With the Chinese economy forecast to grow faster than the U.S., we investigate if these three Chinese stocks are a worthwhile investment.
The Chinese economy is forecast to grow by 4.3% in 2022. While this is lower than the estimate in December by 0.8%, it is still relatively high, especially when taking the nation's extreme Zero-COVID policy into account. On the other hand, the U.S. economy is forecast to only grow by 2.5% by the end of the year, much lower than China's estimate. Inflation in China is also significantly lower than in the U.S.
With these economic metrics in mind, maybe it's time to check back in on some Chinese companies listed in the U.S.
Pinduoduo, Inc.
Pinduoduo, Inc. (NASDAQ: PDD) is the largest agriculture-focused technology platform company based in China. The platform connects farmers and distributors with consumers directly through its interactive shopping experience.
Pinduoduo saw total revenues in Q1 2022 rise by 7% year-over-year (YoY) to $3.75 billion, while net income increased to $410 million from a loss of $458.4 million the year prior. This solidifies Pinduoduo's position as a profitable company, as it has made gains in the past four quarters. These profits have helped the company build a substantial cash balance of $1.16 billion, which can be used for future investments.
Pinduodou's finance VP said in its most recent earnings announcement that "at this current scale, it is inevitable for us to see slower growth" -- not great news for investors looking for high-growth stocks. The company also has roughly $2.2 billion in convertible bonds on its balance sheet. If these bondholders choose to convert their holdings it will increase the number of shares issued, lowering the company's share price.
NetEase, Inc.
NetEase, Inc. (NASDAQ: NTES) is an IT company providing premium online services centered around innovative and diverse content, community, communication, and commerce. It also develops and operates popular Chinese mobile and PC games.
In Q1 2022, the company's net revenue was up 14.8% YoY to $3.72 billion, while net income decreased by 1% to $693.1 million over the same period. This fall in net income is primarily due to investment and exchange losses during the quarter compared with gains in the previous year. However, due to a lower share count, NetEase generated higher earnings per share in 2022.
The company has cash and cash equivalents of $1.55 billion, which is less than half the size of its short-term loans but triple the size of its long-term loans. However, this cash and equivalents figure is 32% lower than in the first quarter of 2021, which is a worrying sign, especially as the company's debts continue to grow.
Baidu, Inc.
Baidu, Inc. (NASDAQ: BIDU) is a Chinese multinational tech company specializing in internet-related services, products, and artificial intelligence. Its products include Baidu Search, Baidu Feed, and Haokan, a short-form video app.
In Q1 2022, Baidu saw revenues increase by 1% YoY to $4.48 billion, a low growth rate for investors. The company recorded a net loss of $466 million due to fair value losses in long-term investments. These investments include equity in public and private companies, private equity funds, and digital assets. The value of all these assets has fallen over the past year but may experience an uptick in the coming months. Therefore, investors may have a chance to buy the stock while its net income is discounted on paper.
Like Pinduoduo, Baidu has a lot of convertible bonds, valued at $2.09 billion. If this debt is converted into shares, it will dilute any investors' holdings in the company. However, the firm also has cash and equivalents to the value of $5.8 billion, which should allow it to continue to grow, even in a higher interest rate environment.
The Bottom Line
Investors should be wary of investing in Chinese companies as there are several political and economic risks involved that they may not be used to dealing with in more developed markets. These include tough regulations recently introduced to curtail the power of tech companies, the harsh lockdown restrictions still being imposed, high debt levels, and a reliance on a creaking property sector for economic growth.
