At the beginning of 2023, the general consensus was that Chinese economic growth would lend support to the global economy - even as some developed economies, including the U.S., might enter a recession. However, reality turned out to be almost the mirror opposite. While growth in developed markets - especially the U.S. - has held up relatively well, China's economic rebound has disappointed. Most data points, including the most recent July economic data, show that China's economic growth continues to falter, with the country's retail sales rising only 2.5% last month - way below the 4.5% that analysts expected.
The country also stopped providing youth unemployment data, which raises serious questions after the metric previously rose to an all-time high of 21.3% in June. Meanwhile, Chinese exports fell 14.5% in July – the second consecutive month where they fell by double digits. China’s export sector faces serious headwinds as not only are developed economies - which are major importers of Chinese goods - facing a slowdown, but Western companies are also diversifying their sourcing and lowering their reliance on China.
Some fund managers are also apprehensive about Chinese stocks after the painful tech crackdown of 2021. The Didi delisting disaster might still be fresh in the minds of many U.S. investors, as China forced the ride-hailing app to delist from the U.S. within a few months of its IPO – leaving a big hole in the pockets of those who held the shares.
Chinese Stocks Now “Uninvestable” for Many Global Fund Managers
Chinese stocks are all but “uninvestable” for many fund managers after the tech crackdown. Cathie Wood of ARK Invest, who once backed multiple Chinese companies, has sold all Chinese shares in her flagship ARK Innovation ETF (ARKK).
However, it is not all gloom and doom as far as China is concerned. A slowing economy has forced a policy rethink in the world’s second-largest economy, and lately Beijing has dropped multiple hints that not only is the tech crackdown over, but it is warming up to domestic tech companies in a bid to shore up its sagging economic growth.
China has been easing monetary policy and is taking other measures to support its economy, and while releasing July's economic data, the country’s National Bureau of Statistics said, “We must intensify the role of macro policies in regulating the economy and make solid efforts to expand domestic demand, shore up confidence and prevent risks.”
While there are multiple headwinds facing the Chinese economy, and the structural deterioration in U.S.-China relations is not helping matters, I believe Alibaba (BABA) and Xpeng Motors (XPEV) look like two Chinese stocks worth buying in August – given China’s focus on boosting domestic consumption and electric vehicle (EV) adoption, respectively.
Alibaba Stock Looks Reasonably Valued
Alibaba was perhaps the poster boy of China’s tech crackdown, but the company settled things with regulators by paying a record $2.8 billion fine in 2021. This year, its affiliate company Ant Financial also paid an almost $1 billion fine, clearing the path for its long-awaited IPO - which should help Alibaba unlock value in the fintech giant.
While Alibaba stock has underperformed since 2020, I find the stock a good buy at these levels, as it is among the best ways to play the consumer and ecommerce sector in China. Plus, the company has sprawling cloud operations and has also forayed into generative AI.
Alibaba has reorganized its business into six units, which I believe will help add shareholder value, as the company intends to list the businesses as separate entities. The real value of some of these businesses might not be fully reflected in Alibaba’s current stock price, and the “sum of the parts” valuation could be higher than the current valuation.
The stock's valuation also looks reasonable as it trades at a forward price/earnings-to-growth (PEG) multiple of a mere 0.71x. Usually, a PEG ratio below 1x is seen as a sign of undervaluation. Overall, I believe that BABA is among the best Chinese stocks to buy now, given its tepid valuations.
Xpeng Motors: An Underappreciated China EV Stock
Xpeng Motors looks like another good Chinese stock to buy in August, even as its 2023 operating performance hasn’t been satisfactory - monthly deliveries fell below 10,000 in every month during the first half of the year. For comparison, NIO's (NIO) deliveries also disappointed in the first half of 2023, and Li Auto (LI) has raced ahead of both in terms of cumulative deliveries.
However, Xpeng Motors' performance has gradually improved, and deliveries topped 10,000 in July. Looking ahead, the company expects monthly deliveries to average 15,000 in Q3 and 20,000 in Q4. Recently, Volkswagen (VWAGY) announced a $700 million investment in Xpeng Motors, and said it will use the latter’s technology to produce two EV models – a significant vote of confidence in Xpeng, which led to a rally in XPEV stock.
XPeng Motors has also expanded its operations to Europe, and further international expansion should help the company increase its deliveries. The automaker has already started deliveries of its G6 SUV, pricing the model competitively against Tesla’s Model Y.
Xpeng Motors Offers Advanced Self-Driving Software
XPeng Motors is also developing autonomous driving technology, and already offers advanced self-driving in multiple Chinese cities. Tesla’s (TSLA) CEO Elon Musk has said multiple times that most of Tesla’s valuation – which peaked above $1.2 trillion in 2021 – comes from its software business, especially its self-driving capabilities. He reiterated his views at the Paris VivaTech Innovation Conference in June, and linked Tesla’s valuation to its autonomous driving business.
Tesla, however, does not have permission to offer its self-driving service in Chinese cities, as the country is concerned about spying - and even barred Tesla cars from some government and military installations over these fears.
I believe markets are not fully appreciating Xpeng Motors’ autonomous driving business, which can be a significant long-term growth driver. From a valuation perspective, XPEV trades at a next-12-month price/sales multiple of 2.65x - and given the expected growth, I find the valuations reasonable, especially after the shares have pulled back considerably in August.
