Chinese stocks have been notably weak in 2023. While the Shanghai Composite Index ($CHSC) is trading flat for the year, Hong Kong's Hang Seng Index ($HSI) is in the red, and continued its slide today amid the slump in property stocks.
Last week, Chinese tech giant JD.com (JD) stock hit a new 52-week low amid the continued rout in tech names. While JD.com stock has recovered slightly from its recent lows, it is still down over 48% for the year. After the recent slump, I believe JD.com looks like an undervalued Chinese stock to buy now.
Why is JD.com Stock Falling?
More than anything company-specific, JD has been falling amid the broad-based slump in Chinese stocks.
The rebound in the Chinese economy has been quite shallow compared to what economists expected. Incidentally, the Chinese economy was expected to be a flagbearer of global growth in 2023, due to its reopening after the lockdowns of 2022 – but growth in the world’s second-largest economy has been disappointing, and looks set to miss the 5% GDP growth forecast set by the government.
The Chinese economy faces several risks. These include:
1. A Worsening Real Estate Crisis
The real estate crisis in China is only worsening. The market is oversupplied, while buyers are dwindling - with the macroeconomic slowdown only making things worse. The real estate crisis has been brewing for a long time, but now seems to have reached its logical conclusion, with several Chinese real estate companies either going bankrupt or on the verge of it.
2. China’s Debt Problem
The real estate crisis has only compounded the debt crisis in China. With an estimated 40% of bank lending in the country related to the sector, a slowdown in the property market spells trouble for the world’s largest banking sector.
Also, China’s debt-to-GDP ratio has ballooned, and much of this debt is held by vehicles of local governments. The troubling debt situation means that Chinese leadership does not have the leeway to announce massive stimulus packages as it did in previous crises – most famously, amid the 2008-2009 Global Financial Crisis, which helped support the Chinese economy and eventually catapulted it to the second-largest economy globally.
3. U.S.-China Tensions
U.S.-China tensions now seem structural, irrespective of who sits in the White House. These continued tensions with the Western world are another risk for the Chinese economy, as many companies in the developed world are now looking to diversify their sourcing away from China, and are either moving some sourcing onshore or to other countries in Asia.
As for JD.com specifically, it is not only battling a slowdown in Chinese consumption, but also increased competition in the Chinese e-commerce market. The company even offered an almost $1.4 billion subsidy to fend off competition and spur sales. Analysts have been concerned about the program, as it will dampen the company's profits even if it helps revive topline growth.
Why JD.com Looks an Undervalued Stock to Buy Now
That said, I believe the sell-off in JD.com stock has gone a bit too far, and the stock now looks quite undervalued at these prices.
The e-commerce sector in China continues to grow, albeit at a slower pace. JD.com is also pivoting to higher third-party sales on its platform, and expects third-party gross merchandise value (GMV) to account for 60% of its total GMV over time.
Analysts expect the company’s sales to rise almost 10% in 2024, which looks quite healthy. The stock now trades at a next 12-month price-to-earnings multiple of 9.46x, which is the lowest ever.
JD.com Stock Long-Term Forecast
JD.com has outlined an aggressive long-term roadmap for the company, and over the next two decades, it plans to establish three enterprises with $10 billion in net profits each. It also intends to have five of its subsidiaries among Fortune 500 companies and 7 publicly traded companies each with a market cap of over 100 billion yuan (around $14 billion).
The long-term forecast sounds quite ambitious, but will take a lot of time to materialize – if it does at all. Meanwhile, at these prices, I believe JD.com’s risk-reward ratio is quite attractive and the stock can deliver handsome returns over the medium to long term.
Analysts See Massive Upside in JD.com Stock
Wall Street analysts also see massive upside in JD.com stock, as its mean target price of $57 is 100% higher than its current levels. Even the Street-low target price of $39 is 36.8% above JD's price today.
Overall, Wall Street analysts rate JD.com stock as a Moderate Buy, with 6 analysts rating it as a Strong Buy and 1 as a Moderate Buy. The remaining 4 analysts rate the stock as a Hold.
All things considered, while Chinese tech stocks face some potent risks - and the global perception of Chinese companies as an investment vehicle has changed for the worse after the brutal tech crackdown - I believe JD.com is among the top undervalued names to play the stabilization in the world’s second-largest economy.
On the date of publication, Mohit Oberoi had a position in: JD . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
