How Has The Current China Crisis Impacted US Chinese Stocks?

  • Chinese market seemed to have stabilized  before it came crashing today.
  • The Chinese stocks which outperformed others in last one month were Baidu, Xunlei and Alibaba.
  • Yoku Tudou, Sina and Ku6 Media have emerged as losers in the Chinese market rout.

Roll back a week and the Chinese markets seemed to have found a floor and were showing solid signs of stabilizing. All 3 major Chinese exchanges were up significantly on 17th July: Shanghai +3.8%; Shenzhen + 5.3% and Hang Seng +1.4%. Shanghai, China’s largest securities exchange, was up 10.5% from its June 8 low of 3507.9. Amazingly, the CSI 300 index which tracks 300 major companies on both Shanghai and Shenzen was up 15% YTD even after the capitulation, compared to a modest 6% gain by the S&P 500. Efforts by Beijing to forcibly control the selloff by placing a ban on selling shares in local exchanges therefore seems to be working. Meanwhile, Chinese Securities Finance has made $483 billion of funding available to support the stock market.

Nearly all Chinese stocks in U.S. exchanges were badly hit by the selloff. Some, however, have pared back their losses, and then some:

The Winners

Chinese Internet stocks generally help up well during the Chinese crisis and have been quick to recover since the markets started stabilizing.

1) Baidu

Baidu (NASDAQ: BIDU) shares are up 11% from their July 8 low of $178.81. Baidu’s latest rally has received a significant boost from Google’s (NASDAQ: GOOG) (NASDAQ: GOOGL) stellar quarterly report. The shares though are still down 9.75% YTD.

China-1

Source: CNN Money

Baidu has been facing a lot of margin pressure due to, ironically, its strength in mobile. Baidu has been very successful at cracking the mobile dilemma, and 50% of its revenue now comes from mobile search. In contrast, Google's mobile revenue is 20% of its over all revenue. The big problem with this is that mobile traffic is much harder to monetize than PC traffic resulting in lower CPC rates. This has caused Baidu to repeatedly miss on earnings projections for several quarters now.

2) Xunlei Limited

Xunlei Limited (NASDAQ: XNET) shares were badly hit by the crisis losing about 27% during the selloff. The shares have however been among the first to recover and have gained 6.4% over the past five days. Despite the huge selloff, Xunlei shares are still up 32.3% YTD.

China-2

Source: CNN Money

3) Alibaba

Alibaba (NYSE: BABA)  shares began to fall well before the Chinese market crisis hit. Though the shares lost about 10% during the crisis, that was still pretty modest compared to many other Chinese stocks trading on American bourses. Alibaba shares have gained about 4% since the markets stabilized, but are still down 19% YTD.

China-3

Source: CNN Money

Though Alibaba has continued to deliver great results since its September IPO, its share performance has been hampered by accusations that several of its leading websites such as Tmall and Taobao are havens for counterfeit goods. The investing world also seems to have set up Alibaba for failure by holding excessively high expectations for the company. Alibaba has consequently received a number of earnings projection cuts from a cross-section of analysts that have taken a hit on its shares. However there are some who believe that Alibaba's stock correction makes it a compelling pick.

The Losers

Chinese Telecom and Media Stocks have generally been the worst hit by the crisis.

1)Youku Tudou

Youku Tudou (NYSE: YOKU) ADRs are off 28.4% over the past one month and almost 39% after hitting their 52-week high in June.

China-4

Source: CNN Money

Unlike their Internet stock counterparts, Youku Tudou shares have shown no signs of recovering from their slump due to, as Youku Tudou stock analysis shows, the company’s trend of negative earnings revisions. Youku Tudou stock analysis  Youku Tudou has revised its annual earnings estimate from a loss of $0.20 to a loss of $0.22. This has made investors give the shares a wide berth.

2) Sina

Sina (NASDAQ: SINA) is one of the Chinese stocks that have been hardest hit by the crisis. The shares have lost as much as 27% over the past one month.

China-5

Source: CNN Money

Sina shares were cut in half from their $83 high in 2014 after the company’s online video license was revoked by Chinese authorities. Though the shares had started recovering before the Chinese crisis hit, their performance may be hampered by their rich valuation compared to peers such as Tencent and Baidu, as well as its razor-thin operating margin which leaves it with little gas to grow into its steep valuation. Sina’s operating margin over the last three years has averaged just 3% which pales in comparison to Baidu’s (46%) and Tencent’s (34%).

3) Ku6 Media Company Limited

Ku6 Media's (NASDAQ: KUTV) well-documented troubles grew much worse during the Chinese selloff. The company’s shares lost more than 30% during the crisis, but have only managed to gain about 1% during the recovery period.

China-6
Source: CNN Money

Ku6 Media’s undoing has been its rapidly shrinking top line, which has led to the shares losing close to 90% of their value over the past five years. The company’s revenue fell a jaw-dropping 35% during the previous fiscal year. The company’s revenue tailspin extended into the first quarter when it shrunk by another 32% while its losses increased 20-fold.

Is China Still Worth an Investment?

This is the million dollar question. The current bubble burst seemed like an inevitable ending given how aggressive the market rally was. The Shanghai Comp soared close to 100% between March and May.

China-7
Source: Market Oracle

The Chinese have traditionally been averse to investing in the stock market, with the average Chinese household having just 6% of its investments parked in securities while devoting a much larger 72% of its wealth to real estate. Efforts by the Beijing Government to encourage investments in local markets by local people seem to have gone overboard by over-emphasizing the potential returns while overlooking the underlying risks. This led to herd buying behavior among retail investors, many of whom had minimal prior knowledge of how securities markets work. Many investors exceeded the legal stock margin leverage ratio of 2:1 as they engaged in frenzied buying of stocks based on speculative plays. When the first cracks started appearing in the markets, a massive selloff was inevitable as debt-ridden investors rushed to cut their losses and cover their positions.

So while the Chinese Government is partly to blame for the current state of affairs, the general lack of understanding of how stock markets work by the average Chinese investor also played a key role in the mayhem. But lessons have no doubt been learned, and many who burned their fingers will in all likelihood become much more savvy investors in the future.

And, ironically, the Beijing Government is one of the most compelling reasons to want to invest in China stocks. Beijing wields an unusually huge amount of control on local markets, perhaps more so than any Government in the world. Its zealousness in supporting the local markets offers a measure of guarantee to foreign investors that someone has got their backs covered.

Despite the huge rally in 2014 and this year, Chinese stocks are still surprisingly cheaper than their U.S. counterparts, trading at an average PE ratio of around 15 vs. 19 average for U.S. stocks. Given the fact that China’s economic growth rate of 6% is almost double that of the U.S., and that many experts have projected the market to finally overtake the U.S. market in terms of size in less than 20 years, the potential for good long-term gains seems to outweigh any underlying risks.

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