[Editor’s Note: this article was originally published in December 2019. It is regularly updated to include the most relevant information.]
The bull thesis on Chinese stocks going into 2020 was surprisingly simple and compelling. You had easing trade tensions, stabilizing geopolitical relations, ample fiscal stimulus from the People’s Bank of China, a rebounding manufacturing sector, and similarly rebounding consumer spending trends. Everything looked good for a big rebound in Chinese stocks.
Then, the coronavirus outbreak happened. Tens of thousands of individuals in mainland China fell ill to a new, rapidly spreading coronavirus strain. A few thousand infected patients even died (so far). Daily life in China came to a screeching halt, and the supposed 2020 rebound in China’s economy was put on pause.
But, the coronavirus moves fast, and just as quickly as it burst onto the scene in China in early February, it has faded over the past few weeks.
The number of new cases being reported in China has steadily declined each day over the past few weeks. Indeed, it appears that the virus is hardly spreading anymore in China. Active cases are also dropping, as the number of new cases being reported each day is far behind the number of recoveries being reported each day. So long as this trend persists — and current data suggests it will — then China will be fully recovered from the coronavirus outbreak within the next few weeks.
That’s why Chinese stocks are rallying. The iShares MSCI China ETF (NYSEARCA:MCHI) is up an impressive 5% over the past month.
This rally will continue. The coronavirus crisis appears to be essentially “over” in China. Chinese economic activity will rebound, fueled by a fresh round of fiscal stimulus from the People’s Bank of China and easing global trade tensions. The big 2020 rebound in Chinese stocks will resume, with a little extra firepower.
With that in mind, here are the best Chinese stocks to buy for the big 2020 rebound:
- Alibaba (BABA)
- JD.Com (JD)
- Luckin Coffee (LK)
- Bilibili (BILI)
- Vipshop (VIPS)
Without further ado, let’s take a deeper look at why these five top Chinese stocks are ready to rally in 2020 as coronavirus fears continue to subside.
Chinese Stocks to Buy for 2020: Alibaba (BABA)
The best Chinese stock to buy for 2020 is Chinese internet giant Alibaba (NYSE:BABA).
Forget about the coronavirus for a moment. Excluding that, everything else is going right for Alibaba right now. Revenue growth rates are stabilizing, after several quarters of rapid deceleration, as China’s consumer economy picks up steam again. At the same time, the company’s less developed cloud and adjacent technology businesses are gaining scale, so their profit margins are moving higher. This is providing a lift to Alibaba’s overall profit margins, which are improving for the first time in several years. The profit growth trajectory today is consequently as good as its been in several years.
Sure, the coronavirus provides a near-term risk to these trends. But, not a long-term risk. Once fears regarding the virus disappear — and they already are, to a degree — everything will get back to firing on all cylinders.
U.S.-China trade tensions will keep easing, providing a boost to consumer and corporate spending trends. More fiscal stimulus from the People’s Bank of China will also provide a boost to consumer and corporate spending. As consumer spending goes higher, Alibaba’s e-commerce platform will sustain big growth. Meanwhile, as corporate spending goes higher, Alibaba’s cloud business will similarly sustain big growth.
Thus, Alibaba’s growth trajectory will continue to improve in 2020, once coronavirus fears subside. That growth trajectory improvement will drive reasonably valued Alibaba stock higher.
Next on this list of Chinese stocks to buy for 2020, we have Alibaba’s little brother in the Chinese e-commerce market, JD.Com (NASDAQ:JD).
The bull thesis on JD stock for 2020 is similar to the bull thesis for BABA stock. China’s consumer economy has been slowing for the better part of the past two years, thanks to escalating U.S.-China trade tensions. Those trade tensions are finally de-escalating, and should continue to meaningfully de-escalate into 2020 as neither side wants to up the trade war ante. Easing trade tensions in 2020 will breathe life back into China’s consumer economy. So will increased fiscal stimulus from the People’s Bank of China. Resurgent consumer spending will create a rising tide for all Chinese consumer stocks.
