Beware of These 4 Overvalued Chinese Stocks

Amid concerns surrounding the recently passed bill by the Senate to delist Chinese stocks from the U.S. stock exchanges and growing regulatory scrutiny on them, leading Chinese companies such as Pinduoduo (PDD), (JD), Bilibili (BILI), and ZTO Express (ZTO), which are trading at extremely high valuations, can be susceptible to significant pullbacks in the upcoming months.

There is no doubt that China has successfully snapped back from the pandemic to post modest growth throughout last year. However, the world’s second largest economy’s strong recovery has brought with it the legitimization of Chinese stocks for U.S. investors. The recently passed Senate bill to restrict some Chinese companies from being listed on U.S. stock exchanges could severely impact investors’ confidence in Chinese stocks.

While the new administration in the United States has already reversed several executive orders signed by Trump, the new administration may not reverse course on a  change of policy on Chinese tech companies, which is in tune with the prevailing view in the Congress.

Additionally, the growing regulatory scrutiny on many leading Chinese firms’ dealings around the world has made it even harder for them to operate smoothly, both at home and abroad. In this scenario, Chinese companies that are trading at lofty valuations compared to their global peers without adequate financial and fundamental strength to justify the price gains could witness significant pullbacks in upcoming months.

Against this backdrop, it would be wise to avoid highly overvalued Chinese stocks such as Pinduoduo Inc. (PDD),, Inc. (JD), Bilibili Inc. (BILI), and ZTO Express (Cayman) Inc. (ZTO), given their lofty valuations and limited growth opportunities.

Pinduoduo Inc. (PDD)

Headquartered in Shanghai, China, PDD is an e-commerce mobile platform that provides a range of products like shoes, bags, apparel, food and beverage, fresh produce, electronic appliances, household goods, personal care items, fitness items, and auto accessories.

On December 21, 2020, the company announced a $500 million private share placement to a global institutional investor so that PDD can pursue its strategic priority of raising farm productivity and improving food security. It expects to use the proceeds to strengthen its cash balance and make strategic investments.

PDD appears to be extremely overvalued. In terms of trailing-12-month Price/Cash Flow, PDD is currently trading at 71.42x, 471.5% higher than the industry average of 12.50x. Moreover, the company’s trailing-12-month Price-to-Book currently stands at 56.06x, which is significantly higher than the industry average of 3.50x.

In the third quarter that ended September 30, 2020, PDD’s total revenue increased 89% year-over-year to RMB14.21 billion. However, its sales and marketing expenses rose 46% from the year-ago value to RMB10.07 billion, while research and development expenses rose 60%. The company reported a net loss of RMB784.7 million and an operating loss of RMB1.3 billion over this period.

The consensus EPS estimate for the next quarter ending March 31, 2021 indicates a 51.3% improvement year-over-year. However, its EPS is expected to decline at a rate of 37.3% per annum over the next five years. The stock has gained 427.8% over the past year.

PDD’s POWR Ratings are consistent with its underperformance. The company has an overall rating of C, which translates to Neutral in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

PDD has a grade of D for Stability, and a grade of F for Value. In the D-rated China group, it is ranked #51 of 86 stocks.

To see additional POWR Ratings for Growth, Sentiment, Momentum, and Quality for PDD, Click here., Inc. (JD)

Founded in 1998, JD is a Chinese retail infrastructure and e-commerce service provider that operates in two segments – JD Retail and New Businesses. It also provides online marketing services and logistic services for suppliers, and other business partners. The company offers its products through its website and mobile apps, as well as directly to customers.

In December, JD announced that it has become China’s first virtual platform to accept the country’s digital yuan as payment for some products on its online mall. This should help the company to serve its customers better and benefit its business.

JD’s forward non-GAAP P/E currently stands at 63.27x, 233.2% higher than the industry average of 18.99x. In terms of forward EV/EBIT as well, the stock is currently trading at 79.04x, 343.5% higher than industry average of 17.82x.

The company’s results for the third quarter that ended September 30, 2020 were disappointing. JD’s fulfilment expenses have increased 32.4% year-over-year to RMB11.6 billion in the third quarter that ended September 30, 2020, while marketing expenses rose 22.8%. It reported an operating loss of RMB687.86 million under the new businesses segment. The company’s income from operations declined 11.9% year-over-year to RMB4.97 billion over this period.

However, the stock has gained 147% over the past year.

JD’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary ratings system. JD has a grade of C for both Growth and Stability, and a grade of D for Value. In the same industry, it is ranked #59.

In total, we rate JD on eight different components. Beyond what we stated above we have also given JD grades for Momentum, Sentiment, and Quality. Get all the JD ratings here.

Bilibili Inc. (BILI)

Founded in 2009, BILI is an online entertainment services platform in China, which covers a wide range of genres and media formats like live broadcasting, videos, and mobile games. The company also has a partnership with Tencent Holdings Limited for sharing and operating existing and additional anime and games on its platform.

Last year, the company entered into a definitive subscription agreement with Huanxi Media Group Limited. Under this, BILI made a significant equity investment of US$66 million in the company. BILI has also entered into a three-year strategic partnership with Riot Games for the live broadcast of League of Legends games in China.

BILI’s trailing-12-month EV/Sales currently stands at 32.82x, 1031.9% higher than the industry average of 2.90x. The company’s trailing-12-month Price/Sales of 32.54x, is significantly higher than the industry average of 1.82x.

BILI’s total operating expenses increased 138% year-over-year to RMB1.84 billion for the third quarter that ended September 30, 2020. The company’s loss from operations rose 156% from the year-ago value to RMB1.08 billion, while net loss increased 171.4%. Its net loss per share grew 148.4% year-over-year to RMB3.08.

The consensus EPS estimate for the next quarter ending March 31, 2021 indicates an 80% decline year-over-year. The stock has gained 418% over the past year, but it is presently trading 18.1% below its 52-week high of $157.66, indicating a short-term bearishness.

BILI’s POWR Ratings reflect this bleak outlook. It has an overall rating of F, which equates to Strong Sell in our POWR Ratings system. BILI has a grade of D for Value and Quality, and grade of F for Growth. Among the 86 stocks in the same industry, it is ranked #86.

Click here to see the additional POWR Ratings for BILI (Stability, Sentiment, and Momentum).

ZTO Express (Cayman) Inc. (ZTO)

Based in Shanghai, China, ZTO offers express delivery and other value-added logistics services to e-commerce and traditional merchants, and other express service users.

In terms of forward Price/Sales, the stock is currently trading at 8.08x, 416.6% higher than the industry average of 1.56x. Moreover, the company’s trailing-12-month EV/EBIT currently stands at 39.26x, which is 82.5% higher than the industry average of 21.52x.

ZTO’s gross profit declined 12.9% year-over-year to RMB1.39 billion in the third quarter that ended September 30, 2020. Its income from operation decreased 16.5% from the year-ago value RMB1.17 billion, while interest income declined 43.3% year-over-year RMB83 million. The company’s adjusted EBITDA declined 11.2% from the prior-year quarter to RMB1.68 billion.

However, the stock has gained 48.9% over the past year.

ZTO’s weak prospects are apparent in its POWR Ratings as well. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system. ZTO also has a grade of D for Value, and Growth. In the same industry, the stock is ranked #53.

In addition to the POWR Ratings grades I've just highlighted, you can see the ZTO ratings for Momentum, Stability, Sentiment, and Quality.

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PDD shares were trading at $179.02 per share on Tuesday afternoon, down $9.22 (-4.90%). Year-to-date, PDD has gained 0.76%, versus a 2.54% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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