Chinese stocks have been a hot topic over the past few years, and mainly for the wrong reasons. A quick recap: the Chinese government cracked down on Chinese technology giants, the U.S. passed a law that threated to delist Chinese stocks from U.S. exchanges if they don't submit to accounting reviews by American auditors, and more recently, the U.S. banned the sale of advanced semiconductor equipment to China. However, over the past couple of months, the sentiment around Chinese stocks has started to improve due to cooperation regarding auditing and Beijing's promises that the tech crackdown is finishing.
I believe this sentiment change and relatively cheap valuations of U.S.-listed Chinese stocks is a promising development. Some gurus seem to agree, including Michael Burry, who is most famous for predicting the financial crisis of 2008 and is a true value investor at heart. Let’s dive into two Chinese stocks that Burry was buying in the fourth quarter of 2022, as per his firm Scion Asset Managmement's latest 13F filing: Alibaba (BABA, Financial) and JD.com (JD, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
1. Alibaba
Alibaba (BABA, Financial) is a vast e-commerce and cloud company similar to Amazon (AMZN, Financial) but with more developed business-to-business and financial services as well. The company operates a plethora of online stores which include Tmall, Taobao and of course AliExpress. In the Western world, Alibaba is known for its ability to connect business buyers with factory suppliers directly in China.
Alibaba was founded by Jack Ma, a charismatic but also outspoken founder. A speech Ma gave previously criticized the Chinese financial system was thought to have been a catalyst for the IPO of Ant Group to be halted in 2020. Given Alibaba owns approximately one third of the Ant Group, this impacted the business substantially.
A positive is that recently, Ma has given up control of the Ant Group through a company restructuring. Ma previously was the controlling individual of Ant Group, but now his stake has dropped to ~6%. This is a positive sign as it could pave the way for the Ant Group to IPO in the future.
Regulators in China have also recently approved a $1.5 billion capital expansion for its consumer finance business, which is a major positive for business progress but also it tells us that regulator sentiment is improving.
Mixed financials
Alibaba reported $28.95 billion in revenue in its most recent quarterly results for the second quarter of fiscal 2023, which increased by just 3% year over year. This was a pretty terrible result, but if we zoom out it's not so bad. Alibaba’s e-commerce business boomed in 2020, before undergoing a cyclical correction in 2021 and 2022, which was enhanced by China’s zero-Covid policy. Therefore, in the recent quarter, Alibaba reported lower transactions in its domestic market.
A silver lining was the business reported a boost in its “to home” business, which recorded a rapid 21% increase in revenue to $1.8 billion. This segment includes Alibaba’s travel app “Fliggy," which has become popular with Chinese citizens for international vacations. A study by China Power indicates that China had a middle class population of ~3.1% of the total in the year 2000, but this has increased to 50.8% of its total population as of 2018. Hence China’s growing middle class will likely have more excessive income to spend and free time to spare to travel. Therefore Alibaba is poised to benefit from this. Alibaba’s “to home” segment also includes the food delivery app "ele.me."
It's also worth noting Alibaba is the largest cloud infrastructure provider in China by market share, according to Statista. It's similar to Amazon's AWS and is poised to benefit from the growth in digital transformation across China.
According to a study by McKinsey, China’s public cloud industry is expected to nearly triple in size from $32 billion in 2021 to $90 billion by 2025. Aliababa is poised to benefit from this trend with the digital transformation of China’s vast manufacturing industry still in its early stages.
Alibaba cloud reported 4% revenue growth year over year to $2.9 billion. This wasn’t fantastic, but I believe it was impacted by the macroeconomic environment, as the secular trends are still intact.
Alibaba reported operating income of $3.5 billion in the quarter, which increased by a solid 51% year over year.
Valuation and guru investors
Alibaba trades at a forward non-GAAP price-earnings ratio of 13.45, which is 41% cheaper than its five-year average.
Its price-sales ratio is 2.3, which is 67% cheaper than its five-year average.
The GF Value chart indicates an intrinsic value of $296 per share and thus the stock is “significantly undervalued” at the time of writing.
Burry's firm purchased 50,000 shares of Alibaba stock in the fourth quarter of 2022, during which shares traded at an average price of $78.85. From that average price, the stock has increased by ~32% as of this writing.
2. JD.com
Some may think of Alibaba as the “Amazon of China," but personally I think JD.com (JD, Financial) fits that bill more, at least on the e-commerce side. JD.com operates a vast e-commerce website in China which provides a range of products from electronics to clothing and even fresh food / grocery delivery.
The company operates a “direct sales model” which enables consumers to purchase directly from manufacturers and distributors. In addition, the company enables third party suppliers to sell products on its platform and JD.com takes a cut of sales. The business is also vertically integrated and operates a wide logistics network across China which includes a range of distribution centers.
Its platform also includes a loyalty program called “JD Plus” which is similar to Amazon Prime, in that it offers free delivery, discounts and more extra perks.
Steady financials
JD.com reported solid financial results for the third quarter of 2022. The company reported $34.21 billion in revenue, which missed analyst expectations by $267 million, despite growing by ~1% year over year.
Similar to Alibaba, its revenue was impacted by flat consumption demand on the back of Covid-19 resurgences and the zero-Covid policies which were still in place at the time.
A positive was JD’s active user base reached a staggering 588 million, with 10 million net active users added year over year. To put this number into perspective, the entire U.S. population is ~331 million.
The company also reported higher growth in its Plus members relative to other groups, which was a positive sign for business loyalty and retention.
Moving onto profitability, JD.com reported earnings per share of $0.05, which beat analyst expectations by $0.10. This is a positive sign given profitability has become essential for many investors and businesses recently amid the weakening economy and rising interest rates.
The company has a robust balance sheet with $29.7 billion in cash and short term investments vs. total debt of ~$9 billion, with ~$4 billion of this being long term debt.
Valuation and guru investors
The non-GAAP forward price-earnings ratio is 21.56, which is close to 52% cheaper than its five-year average.
JD.com trades at a price-sales ratio of 0.57, which is nearly 29% cheaper than its five-year average.
The GF Value chart indicates a fair value of $117.58 per share and thus the stock is “significantly undervalued” at the time of writing.
Burry's firm purchased 75,000 of JD.com in the fourth quarter of 2022, during which shares traded at an average price of ~$50 apiece, which is close to where the stock is trading at the time of writing.
Final thoughts
Alibaba and JD.com are leading e-commerce companies in China. Both have faced the tech crackdown. Alibaba has the most diverse business model with e-commerce, financial services and the cloud. However, JD.com has demonstrated stronger profitability, even beating earnings expectations. I believe they are two of the best ways to play the growth of China’s middle class population.