JD stock looks particularly good heading into this 2020 Chinese consumer stock boom. That is, JD’s revenue growth rates and profit margins are both meaningfully improving. Thus, this company already has a ton of operational momentum, before the 2020 boom. That operational momentum will couple with favorable market conditions over the coming quarters to super-charge this company’s growth narrative.
Yes, again, coronavirus provides a near-term risk here. But, while it will depress first quarter numbers, it will likely produce a boost to second quarter numbers as pent-up consumer demand translates into big consumer spending once daily life in China gets back to normal.
Consequently, big picture, JD stock will power higher in 2020.
Luckin Coffee (LK)
Often labeled as the Starbucks (NASDAQ:SBUX) of China, retail coffee house operator Luckin Coffee (NASDAQ:LK) is arguably the most exciting growth stock in China at the moment, with a ton of potential to grow by leaps and bounds over the next several years.
From this perspective, the coronavirus crisis — which has knocked LK stock down by 20% — is creating a compelling buying opportunity into a strong growth stock with huge long-term upside potential.
Here’s the story.
Luckin operates small coffee houses in China. They started with less than a dozen such stores at the end of 2017. Today, they have over 4,500 coffee houses in China. This robust growth is supported by two tailwinds. First, there has been a secular pivot among young, urban Chinese consumers from regular tea consumption, to regular coffee consumption. This pivot will continue with significant momentum over the next several years, as young Chinese consumers become increasingly more “Western”.
Second, Luckin has figured out the best way to tap into growing coffee demand, by creating small, asset-light coffee houses that are optimized for mobile ordering and quick service, and feature the lowest prices in the industry. Low prices and high convenience will continue to appeal to China’s young consumers. As long as Luckin maintains an advantage on both of those fronts, the company will continue to gain share in China’s booming retail coffee market.
Because both of these tailwinds project to remain vigorous for the next few years, Luckin Coffee projects to keep growing at a robust pace for the next few years, too. That big growth should sustain strong gains in LK stock.
The bull thesis on Chinese social video platform Bilibili (NASDAQ:BILI) is pretty simple: a digital ad market rebound in 2020 should spark a big rally in BILI stock.
Bilibili has been hurt by digital ad market headwinds over the past few quarters, as revenue growth has slowed amid slowing digital ad spend across all of China. But, the Bilibili platform continues to grow, attracting users left and right because of its video-first value prop in an increasingly video-dominated online world. Last quarter, Bilibili saw its user base grow by nearly 40% year-over-year.
Ad dollars always follow engagement. Bilibili has the engagement. Thus, once Chinese companies re-up their digital ad spend, a lot of those digital ad dollars will find their way onto Bilibili’s platform.
Chinese companies should re-up their digital ad spend in 2020, as global trade tensions ease and the economic outlook improves. Bilibili’s revenue growth rates will improve, too. At the same time, profit margins are finally starting to stabilize here, and improving ad demand trends in 2020 should sustain that margin expansion.
Big picture — Bilibili’s revenues, margins and profits should all march higher in 2020. All that upward momentum should push BILI stock higher, too.
Last, but not least, on this list of Chinese stocks to buy for 2020 is Chinese online discount retailer Vipshop (NYSE:VIPS).
Vipshop has staying power in the Chinese e-commerce market as the de-facto off-price leader. If there is one thing that consumers are always attracted to, it is low prices. Thus, so long as Vipshop can maintain dominance in the off-price channel, the company will forever remain an important part of the Chinese e-commerce landscape.
The Chinese e-commerce landscape projects to rebound in 2020. As it does, Vipshop’s revenue growth rates will rebound, too.
This rebound will create a rising tide across the business. Profit margins will expand, since bigger revenue growth will converge on cost-cutting initiatives and drive positive operating leverage. Bigger revenue growth and positive operating leverage will lead to reinvigorated profit growth.
Ultimately, in 2020, Vipshop’s profit growth trends should improve. As go profits, so go stocks. VIPS stock is no exception. Over the next few quarters, then, reinvigorated profit growth will drive this stock way higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango was long LK.