarterly loss last quarter, and analysts expect its full-year earnings to tumble nearly 50%. Things look grim now, but the stock’s downside is arguably limited at just 15 times forward earnings. Moreover, a trade truce could help Baidu’s core advertising business recover quickly, and the stock could suddenly look very cheap relative to its long-term growth potential.

China’s biggest retailer

JD.com is China’s top direct retailer and the second largest e-commerce player after Alibaba. JD lost more than 30% of its market value over the past 12 months as it struggled with slowing sales growth, rising costs, and a rape allegation against its founder and CEO Richard Liu.

But those clouds are parting. JD’s revenue rose 21% annually last quarter, marking its slowest growth since its IPO, but its forecast for 19%-23% growth in the second quarter indicates that its growth is finally stabilizing…

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