Chinese stocks have struggled, as indicated by the downtrend in the Shanghai index. It’s also noteworthy that the index has remained sideways (amid volatility) in the last five years. The reasons for depressed valuations include macroeconomic challenges and geopolitical factors.
However, there is no doubt that several quality stocks in the Chinese market have overreacted on the downside. Valuations generally look attractive, and it’s a good time for selected exposure to Chinese stocks.
Once the index sentiment reverses, several stocks will likely skyrocket from deeply oversold levels. I am betting on some fundamentally strong names delivering 100% returns within the next 24 months.
This column discusses three Chinese stocks that are worth buying at current levels. I must mention that these stocks represent companies delivering strong financial numbers. However, the stock price action has not aligned with company-specific fundamentals.
Li Auto (LI)
Li Auto (NASDAQ:LI) is among the most undervalued Chinese stocks to buy. LI stock trades at a forward price-earnings ratio of 27.3 at a time when the company’s growth is well over 100% on a year-on-year basis. I expect a big move on the upside as Li Auto continues to surprise in terms of delivery growth.
For the current year, Li Auto has set an ambitious target of delivering 800,000 vehicles. It’s worth noting that last year, the company delivered 376,030 vehicles, which was higher by 182.2% on a year-on-year basis.
In my view, the delivery growth target seems achievable. First, Li Auto has aggressively opened new retail outlets in China. Further, LI MEGA is due for commercial launch in March. Strong deliveries growth will be associated with stellar financials.
I like that Li Auto has been reporting robust free cash flows. Considering the potential growth trajectory, it’s likely that FCF will be more than $10 billion this year. The company, therefore, has high financial flexibility for investing in product innovation and expansion.
Miniso Group Holding (MNSO)
Miniso Group (NYSE:MNSO) is another undervalued name likely to surge. MNSO stock trades at a forward price-earnings ratio of 17.2 and offers a dividend yield of 2.22%. With the lifestyle retailer in an aggressive expansion mode globally, the stock is poised to surge higher.
For Q1 2024, Miniso reported revenue growth of 36.7% on a year-on-year basis to $519.6 million. The company reported an adjusted EBITDA margin of 26.8% for the same period. It’s worth noting that Miniso has delivered healthy margin expansion, a key catalyst for stock upside. With supply chain integration and favorable product mix, EBITDA margin expansion will likely be sustained.
During Q1 2024, Miniso reached a total global store count of 6,115. On a year-on-year basis, the number of stores increased by 819. This is the key revenue driver. Besides, the company has a dynamic SKU of lifestyle products.
JD.com (JD)
JD.com (NASDAQ:JD) has corrected 48% in the last 12 months. At a forward price-earnings ratio of 8, the stock looks undervalued. Further, JD stock offers an attractive dividend yield of 2.61%.
For Q3 2023, JD.com reported revenue of $34 billion. While growth was muted on a year-on-year basis, the following points are important to note. First, in the last 12 months, JD.com has reported operating and free cash flow of $8 billion and $5.4 billion, respectively. Financial flexibility, therefore, remains high for investments and dividends.
Further, the company is diversified with emerging segments, including JD Health, JD Logistics and JD Industrials. These emerging businesses will likely be growth drivers in the next five years. It’s worth mentioning that during Q3 2023, JD Logistics reported a positive operating margin. The business will likely witness further margin expansion on the back of operating leverage. This is likely to help boost the company-level EBITDA margin.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
