Chinese stocks experienced a sell-off earlier this week after the country’s President Xi Jinping tightened his grip on the country. The Invesco Golden Dragon China ETF (NYSE: PGJ) fell by 14.5% on October 24 and is trading at its lowest level since 2009.

Alibaba (NYSE: BABA) shares are currently priced at $63, significantly below its all-time high of $310. In fact, shares of the Chinese tech giant were listed at $68 on the NYSE back in 2014. Other heavyweights such as Baidu (NASDAQ: BIDU), Pinduoduo (NASDAQ: PDD), and Nio (NYSE: NIO)  all reported double-digit percentage declines on Monday.

It seems the risk premium of China has increased among investors after Jinping bagged a third term as the leader of the Communist Party. The Chinese premier has reportedly stacked the party with loyalists increasing the uncertainty of future economic policies. 

Jinping’s zero COVID-19 policy and the recent crackdown on tech companies, as well as underlying tension with Taiwan, have all contributed toward the sell-off. In the last three years, China has tightened regulations on several tech companies ranging from areas of data protection and the way in which algorithms are used. 

China continues to impose lockdowns in several provinces to keep COVID-19 cases in check. This, in turn, has resulted in global supply chain disruptions and lower manufacturing numbers. Comparatively, several other countries are relaxing pandemic-related restrictions drastically and reopening borders once again. 

Due to the lack of transparency surrounding Chinese stocks and ADRs, several market participants now believe these companies to be uninvestable.

 

Are Chinese stocks undervalued or a value trap?

The ongoing sell-off presents investors with an opportunity to buy the dip. Companies that were once trading at a premium are available at cheap valuations. Further, China is the world’s second-largest economy, the biggest EV market globally, and one of the fastest-growing e-commerce markets, making it a top bet for those with a high-risk profile. 

Marko Kolanovic, a JPMorgan (NYSE: JPM) strategist, believes the sell-off in Chinese stocks is not connected to their fundamentals and presents a buying opportunity right now. For example, the shares of Pinduoduo and Nio are trading at attractive valuations. Let’s see how.

In Q2 of 2022, sales of Pinduoduo, a China-based e-commerce company, increased its sales by 36% year over year to $4.7 billion, above analyst estimates of $3.45 billion. Its adjusted earnings per share more than doubled to $1.13 per share, compared to estimates of $0.41 per share.

Pinduoduo has grown its top line at the fastest rate in three quarters in Q2. It generated 80% of sales from the online marketing services business, where the company charges fees from merchants to list products on its marketplace. Around 20% of revenue comes from transaction-related services.

Valued at a market cap of $67 billion, PDD stock is valued at 4x forward sales and 18x forward earnings. Despite a challenging environment, analysts expect Pinduoduo to increase sales by 20.9% to $17 billion in 2022 and by 23.3% to $20.92 billion in 2023. Its adjusted earnings are forecast to increase from $3.53 per share in 2023 to $1.43 per share in 2021.

 

Is Nio stock a buy right now?

 In the last 15 months, Nio has been wrestling with higher input costs, chip shortages, and lower production numbers (due to lockdowns), driving the stock lower by 84% from all-time highs. 

However, Mizuho analyst Vijay Rakesh has a 12-month price target of $40 for Nio, indicating an upside of 300% from current levels. Rakesh is optimistic about robust demand for Nio’s portfolio of electric vehicles and China’s push towards clean energy solutions.

Valued at a market cap of $17 billion, Nio stock is priced at two times forward sales. While still unprofitable, Nio is forecast to narrow its loss per share from $1 in 2021 to $0.21 in 2023.

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